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1 The Theoretical Dilemma in the Transfer of Property Rights

The legislative choice regarding the pattern of property rights transfer has long been regarded as a “Hilbert problem” in Chinese civil law scholarship. Since the 1980s, proponents of obligational formalism and proprietary formalism have remained deadlocked, with both sides firmly maintaining their respective positions¹. Recently, following the comprehensive implementation of the Civil Code of the People’s Republic of China (Civil Code), debates concerning China’s property rights transfer paradigm have experienced a significant resurgence².

However, the solutions proposed by traditional legal dogmatics possess inherent limitations. For instance, based on the principle of distinction (or Trennungsprinzip) in the Civil Code, some scholars have attempted to reconstruct the independence and abstractness of real juristic acts (Dingliches Rechtsgeschäft) from a normative perspective, advocating for a moderated theory of real juristic acts (3); this highlights the disconnect between traditional doctrine and the realities of the living world. Further reflection reveals that the pattern of property rights transfer is essentially a matter of interpretive choice (4), forcibly replacing an interpretive path already entrenched in practice may not yield the desired outcomes.

In response to this dilemma, law and economics offers an alternative perspective by introducing economic reasoning, such as cost-benefit analysis. It breaks free from entrenched mindsets, shifting the focus away from the absolute truth or falsehood of conceptual logic toward evaluating the practical efficiency of institutional arrangements. However, economic analysis of law is not an entirely value-neutral tool capable of yielding a singular truth. In integrating law and economics into the realm of property rights transfer, current scholarship often suffers from one-sided variable selection or an oversight of the macroeconomic and institutional context. Divorcing the discussion of institutional choices from China’s native legal soil makes it highly susceptible to a reductive, efficiency-centric fallacy. Therefore, this article integrates empirical legal studies with law and economics. Grounded in the post-Civil Code judicial realities, it reassesses the costs and benefits associated with shifting the property rights transfer paradigm.

2 Systemic Costs in Shifting the Property Rights Transfer Paradigm

As Richard Posner aptly noted, “In a sense, legislation, along with its attendant judicial and enforcement activities, constitutes economic activity.” (Posner, 1997) The formulation and enforcement of laws directly or indirectly influence market operations, resource allocation, and overall economic development. Scholars favoring proprietary formalism argue either that legislation should adopt a causal proprietary formalism (Ye, 2024; Ning, 2006) or that it should embrace a full proprietary formalism (Ge, 2007; Sun, 1999a, 1999b). However, they often confine their focus to the theoretical advantages of the new system in specific transactional scenarios, falling short of accounting for the various costs dissipated during the transition from one institutional arrangement to another. From the perspective of economic analysis, the following sections conduct a macro-level, systemic examination of the paradigm shift in property rights transfer.

2.1 Law and Economics Balancing Criteria for Institutional Choice

Social welfare is commonly regarded as a vital baseline for evaluating legal policies. However, when assessing specific legal rules, efficiency serves as the best proxy for welfare (Miceli, 2004). The primary efficiency standard in economics is “Pareto efficiency.” A choice or decision involving two or more individuals achieves “Pareto superiority” (or a Pareto improvement) when it betters the condition of at least one person without worsening that of any other; when no further improvement is possible, it reaches “Pareto optimality,” i.e., “Pareto efficiency” (Dellis, 2021, p. 32-33). Given that losses induced by legal changes are ubiquitous and that compensating all such losses often entails prohibitive costs, the “Pareto efficiency” standard exhibits practical limitations. Consequently, “Kaldor-Hicks efficiency” emerges as a superior alternative: if the gains of the winners outweigh the losses of the losers, thereby increasing total social wealth, the legal change is deemed efficient (Mercuro & Medema, 2006, p. 105).

Another pivotal analytical tool in economics is externality theory. Externalities refer to the positive or negative impacts exerted by an economic agent’s production or consumption activities on other individuals or society as a whole. Among these, positive impacts are termed positive externalities, whereas negative impacts are designated as negative externalities. The interaction of various external factors directly dictates the ultimate degree of efficiency. Therefore, adopting the lens of externalities and utilizing “Pareto efficiency” and “Kaldor-Hicks efficiency” as auxiliary evaluative benchmarks, the following analysis examines the variations in social welfare during legal institutional transitions.

