Lueck 8 Miceli-Property Lato Consider an asset(e. g, a plot of land) that yields an instantaneous(net)flow of benefits r(x(o)), where x(t) is the amount of a variable input supplied by private owners at time t. Let r be the interest rate, and assume the flow value r(o, grows over time at the continuous rate g<r, so that the value of the asset grows over time. Also assume that each periods return is independent of past returns. The term g can be thought to measure increases in the demand for the asset perhaps because of population growth. This formulation also recognizes the usual case that during early periods assets are not sufficiently valuable to cover the costs of establishing ownership. The first-best, full-information outcome is =「R(x'()e-yd (3.1) where x(t)is the optimal input level in period t. In general, V is not attainable because of the costs of both establishing and enforcing rights that efficiently allocate use of the resource 3.2. Claiming the Asset The left-hand side of Figure 1 shows the case when ownership of the asset is granted to the first person to obtain possession of the entire stock. To simplify, we assume that the method of possession does not damage other resources; this is equivalent to assuming that the asset is a simple, single attribute good. The first claimant thus obtains exclusive rights, into the indefinite future,to the flow of rents, TR*(O)dt, generated by the asset. Since establishing a bona fide claim will be costly and because g r, rights may not be worth enforcing. Under these the value of the asset increases(Demsetz 1967). Maximizing resource value is, in effect, a as conditions, property rights to the asset will emerge, after an initial period without ownership, as problem of optimally timing the establishment of rights under first possession Now assume there are one-time costs, C, of establishing enforceable rights, or demonstrating possession which grant the owner the exclusive right to the stream of production for all time. If there is a single potential claimant, the flow from the asset(and the rents) is available after rights to the stock are established. The decision to claim the stock is the result of private maximization which, in this case, means the net present value of the asset is R(x()e] where i is the time at which ownership of the stock(and the flow of output)is established under first possession. The optimal time to establish ownership is when the marginal return from waiting, given by the present value of the asset's flow at t, equals the marginal cost of waiting The model here is derived from Lueck(1995, 1998) 8 One can think of R(t) as the steady-state flow of benefits. Note that if g >r, the present value of the asset would be infinite
Lueck & Miceli – Property Law 15 Consider an asset (e.g., a plot of land) that yields an instantaneous (net) flow of benefits R(x(t)), where x(t) is the amount of a variable input supplied by private owners at time t. 47 Let r be the interest rate, and assume the flow value, R(t), grows over time at the continuous rate g < r, so that the value of the asset grows over time. Also assume that each period's return is independent of past returns.48 The term g can be thought to measure increases in the demand for the asset, perhaps because of population growth. This formulation also recognizes the usual case that during early periods assets are not sufficiently valuable to cover the costs of establishing ownership. The first-best, full-information outcome is * () 0 ( ( )) , FB r g t t V R x t e dt ∞ − − = = ∫ (3.1) where x * (t) is the optimal input level in period t. In general, VFB is not attainable because of the costs of both establishing and enforcing rights that efficiently allocate use of the resource. 3.2. Claiming the Asset The left-hand side of Figure 1 shows the case when ownership of the asset is granted to the first person to obtain possession of the entire stock. To simplify, we assume that the method of possession does not damage other resources; this is equivalent to assuming that the asset is a simple, single attribute good. The first claimant thus obtains exclusive rights, into the indefinite future, to the flow of rents, 0 R*( )t dt ∞ ∫ , generated by the asset. Since establishing a bona fide claim will be costly and because g < r, rights may not be worth enforcing. Under these conditions, property rights to the asset will emerge, after an initial period without ownership, as the value of the asset increases (Demsetz 1967). Maximizing resource value is, in effect, a problem of optimally timing the establishment of rights under first possession. Now assume there are one-time costs, C, of establishing enforceable rights, or demonstrating possession which grant the owner the exclusive right to the stream of production for all time. If there is a single potential claimant, the flow from the asset (and the rents) is available after rights to the stock are established. The decision to claim the stock is the result of private maximization which, in this case, means the net present value of the asset is * () [ ( ( )) ] , S s S r g t rt t V R x t e dt Ce ∞ −− − = − ∫ (3.2) where t S is the time at which ownership of the stock (and the flow of output) is established under first possession. The optimal time to establish ownership is when the marginal return from waiting, given by the present value of the asset's flow at t S , equals the marginal cost of waiting, 47 The model here is derived from Lueck (1995, 1998). 48 One can think of R(t) as the steady-state flow of benefits. Note that if g > r, the present value of the asset would be infinite
