Property Rights and Incomplete Contracts: Dealing with Nuisance
A model of externalities with sequential location choice is developed. The first mover decides on location before it knows the identity of the second mover. Joint location results in a negative externality. The court, having limitd information, allocates property rights over the externality based on the limiting of location. Sufficient conditions are presented supporting the 'coming to the nuisance' dotrine, where the first mover is given property rights. This doctrine is nit always supported: greater surplus may be generated by giving property rights to the second mover. A sufficient condition guaranteeing optimality for any property rights allocation is derived.
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