Read an Excerpt
INFORMATION AND EXCLUSION
By Lior Jacob Strahilevitz
Yale University PressCopyright © 2011 Lior Jacob Strahilevitz
All right reserved.
Chapter OneTHREE MECHANISMS FOR EXCLUSION
When discussions of "rights" appear in the newspapers or blogo-sphere, the authors are often referring to individuals' rights that correlate with distinct obligations on the part of governments. An individual's right to free speech correlates with a governmental duty not to, say, throw a dissident in jail on the basis of his unpopular expressions. An individual's due process rights prevent the government from depriving an individual of liberty without first following a set of fair procedures. These sorts of rightslong dubbed negative libertiesprevent the government from taking particular actions against individuals. In some democracies, especially European ones, individuals are guaranteed positive rightssuch as a right to shelter, health care, or educationand the government has affirmative duties to vindicate those rights. Analysts of all stripes have spilled a great deal of ink concerning political rights that vindicate affirmative and negative liberties.
Another set of rights figures somewhat less prominently in the popular discourse but perhaps influences individuals' everyday lives to a more significant degree than political rights. There are contract rights and property rights. When Americans arrive at work each weekday, it is a series of contract rights that governs their relationship with their employer. When Americans return from work at the end of the day, it is a series of property rights that protects the privacy of their homesindeed, property rights were necessary to keep their homes free of undesired interlopers while the owners were at work. Contract rights facilitate the worker's commute to work (probably in a vehicle purchased by the worker via a contract with a car dealership), and property rights govern the entertainment websites that the worker visits during a coffee break. Contract and property rights are, in short, omnipresent in people's everyday affairs.
The basic distinction between contract and property rights is straightforward. A contract right is a right that can be enforced only against parties to a bargain. Lawyers call such rights "in personam." An owner can enforce a property right, also called an "in rem" right, against any member of society. A couple of illustrations will be helpful. Suppose I contract with a handyman to paint my house at 9:00 a.m. on Monday. When nine o'clock rolls around, I see no sign of the handyman, so I call him on his cell phone. He says that after agreeing to paint my house, he got a call from James, who offered him $200 more than I was paying to paint his similarly sized house at 9:00 a.m. on Monday, so he decided to do that more lucrative job instead. The handyman seems to have breached our contract, and I may be able to recover damages against him in court. But I have no contract rights against James. My rights in this instance are in personam, and they only run against individuals with whom I have entered into contractual arrangements.
Now suppose that I wake up the next morning and find James splashing in my swimming pool. I don't know James from Adam. I never gave him permission to use my pool, but neither did I tell him he couldn't dive in whenever he pleased. No matter, my right to exclude James from my pool is an in rem rightit is good against the whole world, and certainly good against James in this instance. I can sue James for trespass, and will certainly win, even though James and I never entered into a contract whereby he promised me not to swim in my pool. This right to exclude James is a quintessential property right. Indeed, the United States Supreme Court has characterized the right to exclude as the "hallmark of a protected property interest," and property scholars routinely describe the right as the core, or the essential element, of ownership. We need not think too hard to imagine a world without rights to excludethe virtual world in Second Life essentially has no prohibitions on trespassing. As a result, some mayhem ensues: vandals destroy the virtual campaign headquarters set up by presidential candidate John Edwards, smearing his posters with excrement or covering them with blackface, and openings of virtual stores in Second Life are disrupted by virtually armed paramilitary forces.
The right to exclude protects more than backyard swimming holes. It is the essential protection for a pharmaceutical company seeking to bring a new drug to the market, a Manhattan nightclub owner trying to establish a haven for the trendy and the beautiful, and a baseball stadium owner who wants to make sure that only paying customers get to see the action on the field firsthand.
My right to keep James out of my swimming pool, backed by trespass law, is indeed a vital sort of exclusion. Yet it is not the whole ballgame. Individuals can be excluded effectively via other mechanisms as well. Namely, I can use my protected political rights to keep James off my property. My right to display a "No Trespassing" sign depends as much on First Amendment rights of expression as it does on property rights. And an individual who exercises power over a community, such as a real estate developer, a landlord, or the proprietor of a nightclub, can use contract law to control which sorts of individuals wind up gaining admission to a community, and which sorts of individuals wind up on the outside looking in. In my view, it is helpful to think about exclusion more broadly, so as to encompass those rights that are not themselves founded on trespass law but can nevertheless substitute for in rem exclusion rights. Exclusion, in these terms, includes a property owner's efforts to exclude prospective entrants from a resource, as well as the entrants' decisions to exclude themselves from the owner's resource.
