THE ECONOMICS OF LAND TRANSFER AND TITLE INSURANCE

In the presence of uncertainty over the title of land (due to fraud or error), a legal system can protect either the current (innocent) owne r, or a previous owner who claims title. The predominant system in the United States generally awards title to the latter in the event of le gitimate claim. Thus, current owners frequently purchase title insuran ce to provide indemnification in the event of a loss. In contrast, the Torrens system awards title to the current owner, but provides for in demnification of any legitimate claimants. We evaluate these two syste ms and argue that if transaction costs are low, both promote efficient assignment of title (according to the Cease Theorem), but if transact ion costs are high, the Torrens system is more likely to award title t o the party that values it the most (namely, the current possessor).