5

Average Reciprocity of Advantage

Brian Angelo Lee*

1. Introduction

Compensation plays an integral role in the system of practices which constitute the institution of property. This role is most obvious in legal requirements that people or organizations who engage in certain activities that adversely affect other people’s property must compensate the owners of the affected property.1 Compensation requirements therefore provide a lens through which one can obtain a clearer view of the scope and nature of property entitlements and obligations.2

In situations where the law says that compensation is owed, three questions immediately arise. One is who should determine the amount of compensation required. Guido Calabresi and Douglas Melamed (1972) famously addressed that issue by distinguishing between ‘property rule’ protection and ‘liability rule’ protection for entitlements, and the later literature on this question, much of it inspired by Calabresi and Melamed, is now vast.3 A second question is what amount of compensation is required. Because the practical outcome of a given case will often depend significantly on specific assessments of the amount of compensation owed, this second question is one which courts and litigants must grapple with routinely.4

* I wish to thank James Penner, Henry Smith, and participants in the 2012 Philosophical Foundations of Property Law conference at University College London for their helpful comments on an earlier draft of this chapter. Any errors are my own. The Brooklyn Law School Dean’s Summer Research Stipend provided financial support for this project.

1These requirements may not be solely legal. There is an extensive literature on the relationship between informal social norms and the institutions of property, and compensation requirements may play a prominent role in those norms. See e.g. Ellickson 1991. Although my discussion here will focus solely on explicitly legal requirements, there may also be connections to these more informal systems of property regulation. Exploring that possibility will have to wait until another day.

2This clarity is possible even if one does not necessarily subscribe to the stronger claim that ‘[o]f course, the so-called remedy defines the nature of the right’. Calabresi 1997, 2205. See also Coleman and Kraus 1986, 1342–3.

3Note that Calabresi and Melamed’s choice of the term ‘property rule’ was not intended to imply that property entitlements necessarily receive protection of that sort, but rather that such protection, when found at all, is typically found in property contexts. Property entitlements often receive only ‘liability rule’ protection. Indeed, that was one of the main focuses of their discussion.

4Answering this question in any given case may require considering a variety of perspectives, including the game-theoretic, the economic, and the moral.

However, a third basic question has drawn much less sustained attention: what form should that compensation take? The two basic alternatives are monetary compensation and non-monetary compensation. The latter alternative can be further divided into compensation that is of a form essentially similar to the loss for which compensation is being provided—‘in-kind’ compensation—and compensation which lacks that essential similarity. Meanwhile, both monetary and non-monetary compensation can be either explicit or implicit.

Some of these possible forms of compensation are, at least on their face, readily understandable. Explicit monetary compensation, for example, is a familiar part of ordinary life. Other options, however, are less straightforward. Of these, implicit in-kind compensation both has played a prominent role in attempts to justify various governmentally imposed burdens on property owners and is particularly theoretically challenging.5

The basic notion of implicit in-kind compensation goes by various names: ‘average reciprocity of advantage’, ‘reciprocity of advantage’, and ‘implicit in-kind compensation’ are the most common. Although the terms are frequently used, there has been little close analysis of their meanings, and it is not evident that any significant difference exists among the concepts to which they refer. In this chapter, I shall treat them as essentially interchangeable, but I shall typically use the term that first appeared historically, ‘average reciprocity of advantage’.

Although the notion of reciprocal advantage potentially has application in a wide range of contexts, in the United States it typically arises in analyses of the law of eminent domain and of ‘regulatory takings’. When the government exercises its power of eminent domain to confiscate privately owned property for use in some public endeavour, a familiar legal principle requires the government to pay compensation to the owners of the taken property. In the United States, this requirement has been elevated to a constitutional mandate. The Fifth Amendment to the US Constitution explicitly provides, ‘nor shall private property be taken for public use, without just compensation’.6

At first glance, the law governing compensation for physical taking of real property might seem relatively straightforward. Questions quickly arise, however, when property owners assert that a government regulation which affects the use of their property is so restrictive that the regulation’s imposition should be treated as equivalent to a physical confiscation and the government should therefore be required to compensate the owners for the inconvenience caused by that regulation. These claims of alleged ‘regulatory takings’ naturally give rise to two questions: first, whether the governmental action constitutes a ‘taking’,

5The phrase ‘implicit in-kind compensation’ appears to have been first coined by Richard Epstein (1985). Although I shall borrow the term, I do not wish to imply that what I mean here by that term and what Epstein meant are necessarily identical.

6US Const. amend. V. In 1897 the US Supreme Court held that this amendment is binding on state governments as well as the federal government, by virtue of having been ‘incorporated’ in the Fourteenth Amendment. Chicago, B. & Q. R. Co. v Chicago 1897, 236–8. State constitutions themselves typically contain similar language.