Lueck 8 Micelli-Property Lazo given by the present value of the opportunity cost of establishing rights at i, or r'e-(r-g) =rCe-r. Inspection of(3. 1)and (3.2) shows that the value of the asset clearly falls short of first-best or y y this is because the net value of the asset must now account fo the costs of establishing ownership, and the fact that these costs delay ownership and production to t from t=o gain ownership by establishing possession just before their competitors. A claim is worth staking as long as the net value of the asset is positive, so a competitive rush to claim rights causes ownership to be established at exactly the time, when the present value of the rental flow at r equals the present value of the entire costs of establishing ownership at r, or when R*e-ir-g=Ce-riR. In such a race, rights are established prematurely at /, where /<r50 More important, the race equilibrium implies that the rental stream is fully dissipated; that is, 7R=JIR(x'()e(rgdtj-Ce-n=0 (3.2) Heterogeneity among potential claimants can reduce, or even eliminate, the dissipation of wealth (Barzel 1994, Lueck 1995). Assume there are just two competitors(i and j) for ownership of the asset with possession costs Ci<C. Also assume that neither party knows each others costs In a race, person i gains ownership just before the closest competitor makes a claim, at time, t r-e, and earns rent equal to the present discounted value of his cost advantage V. The key mplication is that as the heterogeneity of claimants(C-Ci) increases, the level of dissipation will decrease. The analysis remains the same with rental value differentials such as R;FRor different expectations about the rate of growth of the flow value, gi*gi. In the extreme case, where just one person has costs less than the net present value of the asset's flows, the first-best outcome is achieved. Since only one person enters the race, there is no dissipation Altering the assumption about information can alter the racing equilibrium. Fudenberg et al (1983)and Harris and Vickers(1985)show that if competitors have complete information about each other's talents a race will not ensue because only the low-cost individual will have a positive expected payoff of entering the race; that is, I is achieved if Ci <Ci, itj=L,.n Even though claimant heterogeneity can limit or eliminate racing dissipation, there arises the possibility that a claimant can gain a cost advantage by expending resources, thereby altering the margins of dissipation(McFetridge and Smith 1980). For example, if competing claimants can acquire the technology to achieve the minimum costs(Ci), then homogeneity and the full dissipation equilibrium is re-established. This extreme result, however, relies on the assumption This phenomenon was first studied by Barzel (1968)in the context of research and technological development. Also see Mortensen(1982) The single claimant solution yields f=(nr+InC-InRWg while the race model gives /=(In(r-g)+InC-InRl/g Suen(1989)also notes the importance of heterogeneity in reducing dissipation in the context of rationing by
Lueck & Miceli – Property Law 16 given by the present value of the opportunity cost of establishing rights at t S , or *( ) . S S r g t rt R e rCe −− − = Inspection of (3.1) and (3.2) shows that the value of the asset clearly falls short of first-best, or V* < VFB. This is because the net value of the asset must now account for the costs of establishing ownership, and the fact that these costs delay ownership and production to t S from t = 0. A first possession rule can dissipate value when there is unconstrained competition among potential claimants. 49 In the simplest case with homogeneous competitors, potential claimants gain ownership by establishing possession just before their competitors. A claim is worth staking as long as the net value of the asset is positive, so a competitive rush to claim rights causes ownership to be established at exactly the time, t R , when the present value of the rental flow at t R equals the present value of the entire costs of establishing ownership at t R , or when ( ) * . R r g t rtR R e Ce −− − = In such a race, rights are established prematurely at t R , where t R < tS . 