Role of the Legal Framework in Defining Property Rights and Reservation Options
The legal framework plays a foundational role by establishing the initial property rights of parties in an economic interaction. This formal allocation of rights is what determines the reservation option, or fallback position, for each party. By defining these initial endowments, the legal system creates the necessary basis for private bargaining, through which parties can negotiate and trade these rights to achieve Pareto-improving outcomes.
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Role of the Legal Framework in Defining Property Rights and Reservation Options
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