Question

Explain the Normative Hobbes Theorem

Answer 1

It says that the law should aim to allocate property rights to the one who values them the most and thereby it helps in making transaction cost irrelevant and achieving efficiency.

Explanation:

When transaction costs are high, the initial allocation matters for efficiency; goal of the law can be:

Structure the law so as to minimize the harm caused by failures in private agreements.

Or structure the law so as the make the allocation more efficient to begin with, so that fewer negotiations are required and their failure is less costly.

This goal was put forward by Hobbes, who felt that people could not be counted on to be rational enough to cooperate. This is the Normative Hobbes Theorem,