50 More important, the race equilibrium implies that the rental stream is fully dissipated; that is, * () [ ( ( )) ] 0. R R R r g t rt t V R x t e dt Ce ∞ −− − = −= ∫ (3.2) Heterogeneity among potential claimants can reduce, or even eliminate, the dissipation of wealth (Barzel 1994, Lueck 1995).51 Assume there are just two competitors (i and j) for ownership of the asset with possession costs Ci < Cj. Also assume that neither party knows each other’s costs. In a race, person i gains ownership just before the closest competitor makes a claim, at time, t i = t R - ε, and earns rent equal to the present discounted value of his cost advantage, Ri V . The key implication is that as the heterogeneity of claimants (Cj − Ci) increases, the level of dissipation will decrease. The analysis remains the same with rental value differentials such as Ri ≠ Rj or different expectations about the rate of growth of the flow value, gi ≠ gj. In the extreme case, where just one person has costs less than the net present value of the asset's flows, the first-best outcome is achieved. Since only one person enters the race, there is no dissipation. Altering the assumption about information can alter the racing equilibrium. Fudenberg et al. (1983) and Harris and Vickers (1985) show that if competitors have complete information about each other's talents a race will not ensue because only the low-cost individual will have a positive expected payoff of entering the race; that is, VS is achieved if Ci < Cj, i ≠ j = 1, ... n. Even though claimant heterogeneity can limit or eliminate racing dissipation, there arises the possibility that a claimant can gain a cost advantage by expending resources, thereby altering the margins of dissipation (McFetridge and Smith 1980). For example, if competing claimants can acquire the technology to achieve the minimum costs (Ci), then homogeneity and the full dissipation equilibrium is re-established. This extreme result, however, relies on the assumption 49 This phenomenon was first studied by Barzel (1968) in the context of research and technological development. Also see Mortensen (1982). 50 The single claimant solution yields tS = (lnr+lnC-lnR)/g while the race model gives t R = (ln(r-g)+lnC-lnR)/g. Inspection reveals t R < t S . 51 Suen (1989) also notes the importance of heterogeneity in reducing dissipation in the context of rationing by waiting
Lueck 8 Miceli-Property Lato that homogeneity can be attained easily by investing in the low cost claimant's technology. The more likely reality is that claiming costs depend not only on endogenous investment decisions but also on exogenous forces that generate and preserve heterogeneity. Consider two possibilities. First, if the distribution of talent across individuals is not equal, some people will have innate advantages that will be difficult or impossible to overcome with investment. Second if there is random variability in opportunities, then some individuals will be in the position of being the low cost claimant; again, investment is unlikely to destroy the random advantage Because first possession is a rule that restricts competition to a time dimension, there is another reason why investment cannot routinely eliminate heterogeneity. Cost advantages, no matter how they were gained initially, are expected to diminish over time because potential investors ultimately will gain information that allows them to mimic the behavior of the low cost person (Kitch 1977, Suen 1989). As long as costs depend on exogenous factors, dissipation will be incomplete. In the worst-case race equilibrium, the first claimant will own just the value of his exogenous advantage; in the best-case, extreme heterogeneity or the full information game theory equilibrium, the first claimant will own the full potential value, V, of the asset 3.3 The Rule of Capture for Asset Flows When the costs of enforcing a claim to the asset are prohibitive ownership can be established only by capturing or reducing to possession'a flow from the asset. See the right side of Figure 1. The rule of capture- simply a derivation of the rule of first possession--will occur when enforcing possession of the flow is cheaper than enforcing possession of the stock. Wildlife and crude oil are the classic examples: ownership is established only when a hunter bags a pheasant or when a barrel of oil is brought to the surface. The stock itself, be it the pheasant population or the entire underground reservoir of oil, remains unowned. as a result the new race'is to claim the present flow R(o by capturing the product(e. g, the dead pheasant) first As a rule of capture, first possession can lead to classic open access dissipation(Epstein 1986 Lueck 1995). Under the rule of capture no one owns the asset s entire stream of flows, R(Odt. Now the formal economic analysis of dissipation is just one-period, rather than inter- temporal as in the race, and in fact is identical to the open access model developed in section 2.1 with an equilibrium level of effort determined by equation (2.2) 3.4. First Possession in Law The law of first possession seems to be consistent with the model that includes two potential paths of dissipation(racing and over-exploitation). When first poss has the potential for a race, the law tends to mitigate dissipation by assigning possession when claimant heterogeneity is greatest. On the other hand, when first possession breeds a rule of capture, the law tends to imit access and restrict the transfer of access rights to limit open access exploitation. It should be noted that judicial oplmle of capture. Regardless of the precise legal terminology, all of the ons and statutes may use such terms as ' first in time, first in right, priority in time, or the ru subjects examined below are governed by rules in which legitimate ownership is created by
