Abstract
This paper studies how the default private property protection liability can lead to persistent resource misallocations. Counties throughout the U.S. had different fence laws that assign the liability for livestock trespassing to different parties. Farmers under “fence-out” rule can claim damage from animal trespassing only if the land is enclosed by a legal fence, while those under “fence-in” rule can claim damage regardless of fence conditions. While Coase (1960) emphasizes that, absent of transaction cost, liability rules do not affect resource distribution, prolonged public debates and occasional violent conflicts between farmers and cattlemen suggest that the liability rules had significant economic implications. For the analysis, I construct a new data set of county-level laws from 1850 to 1920 from state session laws. This data provides a comprehensive legislative history on liability rules for the western states. The analysis exploits the variation in fence laws at the county level over time to quantify the effects of liability rules on agricultural productivity. Consistent with historical accounts, the baseline difference-in-differences results show that fence-in rules incentived agricultural development. Compared to fence-out counties that required farmers to construct fences, fence-in rule increased the density of farmland by 13.4 percent and the share of improved farmland by 18.3 percent. Fence-in rule also increased the cultivation area and the average yield for corn, which is vulnerable to trespassing without fences. This eventually translates to a higher total value of farm output for fence-in counties, although the higher productivity was not reflected in land values.