A Behavioral Law and Economics Analysis of Property

Property is complex but nonetheless, decisions-makers need to make decisions relating to property all the time. This paper uses both traditional law and economics and behavioral law and economics to theoretically consider how decision-makers may make decisions with respect to property. It surveys a range of heuristics and biases and how two common conceptions of property – discrete asset and bundle of rights – may interact in decision-making, drawing from examples in the US and Australia. Finally it focuses on the application of these concepts to the investment decisions of property owners in the context of government takings. In doing so it finds while traditional law and economics analysis may suggest that under-compensation for property compulsorily acquired by the government will deter property owners from over-investing in their property, once we allow property owners to be imperfectly rational under a behavioral law and economics framework under-compensation may still lead to over-investment. The theoretical considerations in this paper could form the foundation for future empirical tests on how decisions-makers actually think in relation to property and whether they respond to policy in the way predicted by theory.