Lueck & Miceli – Property Law 17 that homogeneity can be attained easily by investing in the low cost claimant's technology. The more likely reality is that claiming costs depend not only on endogenous investment decisions but also on exogenous forces that generate and preserve heterogeneity. Consider two possibilities. First, if the distribution of talent across individuals is not equal, some people will have innate advantages that will be difficult or impossible to overcome with investment. Second, if there is random variability in opportunities, then some individuals will be in the position of being the low cost claimant; again, investment is unlikely to destroy the random advantage. Because first possession is a rule that restricts competition to a time dimension, there is another reason why investment cannot routinely eliminate heterogeneity. Cost advantages, no matter how they were gained initially, are expected to diminish over time because potential investors ultimately will gain information that allows them to mimic the behavior of the low cost person (Kitch 1977, Suen 1989). As long as costs depend on exogenous factors, dissipation will be incomplete. In the worst-case race equilibrium, the first claimant will own just the value of his exogenous advantage; in the best-case, extreme heterogeneity or the full information game theory equilibrium, the first claimant will own the full potential value, VS , of the asset. 3.3 The Rule of Capture for Asset Flows When the costs of enforcing a claim to the asset are prohibitive, ownership can be established only by capturing or ‘reducing to possession’ a flow from the asset. (See the right side of Figure 1.) The rule of capture -- simply a derivation of the rule of first possession -- will occur when enforcing possession of the flow is cheaper than enforcing possession of the stock. Wildlife and crude oil are the classic examples: ownership is established only when a hunter bags a pheasant or when a barrel of oil is brought to the surface. The stock itself, be it the pheasant population or the entire underground reservoir of oil, remains unowned. As a result, the new ‘race’ is to claim the present flow R(t) by capturing the product (e.g., the dead pheasant) first. As a rule of capture, first possession can lead to classic open access dissipation (Epstein 1986, Lueck 1995). Under the rule of capture no one owns the asset’s entire stream of flows, 0 R() . t dt ∞ ∫ Now the formal economic analysis of dissipation is just one-period, rather than intertemporal as in the race, and in fact is identical to the open access model developed in section 2.1, with an equilibrium level of effort determined by equation (2.2). 3.4. First Possession in Law The law of first possession seems to be consistent with the model that includes two potential paths of dissipation (racing and over-exploitation). When first possession has the potential for a race, the law tends to mitigate dissipation by assigning possession when claimant heterogeneity is greatest. On the other hand, when first possession breeds a rule of capture, the law tends to limit access and restrict the transfer of access rights to limit open access exploitation. It should be noted that judicial opinions and statutes may use such terms as ‘first in time, first in right,’ ‘priority in time,’ or the ‘rule of capture.’ Regardless of the precise legal terminology, all of the subjects examined below are governed by rules in which legitimate ownership is created by
Lueck 8 Miceli-Property Lato establishing on before anyone else. Table I summarizes some important first possession rules ITable I here] In those cases where first possession rules establish ownership in a resource stock, a number of common principles are evident. First, possession tends to be defined so that valid claims are made at low cost and before dissipating races begin, thus exploiting claimant heterogeneity Second, once rights are established, the transfer of rights to the resource is allowed routinely Third, the use of auctions or other administrative allocation mechanisms are high cost alternatives In certain cases, establishing possession of an entire stock is especially costly and leads to the rule of capture, as in the case of so-calledfugitive' resources( Rose 1986)such as oil and wildlife. In these cases a number of common principles can be found. First, the rule of capture may not produce severe dissipation when there are but a few users or when there are what rose (1986)calls'plenteous'goods. Thus open access