| Summary: | Limitations on the customizability of property rights (the numerus clausus principle) are a puzzling feature of the common law conception of property. An economic rationale, built upon 1) the pivotal role that rules of exclusion play in fostering user innovation, and 2) the role that psychological ownership plays in preventing recontracting around governance rules, is offered to explain the modern persistence of the doctrine. Application of the numerus clausus principle limits the proliferation of governance rules in the economy (governance), replacing them with rules of exclusion (exclusion). Exclusion unifies rights of use and possession in assets, while governance separates, to a greater or lesser degree, possession from use rights. Full user, sale and the policy against restraints on alienation are the paradigmatic examples of exclusion; while governance is exemplified by servitudes and contractually-burdened assets. Exclusion plays a critical role in user innovation because it allows the possessors of assets to unilaterally seek out new uses of those assets. Whenever the law replaces governance with exclusion, user innovation is more likely to occur because the possessors of assets can apply their unique, rival and nontransferable human capital inputs to tangible assets, generating outputs (the new uses) that move resources to their higher-value uses. This is how all innovation, both high-tech and low-tech, occurs. In addition to negatively impacting user innovation, governance hinders recontracting because both possession and legal entitlements (rights of use in an asset) give rise to feelings of psychological ownership, and individuals will not recontract over uses that they feel they already ‘own’. The user innovation theory’s focus on search, innovation and human capital explains why the numerus clausus principle remains most robust in the areas of personal and intellectual property (where users generate a significant amount of innovation), and why it has been somewhat attenuated in the area of real property (where we restrict search in order to facilitate coordination of land uses). It also explains why the law enforces the principle even when the cost of providing notice of governance rules is low.
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