Information asymmetries and the rights to exclude.

• Author: Strahilevitz, Lior Jacob

TABLE OF CONTENTS I. THE RIGHTS TO EXCLUDE A. The Hermit's Right B. The Bouncer's Right 1. Sex Offender Residency Restrictions 2. The Greek System 3. Intellectual Property Rights C. Exclusionary Vibes 1. The Regulation of Residential Advertising 2. Aesthetics 3. "No Trespassing Signs" and Public Trust Lands 4. The Inadequacies of Exclusionary Vibes D. Exclusionary Amenities E. Non-Trespass-Based Rights as Property Rights F. Exclusionary Strategies as Substitutes in Property Theory and Case Law 1. Takings 2. Adverse Possession 3. Fair Housing Act II. THE RESOURCE OWNER'S CHOICE OF EXCLUSION STRATEGIES A. Private Information B. The Nature of the Game C. Law D. Social Meaning E. Mistakes III. SOCIETAL CONSIDERATIONS IN REGULATING OWNERS' EXCLUSION STRATEGIES A. Symbolic Externalities B. Misperception Externalities C. Liberty Externalities D. Mechanisms for Selective Regulation o Exclusion Rights E. Applications 1. Sex Offenders 2. Racial Discrimination in Rental Housing 3. Religious Exclusion in Housing CONCLUSION The American law generally regards the "bundle of rights" as property's dominant metaphor. On this conception of property, ownership empowers an individual to control a particular resource in any number of ways. For example, he may use it, transfer it, exclude others from it, divide it, and perhaps even destroy it. (1) The various rights in the bundle, however, are not equal in terms of importance. To the contrary, American courts and commentators have deemed the "right to exclude" foremost among the property rights, with the Supreme Court characterizing it as the "hallmark of a protected property interest" (2) and leading property scholars describing the right as the core, or the essential element, of ownership. (3) Yet for all its centrality, in the minds of courts and legal scholars, there is substantial conceptual confusion about the nature of the "right to exclude." This confusion manifests itself in the form of inconsistent judicial opinions and unsatisfying commentary on those opinions.

Discussions of a unitary "right to exclude" in property law obscure more than they reveal, in part because scholars of exclusion have focused entirely on pure in rem exclusion rights protected by trespass law without exploring the interactions of those exclusion rights that are not protected by trespass law. In my view, it is more helpful to think about exclusion more broadly, so as to encompass those rights that are not themselves founded on trespass law, but that can nevertheless substitute for trespass-based exclusion rights. Exclusion, in these terms, includes a property owner's efforts to exclude prospective entrants from his resource, as well as the entrants' decisions to exclude themselves from the owner's resource.

Broadly conceived in this manner, the fight to exclude can be unbundled into its four component rights: (4) (1) The Hermit's Right (the right to keep everyone off the resource owner's property); (2) The Bouncer's Right (the right to admit prospective entrants selectively to the resource owner's property); (3) The Exclusionary Vibe (the fight to convey messages about who is welcome or unwelcome on the property, enforced primarily by social and psychological sanctions); and (4) The Exclusionary Amenity (the right to embed polarizing and costly club goods on the resource owner's property in order to sort between desirable and undesirable entrants). (5) Though the first two rights are enforced via trespass law, the latter three rights are substitutes for each other, such that when the law tries to restrict one right this merely encourages an owner to exercise another.

The potential substitutability of trespass-based and non-trespass-based exclusion rights raises an important question that this paper will answer: How does a resource owner choose which exclusion strategy to adopt? This paper's most important insight is that information costs are often the primary factor guiding a resource owner's decision about which fight to exclude he should exercise in a particular context. More precisely, when a prospective entrant has private information about his preferences and behaviors that the resource owner cannot obtain at a low cost, the resource owner essentially will delegate the exclusion function to the prospective entrant, using either exclusionary vibes or an exclusionary amenities strategy. When, by contrast, pertinent information asymmetries do not exist, the resource owner generally will prefer a bouncer's right strategy.