may persist optimally as in the case of nineteenth-century whaling. Second, when dissipation becomes severe, access to the resource tends to be limited through legal, contractual, or regulatory methods. Third, transfer of rights to capturable flows tends to be restricted. Contemporary fishing regulations are perhaps the best example of such regimes, though the complexity of assets makes it difficult to eliminate the margins for dissipation( Karpoff 1987) Even possession under the rule of capture can vary, as illustrated in the famous case of Pierson v Post where the court was divided over whether possession of a wild fox was determined by"hot pursuit or physical capture. A similar distinction was present in nineteenth century Atlantic whaling(Holmes 1881, Ellickson(1989). Here, the rule of capture typically required that a arpoon be fixed to the mammal before a legitimate ownership interest was established, the fast fish, loose-fish'rule. In the case of the aggressive sperm whale, however, the iron holds the whale rule granted ownership to a whaler whose harpoon first was affixed to the whale so long as the whaler remained in fresh pursuit. The law seems to recognize how the precise way in which possession is defined will influence the outcome and tends to define possession so that waste(e.g, fruitless or dangerous whaling effort)will be minimized What must be done to maintain a legitimate claim? Ownership, says Blackstone, remains with the original taker, till such time as he does some other act which shows an intention to abandon it. In general the law tends not to require a claimant to continually exert the effort required for The analysis here suggests broad confirmation of the economics models, but the literature shows considerable disagreement among law and economics scholars on the merits of first possession rules(Merrill 1986). For instance, in studies of homesteading(Anderson and Hill 1990)and water(Williams 1983) first possession has been criticized as causing wasteful races. In contrast, studies of the broadcast spectrum(Hazlett 1990), homesteading(Allen 1991), and patents and mining(Kitch 1977)argue that racing dissipation is minimal ro, a rare empirical study on this issue, Lerner(1997)finds evidence consistent with racing in the U.S.disk drive Pierson v. Post, 1805, 3 Cal.R. 175, 2 Am. Dec. 264 (Sup. Ct. ofN.Y. 1805). Dharmapala and Pitchford(2002) develop a formal model of the differential incentives under the two rules S>Book ll, Chapter 1. Of course, property rights can also be relinquished by gift or sale to another
Lueck & Miceli – Property Law 18 establishing possession before anyone else. Table 1 summarizes some important first possession rules.52 [Table 1 here] In those cases where first possession rules establish ownership in a resource stock, a number of common principles are evident. First, possession tends to be defined so that valid claims are made at low cost and before dissipating races begin, thus exploiting claimant heterogeneity.53 Second, once rights are established, the transfer of rights to the resource is allowed routinely. Third, the use of auctions or other administrative allocation mechanisms are high cost alternatives. In certain cases, establishing possession of an entire stock is especially costly and leads to the rule of capture, as in the case of so-called ‘fugitive’ resources (Rose 1986) such as oil and wildlife. In these cases a number of common principles can be found. First, the rule of capture may not produce severe dissipation when there are but a few users or when there are what Rose (1986) calls ‘plenteous’ goods. Thus open access may persist optimally as in the case of nineteenth-century whaling. Second, when dissipation becomes severe, access to the resource tends to be limited through legal, contractual, or regulatory methods. Third, transfer of rights to capturable flows tends to be restricted. Contemporary fishing regulations are perhaps the best example of such regimes, though the complexity of assets makes it difficult to eliminate the margins for dissipation (Karpoff 1987). Even possession under the rule of capture can vary, as illustrated in the famous case of Pierson v. Post where the court was divided over whether possession of a wild fox was determined by “hot pursuit” or physical capture.54 A similar distinction was present in nineteenth century Atlantic whaling (Holmes 1881, Ellickson (1989). Here, the rule of capture typically required that a harpoon be fixed to the mammal before a legitimate ownership interest was established, the ‘fastfish, loose-fish’ rule. In the case of the aggressive sperm whale, however, the ‘iron holds the whale’ rule granted ownership to a whaler whose harpoon first was affixed to the whale so long as the whaler remained in fresh pursuit. The law seems to recognize how the precise way in which possession is defined will influence the outcome and tends to define possession so that waste (e.g., fruitless or dangerous whaling effort) will be minimized. What must be done to maintain a legitimate