2.2 Externality and Efficiency Analysis of the Paradigm Shift

Legal certainty establishes the necessary trust among legal subjects. Trust is not merely an individual right; it is a public good provided by a non-consensual system of institutions (Dellis, 2021, p. 105). Hypothetically, if China’s property rights transfer paradigm were to shift from obligational formalism to proprietary formalism, it would inevitably disrupt the existing framework of trust, thereby generating substantial negative externalities.

First, in terms of legislation, a paradigm shift in property rights transfer implies a substitution of the underlying doctrinal logic, which would trigger frequent amendments to statutory provisions and judicial interpretations. Taking Germany as an example, its Civil Code adopts a five-book structure rooted in the Pandect system, which naturally accommodates the proprietary formalism centered on real act theory. Should the Chinese Civil Code pivot to follow this model, it would require the forced decoupling of the law of obligations from the existing Book IV: Contracts within the existing seven-book framework, requiring a radical unbundling and restructuring of the established codification system. This process would dissipate prohibitive legislative resources.

Second, judicial practice would experience a profound disruption. Judicial organs, including courts and procuratorates, would need to undergo extensive re-training and reshape their legal mindsets. Such top-down legal reform demands a comprehensive realignment stretching from legal education to public legal awareness campaigns. Given China’s immense population base, the costs incurred in social communication and cognitive persuasion would be exceptionally high.

Furthermore, public adaptability to drastic institutional changes must be carefully weighed. Proprietary formalism would significantly expand the scope of unjust enrichment while relatively narrowing the operational space for real claims. When dealing with defects or mistakes in juristic acts, it would further require differentiating between the varying scenarios of obligational acts and real juristic acts—a distinction that demands highly cumbersome definitions in practice (Cui, 2004b). Introducing excessive abstract concepts into practice would markedly increase the difficulty of legal application. The public exhibits a clear path dependency toward the law, which dictates that legal frameworks should maintain modesty and stability. As Harold J. Berman famously stated, “Law must be believed in, or it will not work,” implying that the public’s legal sentiment (or Rechtsgefühl) also constitutes an institutional cost that cannot be overlooked.

Many scholars support proprietary formalism primarily on the grounds that sales contracts do not embody the intent to transfer property rights, that retention of title can only be conditionally attached to a real act, and that transfer of title for security purposes can only be cogently explained through the theory of real juristic acts (Cui, 2004b). These rationales appear to prioritize the refinement of legislative technique, bearing a distinct German-style abstract coloring. However, a purely doctrinal dispute over paradigms does little to advance the resolution of practical problems. From the perspective of institutional transition, proprietary formalism generates more negative externalities; in particular, its shock to public cognition makes it difficult to achieve “Pareto efficiency.” Even under the “Kaldor-Hicks efficiency” standard, compared to obligational formalism—which is easily accessible and aligns with common sense—the prospects of such institutional reform remain far from optimistic in terms of social acceptance and judicial efficiency.

2.3 Examination of the Paradigm Analytical Model: The Fallacy of Efficiency Calculation Divorced from Path Dependency

Within current scholarship, a paradigm analytical model routinely emerges when applying law and economics to justify proprietary formalism. This model posits that recognizing the independence of real juristic acts vests the seller with the power of disposition (Yang, 2025). This freedom, the argument goes, not only embodies the philosophy of free market competition but also helps maximize resource allocation efficiency and reduce overall transaction costs. However, this assertion substantially and disproportionately inflates the scope of the “efficient breach” theory within law and economics, falling into two primary fallacies.

First, this perspective merely calculates the micro-incremental gains derived from individual breaches—namely, the higher bid offered by a third party—while ignoring the concomitant subversion of legal certainty. If the macro-institutional framework condones such power of disposition by recognizing the independence of real juristic acts, it will trigger a systemic crisis of trust across the market. To hedge against the ubiquitous risk of multiple sales of the same property, market participants would have to incur prohibitive precautionary costs prior to transactions, such as conducting more rigorous credit investigations or demanding substantial collateral. Such an inflation of macro-transaction costs can by no means be offset by the meager price differentials captured in a single breach.

