The Problem of Sequential Exchanges

By Marian Moszoro

Since Coase (1960), the perspective on property has been contractual and the economic analysis of contracts has focused on single-exchange in-personam enforcement, where only use-related externalities arise, transaction costs are internalized by the parties, and mandatory rules constraining parties’ freedom to structure their rights are unnecessary.

As Arruñada (2016) argues, such a two-party world is an axiomatic simplification. In reality, past and future acquirers (i.e., third parties to present transactors) have implications in rights ad personam. For example, when the transactor in one of Coase’s cases is assumed to hold a right to pollute, it is undefined if she also has a right to sell such a right or to sell the corresponding asset, and, if she does sell the asset, it is also unclear who would be committed by the previous transaction on the right to pollute the seller or the whole world, including asset buyers. Freedom of contract will cause greater information asymmetry for non-contemporaneous acquirers of that specific and alike assets for they may be subject to analogous burdens.

This exchange-related externality reduces the value of alike durable assets due to:

a)     Lesser standardization: when customized property rights are enforced in rem, the value of alike assets is reduced if acquirers incur greater costs to understand the idiosyncrasies of the transacted asset (Merrill and Smith 2000; Smith 2011)

b)    Greater information asymmetry: as in Akerlof (1970), granting in rem enforcement to hidden rights (e.g., a hidden mortgage or a hidden entitlement to impede certain uses) decreases the market value of similar assets (which potential buyers may presume to be encumbered with hidden burdens) due to increased verification costs (Hansmann and Kraakman 2002) 

To contain the risk of inter-temporal third parties (i.e., past or future transactors) challenging the legitimacy of the contract in in-rem exchanges of durable assets, contractees undertake costly formalities of private ordering (e.g., title insurance for houses in the US and France) or public ordering (e.g., registries for real estate in Spain and Italy).


An illustrative example of “rights in rem” versus “rights in personam” is paper money (e.g., a common $20 bill) versus digital currencies (e.g., bitcoin):

a)     On the one hand, a $20 dollar bill is a good ad rem in essence: Its holder is the presumable right owner, it is easily transferable and interchangeable, and its verification is relatively simple (i.e., there is a registry for each dollar bill, but it is rarely consulted for common nominal values). Moreover, one does not have to demonstrate the right to its possession to execute a transaction (e.g., an exchange for another good).

b)    On the other hand, bitcoin is a pure good ad personam: Its value is embedded in the registry that shows the chain (called “lockchain”) of previous owners until its origin (i.e., “mine”). In other words, without the registry, bitcoin does not have any value at all.

 The fact that all transactions are registered in the lockchain of digital currencies will surely serve to develop interesting research on the externalities of sequential transactions.


Akerlof, G. A. (1970). The market for “lemons”: Quality uncertainty and the market mechanism. Quarterly Journal of Economics 84(3), 488–500.

Arruñada, B. (2016). Coase and the departure from property. In C. Ménard and E. Bertrand (Eds.), Ronald H. Coase, Chapter 22. Cheltenham, UK: Edward Elgar Publisher.

Coase, R. H. (1960). The problem of social cost. Journal of Law and Economics 3, 1–44.

Hansmann, H. and R. Kraakman (2002). Property, contract, and verification: The numerus clausus problem and the divisibility of rights. Journal of Legal Studies 31(S2), S373– S420.

Merrill, T. W. and H. E. Smith (2000). Optimal standardization in the law of property: The Numerus Clausus principle. Yale Law Journal 110(1), 1–70.

Smith, H. E. (2011). Standardization in property law. In K. Ayotte and H. E. Smith (Eds.), Research Handbook on the Economics of Property Law, pp. 148–173. Cheltenham: Ed- ward Elgar.