Properly understood, the right to exclude encompasses three component rights. The first right enables the resource owner to exclude outsiders using trespass law. The owner can exclude everyone from the property, as the government may do with an environmentally fragile wilderness area; admit only a few stylish individuals to the club while keeping most would-be entrants shivering behind a red velvet rope; or admit the overwhelming majority of entrants but exclude a small segment of undesirable prospective customers ("No shirt, no shoes, no service"). This right to admit prospective entrants selectively is known as the "bouncer's right," and it will be our focus in chapter two.
A second exclusionary right relies not on trespass law, but on language and the predictable social dynamics that it can create. This right is really a free speech right, one that permits a resource owner to convey messages about who is welcome or unwelcome on the property. Will different prospective freshmen show up if you change the name of your university from "The University of the South" to "Sewanee"? You had better believe it, and a concern about student demographics explained that recent rebranding campaign by a well-regarded liberal arts school. We will refer to intentional use of language in order to prompt undesired entrants to exclude themselves as "exclusionary vibes." Chapter three will discuss them in detail.
Finally, in some instances where a resource owner wants undesired prospective entrants to sort themselves out, an exclusionary vibe may be ineffective, perhaps because the law sometimes prohibits the use of exclusionary vibes (as we will see later), or because the stakes are high enough to prompt members of undesired groups to ignore the exclusionary vibe. In such circumstances, a resource owner may embed an "exclusionary amenity" in the community. An exclusionary amenity is a costly resource that desired entrants will benefit from but undesired residents will not. Because of that simple dynamic, a resource owner can convince undesired prospective entrants who would be willing to ignore an exclusionary vibe that joining the community, and paying for an amenity that will not benefit them, will be too costly. Chapter four will offer a number of instances where exclusionary amenities seem to have been employed by real estate developers, town planners, and other social engineers.
It should be immediately apparent that a savvy resource owner can substitute one exclusionary strategy for another. When the law restricts the discretion available to an owner to exclude people directly, as it often does, that owner may turn to exclusionary vibe strategies, which may be scrutinized less closely by government officials, or which might be favored by some measure of constitutional protection. The potential substitutability of trespass-based and non-trespass-based exclusion rights raises an important question that chapters five and six will answer: How does a resource owner choose which exclusion strategy to adopt? One of this book's core insights is that information costs are often the primary factor guiding a resource owner's decision about which exclusionary strategy to exercise in a particular context. More precisely, when a prospective entrant has private information about her 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, the resource owner has or can easily obtain information about prospective entrants' relevant attributes, the resource owner generally will prefer a bouncer's right strategy.
The Demand for Exclusivity
Baseball legend Yogi Berra famously said about Ruggeri's, a St. Louis restaurant, that "nobody goes there anymore, it's too crowded." Although interpreting Berraisms has always been a risky endeavor, the quote makes sense if we interpret Berra to be saying something along the lines of "I don't go there anymore; it's too crowded." Indeed, that is a sentiment that most readers will have identified with at some point in their lives. Popularity has a downside, and one such downside is that the original customers who gave the place some of its charm may be driven elsewhere by crowds of new patrons. It was the exclusivity of Ruggeri's years ago, manifested in the lack of crowds and the presence of the right kind of patrons, that made the restaurant worth going to at the outset.
Similar sorts of dynamics still play outeven where there are no physical constraints on crowd capacity. In 2007, corporate management at the ubiquitous clothing chain the Gap confronted a deeply disturbing downward trend in their sales. The cause? Gap was trying to sell clothes to too many customers. In their effort to appeal to teenagers, middle-aged shoppers, and the elderly, they wound up exciting nobody. Fashion industry analysts were seemingly unified in their diagnosis of what ailed the Gap:
"If you stand for everything in fashion today, you stand for nothing," said Paul R. Charron, the former chief executive of Liz Claiborne. "Brands like the Gap ... have a special challenge to be relevant in a period when focus and exclusivity are so important."
"The definition of a specialty store is focus," said Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting firm and investment bank. Gap does not have that focus, Mr. Davidowitz said. And in trying to meet the needs of infants, teenagers, and even the elderly, its designers play it safe, season after season. "The merchandise is booooooring," Mr. Davidowitz added. "Too basic."
"They have to pick out a demographic and go after it with a maniacal focus, to the exclusion of anyone else," said Bob Buchanan, an analyst at A.G. Edwards & Sons. "If there is one thing you cannot be in the middle of the mall anymore, it is all things to all people," he added. "And that is what Gap has been trying to do."
As an exemplar of the sort of a store whose strategies should be a model for the Gap, industry insiders identified Abercrombie & Fitch, a store that is "openly hostile to what it considers the wrong customertypically anyone over 30warding them off with booming music, dark shades on the front windows and teenage employees standing out front. Gap has veered to the other extreme, putting out a welcome mat to nearly everyone, with well-lighted, sparsely decorated stores and ageless fashions."