claim? Ownership, says Blackstone, remains with the original taker, ‘till such time as he does some other act which shows an intention to abandon it.’55 In general the law tends not to require a claimant to continually exert the effort required for 52 The analysis here suggests broad confirmation of the economics models, but the literature shows considerable disagreement among law and economics scholars on the merits of first possession rules (Merrill 1986). For instance, in studies of homesteading (Anderson and Hill 1990) and water (Williams 1983) first possession has been criticized as causing wasteful races. In contrast, studies of the broadcast spectrum (Hazlett 1990), homesteading (Allen 1991), and patents and mining (Kitch 1977) argue that racing dissipation is minimal. 53 In a rare empirical study on this issue, Lerner (1997) finds evidence consistent with racing in the U.S. disk drive industry. 54 Pierson v. Post, 1805, 3 Cal. R. 175, 2 Am. Dec. 264 (Sup. Ct. of N.Y. 1805). Dharmapala and Pitchford (2002) develop a formal model of the differential incentives under the two rules. 55 Book II, Chapter 1. Of course, property rights can also be relinquished by gift or sale to another
Lueck 8 Miceli-Property Lato an initial claim, but he cannot remain an owner without incurring some continued possession costs(Holmes 1881). An owner must actively and continuously enforce his ownership claim regardless of whether he obtained ownership by first possession or by subsequent method such as purchase, inheritance, or bankruptcy. The law has two responses to a party lax in exerting effort at continued possession. If an owner intentionally ignores the property it can become abandoned and subject to being reclaimed under first possession. In certain cases,(e.g, minerals, trademarks, water) specific rules, often lumped together as use-it-or-lose-it, have developed to determine precisely when the right has been abandoned If an owner is simply inattentive enough to allow another party to establish continued use of the property, then adverse users can ultimately gain ownership under the doctrine of adverse possession(see section 6. 1). Thus the law requires that an owner continue to exert effort to maintain possession but certainly not to the degree initially required to establish possession. In Holmes's words(1881, p. 236):'Everyone agrees that it is not necessary to have always present power over the thing, otherwise one could only possess what was under his hand. The general rule of not requiring the same effort for continuing possession as for establishing possession recognizes economies of enforcement by collective institutions and a protection of specific investments by the original claimant A first possession rule that leads to an optimal system of ownership for one attribute can leave rights unspecified to another attribute. Establishing rights to land for farming, for instance, might creat a system of rights inconsistent with the optimal use of wildlife or groundwater. The process of establishing possession might cause damage to adjacent environmental assets, as when the diversion of water under prior appropriation damages in-stream resources(Leshy 1987, Sprankling 1996). Indeed, the application of first possession to environmental goods(e.g, scenic iew)is not well developed in the law. Private contracting to consolidate land holdings is a possible solution to the ownership problem for the attached resource, but this is an imperfect solution when contracting costs are positive(Libecap and Wiggins 1984, Libecap 1989). For example, detailed property rights to small, urban parcels of land can lead to severe open access dissipation for subsur face oil and gas production. Recent work by Hansen and Libecap(2004) shows that soil erosion during the Dust Bowl'can be similarly viewed as a failure of private contracting among many small farmers Possession rules can also swing dramatically from a rule of capture to a perpetual right to a stock. Water law illustrates the issue clearly. Under absolute ownership a landowner can claim groundwater under the rule of capture by pumping water to the surface, under prior appropriation, however, a successful first claimant earns a permanent withdrawal right to a measured quantity extracted each year. Indeed, such a switch in regimes begs the question of This principle is clearly articulated in the famous'dung case, Haslem v. Lockwood, 37 Conn. 500(1871). In Haslem the plaintiff was a farmer who gathered manure from the ditch along a public highway into heaps, ' leaving them overnight while he returned to his farm to get a cart for transport of the heaps. Before he returned the defendant had begun to load the heaps and take them away. The court, in deciding for the plaintiff, ruled that the manure was abandoned property in the public ditch, that the plaintiff established ownership via first possession by piling the dung into heaps, and finally, that the plaintiff having established ownership did not have to exert the same effort to maintain possession and was therefore justified in returning home to fetch his cart. Implicit in this case and elsewhere is the fact that collective institutions(e.g, courts, custom, police)actively enforce property rights once ey are established, thus minimizing the resources devoted to continued possession Continued possession or maintenance costs can be added to the first possession model, noting that net rents are R(t-c(t) where c(t) is the current cost of maintaining possession. This addition will increase t* in the claim model Nuisance law, as discussed in section 7. 4, addresses these problems