Second, this argument implicitly presupposes an “institutional tabula rasa” and fails to account for the current realities of Chinese judicial practice. As previously discussed, Chinese judicial practice has developed a profound path dependency on obligational formalism. Even if the theory of real juristic acts exhibits internal consistency in its doctrinal deduction, any attempt to overturn the current legal framework, reshape judicial reasoning, and sever the public’s legal sentiment would generate astronomical institutional transition costs. By contrast, the minor functional advantages demonstrated by the theory of real juristic acts at the micro-level fail to generate genuine marginal returns. Consequently, the advocacy for shifting from obligational formalism to proprietary formalism not only lacks moral justification but also fails to satisfy the Kaldor-Hicks efficiency standard.

3 Cost-Benefit Analysis under Scenarios of Unauthorized Disposition

At the micro-transactional level, the controversy surrounding the property rights transfer paradigm primarily centers on scenarios of unauthorized disposition of sales contracts.

3.1 The Utility Dispute Between Abstractness and Causality

Under the scenario of unauthorized disposition in sales contracts, the doctrines of abstractness (Abstraktionsprinzip) and independence (Trennungsprinzip) remain the locus of academic debate. Scholars favoring the theory of real juristic acts contend that the doctrine of good faith acquisition under obligational formalism exhibits palpable limitations. First, due to the system of public notice for property rights, applying good faith acquisition to immovable property encounters legal hurdles; second, requiring litigants to prove subjective good faith poses tremendous evidentiary difficulties in judicial practice. Consequently, they advocate for reinforcing the protection of third-party interests through an “objective good faith doctrine” underwritten by the principle of abstractness (Sun, 1999b). Opponents, conversely, argue that the doctrine of abstractness significantly prejudices the interests of the seller, and that such protection comes at the expense of the core principles of fairness and good faith in civil law (Wang, 1997).

This raises a foundational meta-question: among the interests of the buyer, the seller, and the third party, which warrants legal prioritization? Under the assumption of a perfectly competitive market, the probability of any individual assuming any of these three roles is equal. Therefore, the law should not display a predefined value bias toward any specific actor. Instead, all three parties should be evaluated on an equal footing, utilizing a cost-benefit analysis to determine which paradigm yields higher overall efficiency.

3.2 Cost-Benefit Measurement in Specific Transactions

When a sales contract fails due to non-formation, rescission, or voidance, how the parties’ interests are weighed is contingent upon whether the act of delivery has been completed (Wang, 2001, p. 323-330). The following discussion focuses on the scenario where the seller has delivered the subject matter, but the buyer has failed to pay the price.

Under the framework of proprietary formalism, the buyer acquires ownership from the moment the subject matter is delivered, and the seller correspondingly divests ownership. Regardless of whether the buyer acts in good faith, the seller has no right to demand the restitution of the original object and can only assert a personal claim based on the doctrine of unjust enrichment. The benefit of this paradigm lies in safeguarding the socio-economic order and transactional certainty, allowing subsequent transactors to rely on the appearance of right (ostensible ownership) of the predecessor. However, its cost is exceptionally high: to hedge against the risk of the buyer’s default, the seller must invest substantial duties of care and precautionary costs. Moreover, compelling a faultless seller to bear the loss of the buyer’s non-payment flouts the principle of equity in civil law and may even incentivize opportunistic or bad-faith behavior by buyers.

Under the obligational formalism paradigm, if the underlying contract is void, ownership of the subject matter remains with the seller, and the buyer must return the original object. If a good faith third party is involved, that third party acquires ownership. The cost of this paradigm is primarily manifested in the evidentiary difficulty of establishing good faith in judicial practice. Its benefit lies in balancing the interests of both the original right holder and the good faith third party. For a third party, verifying whether the counterparty possesses the right of disposition typically consumes considerable time and financial resources; hence, the legal protection of good faith third parties is a necessary manifestation of maintaining market order.

Furthermore, from the perspective of social costs, because the principle of abstractness departs from the general cognition of the public, it inevitably drives up the costs of legal enforcement and compliance. If the law extends identical protection to bad-faith third parties, it would not only violate fairness and justice but also erode public confidence in legal credibility.