This paper's other primary contribution is to show that the government can, and does, influence resource owners' preferences among the various rights to exclude, not only through direct and selective prohibitions on exclusion (like those contained in the Fair Housing Act) but also through information access regimes, like Megan's Law and privacy tort law. By altering the cost structure associated with resource owners' discovery of prospective entrants' private information, governmental policies can discourage resource owners from exercising those exclusion rights that undermine social welfare.

This paper proceeds as follows. Part I begins with a very brief examination of exclusion more generally, and draws on Henry Smith's illuminating distinction between governance and exclusion. The Part then breaks down the "right to exclude" into its component parts, explaining hermit's exclusion, bouncer's exclusion, exclusionary vibes, and exclusionary amenities in more detail. The Part concludes by examining the extent to which these various rights to exclude are substitutes for one another.

Part II explains the framework that resource owners use to decide which of the four exclusion strategies they will adopt. This Part argues that the presence or absence of private information is the critical heretofore-unrecognized factor in this decision. This Part then identifies other considerations, such as the nature of the payoff structure, the role of law, the social meaning of various exclusion strategies, and the susceptibility of various exclusion strategies to coordinated action. These considerations may prove decisive for some resource owners contemplating which exclusion strategies to pursue.

Part III asks when the government should intervene to constrain a resource owner's choice of a particular exclusion strategy. There are two dimensions to this argument: the first is an analysis of the negative externalities associated with non-intervention by the government, and the second is an assessment of the costs associated with government intervention, such as the costs of correctly identifying a resource owner's exclusion strategy and the probability of erroneous judgments by the state. Part III then applies this framework to evaluate government policies regarding the residence of sex offenders in residential communities, racial discrimination in the rental market, and voluntary residential segregation by religious groups.

A brief conclusion is provided in Part IV.

1. THE RIGHTS TO EXCLUDE

   This Part introduces the four distinct rights to exclude and elaborates on their uses, importance, and relative merits. Before analyzing the component parts of the right to exclude, it behooves us to consider the right narrowly, in accordance with orthodox property scholarship.

   During the past few years, Henry Smith's keyboard has been the source of the most fascinating contemporary scholarship in property law. Beginning with an article in the Journal of Legal Studies, (6) Smith has analyzed property regimes as mediating a choice between two strategies for controlling a resource: governance and exclusion.

   Exclusion, in Smith's framework, refers to "a low-cost, but low-precision, method that relies on rough informational variables like boundaries to define legal entitlements." (7) When the law grants an owner a right to exclude, it delegates authority over that resource to an owner or group of owners, who can decide whether to fence it off from the outside world or allow users to come and go as they please. These are in rem rights, good against the entire world, and the state will side with the owner when someone seeks to violate those rights. (8)

   This delegation to the resource owner can be advantageous for a host of reasons: it assigns the gatekeeper right to the party with the greatest incentive to exercise it in a wealth-maximizing way; it reduces the need to coordinate among multiple stakeholders in order to make decisions about how to use the resource; and it may maximize consumer options if different owners of fungible resources adopt varying exclusion strategies for optimizing the value of their property. At common law, resource owners' exclusion rights tended to maximize their discretion about whom to admit, with the important exception of common carriers, whose monopoly position in the marketplace justified very substantial limitations on their rights to exclude. (9) In the modern era, courts and legislatures have rendered exclusion rights less absolute, imposing nondiscrimination obligations on resource owners who lack monopolies, but still conferring upon resource owners substantial discretion over whom to admit. (10)

   Smith contrasts the exclusion strategy with governance rules:

   At the pole opposite of exclusion along the organizational dimension are what I am calling governance rules. These roles ... pick out uses and users in more detail, imposing a more intense informational burden on a smaller audience of duty holders. For example, village herdsmen may have rights to graze animals that are circumscribed as to number of animals, time of grazing, and so on.... [A] wide range of rules, from contractual provisions, to norms of proper use, to nuisance law and public environmental regulation can be seen as reflecting the governance strategy; compared to basic trespass and property law, all these governance rules require the specification of proper activities. (11) Governance, in...