The Transfer of Property Rights by Theft: An Economic Analysis

This article studies the involuntary transfer of property rights by theft - a topic almostunexplored in the law and economics literature. The question is whether a buyer of a stolen goodshould obtain title to the good if he/she has purchased it in good faith. As described in the articledifferent jurisdictions treat this issue differently. The traditional theory suggests that there is a tradeoffbetween the costs of protecting the good and the costs of verifying the ownership. However, asshown, the rule of law concerning this issue significantly affects parties' incentives. Specifically, itis shown that a rule of law where good faith is irrelevant in determining the issue of property rightsPareto dominates a rule where good faith may protect an innocent buyer. Thus, an owner of an assetwill spend more resources on protecting his property and potential buyers will incur higher costs inorder to verify the ownership when good faith is decisive for the transfer of property rights.JEL Classification: K11, K14 and K42Keywords: property right law, theft, good faith and game theory