Lueck & Miceli – Property Law 19 an initial claim, but he cannot remain an owner without incurring some continued possession costs (Holmes 1881).56 An owner must actively and continuously enforce his ownership claim, regardless of whether he obtained ownership by first possession or by subsequent method such as purchase, inheritance, or bankruptcy. The law has two responses to a party lax in exerting effort at continued possession. If an owner intentionally ignores the property it can become abandoned and subject to being reclaimed under first possession. In certain cases, (e.g., minerals, trademarks, water) specific rules, often lumped together as ‘use-it-or-lose-it,’ have developed to determine precisely when the right has been abandoned. If an owner is simply inattentive enough to allow another party to establish continued use of the property, then adverse users can ultimately gain ownership under the doctrine of adverse possession (see section 6.1). Thus the law requires that an owner continue to exert effort to maintain possession but certainly not to the degree initially required to establish possession. In Holmes’s words (1881, p.236): ‘Everyone agrees that it is not necessary to have always present power over the thing, otherwise one could only possess what was under his hand.’ The general rule of not requiring the same effort for continuing possession as for establishing possession recognizes economies of enforcement by collective institutions and a protection of specific investments by the original claimant. 57 A first possession rule that leads to an optimal system of ownership for one attribute can leave rights unspecified to another attribute.58 Establishing rights to land for farming, for instance, might create a system of rights inconsistent with the optimal use of wildlife or groundwater. The process of establishing possession might cause damage to adjacent environmental assets, as when the diversion of water under prior appropriation damages in-stream resources (Leshy 1987, Sprankling 1996). Indeed, the application of first possession to environmental goods (e.g., scenic view) is not well developed in the law. Private contracting to consolidate land holdings is a possible solution to the ownership problem for the attached resource, but this is an imperfect solution when contracting costs are positive (Libecap and Wiggins 1984, Libecap 1989). For example, detailed property rights to small, urban parcels of land can lead to severe open access dissipation for subsurface oil and gas production. Recent work by Hansen and Libecap (2004) shows that soil erosion during the ‘Dust Bowl’ can be similarly viewed as a failure of private contracting among many small farmers. Possession rules can also swing dramatically from a rule of capture to a perpetual right to a stock. Water law illustrates the issue clearly. Under absolute ownership a landowner can claim groundwater under the rule of capture by pumping water to the surface; under prior appropriation, however, a successful first claimant earns a permanent withdrawal right to a measured quantity extracted each year. Indeed, such a switch in regimes begs the question of 56 This principle is clearly articulated in the famous ‘dung case,’ Haslem v. Lockwood, 37 Conn. 500 (1871). In Haslem the plaintiff was a farmer who gathered manure from the ditch along a public highway into ‘heaps,’ leaving them overnight while he returned to his farm to get a cart for transport of the heaps. Before he returned the defendant had begun to load the heaps and take them away. The court, in deciding for the plaintiff, ruled that the manure was abandoned property in the public ditch, that the plaintiff established ownership via first possession by piling the dung into heaps, and finally, that the plaintiff having established ownership did not have to exert the same effort to maintain possession and was therefore justified in returning home to fetch his cart. Implicit in this case and elsewhere is the fact that collective institutions (e.g., courts, custom, police) actively enforce property rights once they are established, thus minimizing the resources devoted to continued possession. 57 Continued possession or maintenance costs can be added to the first possession model, noting that net rents are R(t)-c(t) where c(t) is the current cost of maintaining possession. This addition will increase t* in the claim model. 58 Nuisance law, as discussed in section 7.4, addresses these problems