Optimal Property Rights in Financial Contracting

Abstract

This article adopts a definition of property rights from legal scholarship: A property right (in contrast to a contractual right) is enforceable, not only against the parties to a contract, but also against third parties outside the contract. In a financial contracting setting, we ask: When should the law enforce a lender's contractual protections as property rights, given that these rights may be hidden and costly for other lenders to discover? Our model explains why the law limits the creation and enforceability of property rights, and develops principles of optimal enforceability. These principles are often reflected in the law.