In the exercise of property rights, potential conflicts can be prevented as in striking a bargain (Muthoo 2000). Indeed, the common law is efficient, but the law generated by the institutions of private property can also be efficient, however with limitations (Friedman 1996). Creating a system of clear, workable property rights facilitates voluntary exchange and ensures that property rights will end up in the hands of those who value them most (Ayres and Talley 1995)
Property is a "bundle of rights." The owner is free to exercise the rights over his or her property. Others, meaning private persons and the government, are forbidden to interfere with the owner's exercise of his or her rights. Traditionally, that bundle of rights includes: 1) control use of the property, 2) benefit from the property, for example rights and rent, 3) transfer or sell the property, and 4) exclude others from the property (Krauss 1999).
The two major justifications of original property, or homesteading, are said to be effort and scarcity. John Locke emphasized effort, or "mixing your labour" with an object, while Benjamin Tucker preferred to look at the purpose of property in answer to solving the scarcity problem. Only when something is relatively scarce do they become property, he said. Economically scarce means necessarily having exclusivity property or that use by one person excludes others from using it (Ibid).
III. Bargaining Theory
Bargaining theory in property has to do with bargaining principles and their application to a significantly large variety of real-life situations, leading to efficiency and equitable distribution of gains (Muthoo 1999). In the former, the players may fail to reach an agreement, or they may do so but only after some costly delay. In the latter, gains from cooperation are divided between the players. A player's cost from bargaining is said to be derived from the time-consuming nature of bargaining and the importance of time to the player (Ibid).
Some of the fundamental principles expounded in bargaining theory are the following (Muthoo 2000): Patience during the process of negotiations confers bargaining power, while risk aversion affects it adversely. Meanwhile, a player's outside option enhances her bargaining power if and only if it is attractive and therefore credible. Hence, bargaining power is higher the larger her inside option, provided that all negotiators' outside options are not attractive enough. If both negotiators' outside options are sufficiently attractive, then it is likely that gains from cooperation may not exist (Ibid).
Further, when both the costs of negotiators' backing down from their initial demands are sufficiently large, then the negotiations may lead into a stalemate. A player's bargaining power is higher the larger her cost of backing down from her initial demand. In the absence of knowledge of relevant information on the ongoing negotiations which the other party does, there is risk of failure of negotiations or of costly delay until that uninformed party is communicated of the relevant information. Knowledge is veritable power in negotiations and enhances the bargaining strength of the better informed (Muthoo 1999). In bargaining, procedure and format of negotiations matter,