A deep global recession followed this fashion commentary in short order, and to readers perusing this text not long after its publication date, the sentiments expressed might seem like nostalgic reminders of a different, gilded age. Abercrombie has fallen on hard times toowith sales down substantially in the recession as the company was criticized for failing to offer discounts to suddenly value-conscious consumers. Perhaps going forward the fashion industry will reconsider its niche-oriented design and marketing choices. But I doubt it. The same desire for exclusivity that dominates the fashion world characterizes the markets for many consumer goods and services: hair stylists, art, and of course real estate, which will occupy much of our attention in the pages that follow.
In common parlance, the condominium and the cooperative are treated interchangeably. A typical home buyer in a densely populated community will go out looking to buy an apartment, not a condo or co-op per se. As a practical matter, the would-be buyer who decides to make an offer on a unit in a cooperative building will have more work ahead of him than his counterpart who tries to buy a condominium unit. Whereas the condominium buyer needs to make only one personthe sellerhappy, the cooperative unit buyer must convince the cooperative's board of directors that he should be allowed to buy into the building. What explains this difference?
When a condominium purchaser buys a condominium he is purchasing a combination of kinds of ownership rights. He will own a particular apartment in fee simple absolutethe same sort of ownership arrangement that characterizes most single-family homes. He will also obtain rights to use common spaces in the condominiumthe elevator, the lobby, the swimming pool, and so onthat are shared with all his fellow condominium residents. A cooperative owner buys something different. By law, a cooperative is a nonprofit corporation comprised of its shareholders. In a co-op building containing twenty identical apartments, each owner will own a 5 percent share of the building as a whole. Technically, every fractional owner will have the same rights to each apartment that he has to the elevator or lobby. As a practical matter, however, rules arise in each cooperative building giving every owner possessory rights of one (and only one) apartment. That said, because of the nature of cooperative ownership, owners are on the hook for their fellow owners' defaults. More precisely, if one of the twenty owners stops making mortgage payments, the remaining nineteen will have to pay that owner's share or risk defaulting on the mortgage for the building as a whole.
This greater financial interdependence among cooperative owners has affected the laws governing their decision making. More precisely, the law has given cooperative owners more discretion in deciding who to approve as an owner than condominium owners are allowed. The other significant differences between condominiums and cooperatives stem largely from the divergent ownership structures: cooperative owners are typically heavily involved in screening would-be owners, they have more detailed rules governing owners' use of the building, and they spend more time than their condominium counterparts on internal governance as a consequence. In an era where apartment owners are sensitive to the risks that defaulting neighbors might impose on them and generally resistant to spending precious free time in condominium board meetings, it is little wonder that the condominium structure is preferred by most. Developers of new apartment buildings overwhelmingly prefer to adopt the condominium structure over the cooperative one, and some cooperative buildings have endured the lengthy, costly, and contentious process of converting themselves to condominiums. Still, these transition costs are formidable, so a lot of cooperative buildings have retained their structure despite its inefficiencies.
This discussion brings us to recent research by Michael Schill, Ioan Voicu, and Jonathan Miller. Consistent with the foregoing analysis, apartments in condominiums generally attract a premium over similar apartments in housing cooperatives. Controlling for the many variables that differentiate housing units, Schill and his coauthors found that, as a general matter, a condominium apartment commands an 8.8 percent premium over a similarly situated cooperative. This finding was consistent with the expectations of Manhattan real estate agents.
Strikingly, however, Schill and his coauthors identified a group of apartments in which the ordinary patterns were reversed. For these apartments, the cooperative form actually conferred a very substantial premiumapproximately 25 percenton owners. The distinguishing characteristic of cooperative units that command a premium is that they bar financing as part of the purchase of a unit. These units, in short, are in buildings where the owners can afford to buy homes without any need for a mortgage. Prohibitions on mortgage financing arise in both condominium and cooperative buildings, but it is the cooperative apartment buildings that command a hefty premium as the domain of Manhattan's economic elites.
Let us be quite clear about what this data means. Wealthy owners of Manhattan cooperative apartments seem willing to pay a hefty premium, sacrifice substantial leisure time, and forgo a great deal of financial privacy at the time of purchase, all for the benefits of exclusivity and having a much greater say in who their neighbors are. For money-is-no-object types, the leisure-time premium paid by cooperative owners may be even more substantial than the economic premium. Cooperatives' authority to exclude has been exercised to keep the likes of Madonna and Richard Nixon out of prestigious New York buildings, but there is also some evidence suggesting that it has been used to exclude members of historically marginalized groups. The New York courts have begun policing decisions to exclude members of protected groups from cooperative apartments closely in recent years.
Excerpted from INFORMATION AND EXCLUSION by Lior Jacob Strahilevitz Copyright © 2011 by Lior Jacob Strahilevitz. Excerpted by permission of Yale University Press. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.