Correlated Values in the Theory of Property and Liability Rules

Louis Kaplow and Stven Shavell have shown that liability rules tend to efficiently harness the defendant’s private information when courts are imperfectly informed as to litigants’ valuations. But they claim that liability rules cannot harness private information when the disputants’ valuations are correlated. This article rejects the correlated-value claim. While correlated valuations create real problems of implementation, Kaplow and Shavell’s own harnessing result can be extended to redeem the usefulness of liability rules. When values are correlated, enlightened courts can enlarge the damages that takers expect to pay so as to induce efficient takings. The relative efficiency of property and liability rules turns out to be independent of whether the disputants’ values are correlated.