Synthesizing the aforementioned cost-benefit analysis of both institutions, the total social benefits generated by the abstractness paradigm fail to cover its total costs. In legal evolution, only those rules that align with rational expectations and strike an equilibrium between costs and benefits can be conscientiously complied with by members of society (Zhou, 1998, p. 318).

3.3 Examination of the Paradigm Analytical Model: Variables and Models in Micro-Measurement

Based on the aforementioned cost-benefit framework, two methodological fallacies can be identified in current scholarship when applying law and economics at the micro-transactional level: first, a skewed variable weighting; second, a mechanical application of economic models.

One perspective posits that if the abstractness of real juristic acts is denied, buyers would be compelled to bear prohibitive investigation costs to prevent validity defects in predecessor transactions, and might even refuse to transact due to such uncertainty. Based on this, the argument maintains that the doctrine of good faith acquisition cannot effectively substitute for the principle of abstractness (Yang, 2025).

This assertion overestimates the transferee’s investigation costs under the causal paradigm while downplaying the seller’s precautionary costs under the abstractness paradigm. Under the modern system of public notice and public credibility of property rights, a buyer needs only to rely on the registry or the appearance of possession to transact; the law does not require the buyer to scrutinize the validity of prior contracts. Consequently, even under a causal paradigm, routine investigation costs remain exceptionally low. Conversely, the doctrine of abstractness substantively divests a faultless seller of their proprietary claims, forcing them to bear the catastrophic risk of the buyer’s insolvency—a cost-shifting that lacks legal justification. Meanwhile, to remedy the unconscionability caused by abstractness, the theory itself must establish a plethora of cumbersome exception rules. Given that no theory is flawless in practice, adhering to obligational formalism—which aligns better with local practice and public legal sentiment—is manifestly a rational choice with lower overall application costs.

Conversely, within the economic analysis advocating for obligational formalism, there is also a tendency to detach mathematical models from practical realities. For instance, some scholars utilize the “staged performance model” in game theory to argue that under proprietary formalism, a transaction is bifurcated into two stages—the obligational act and the real act—requiring parties to reach two distinct expressions of mutual assent. In contrast, obligational formalism requires only one assent, rendering the latter superior in controlling transaction costs (Wang, 2014).

The fallacy of this analytical model lies in conflating conceptual fictions in jurisprudence with physical actions in economics. In real life, the obligational assent and the proprietary assent in the vast majority of spot transactions are highly coincident in time and space; a simultaneous exchange of payment and delivery does not incur an additional cost of bargaining simply due to a shift in legal theory.

4 Rule Perfection of the Property Rights Transfer Paradigm from a Law and Economics Perspective

4.1 Cost-Benefit Reconstruction of Acts of Disposition

To resolve the ambiguity of acts of disposition in positive law, it is recommended that, instead of introducing the convoluted theory of real juristic acts, its connotation should be clarified through an interpretive approach. Regarding rule design, a paradigm of “definition plus enumeration” can be adopted. Specifically, an act of disposition can be defined as a juristic act whereby the parties, through expressions of intent, directly create, alter, transfer, or extinguish property rights. On this basis, typical acts such as mutual assent to immovable property registration and mutual assent to movable property delivery can be incorporated via non-exhaustive enumeration, thereby delineating a clear institutional boundary.

In terms of systemic coherence, the power of “disposition” in Article 240 of the Civil Code should be subject to a restrictive interpretation. The power of ownership disposition in this article only covers legal disposition (creation, transfer, alteration or extinction of property rights), while factual dispositions such as destruction or modification fall outside the scope of juristic acts of disposition. This distinction effectively averts conceptual conflation, aligning the theory of juristic acts logically with the theory of ownership powers, thereby reducing the cognitive difficulty in legal application.

From the perspective of macro-efficiency, this micro-conceptual optimization offers salient advantages. Compared to the astronomical legislative and judicial costs entailed by completely replacing the property rights transfer paradigm, this approach achieves normative coherence for practical issues—such as retention of title and transfer of title for security purposes—solely through the refinement of interpretive doctrine. It maximizes respect for the path dependency of China’s judicial practice on obligational formalism, forestalls the subversion of legal certainty precipitated by large-scale statutory overhauls, and thus comports with the Kaldor-Hicks efficiency standard.

4.2 Establishing an Objective Good-Faith Standard to Reduce Transaction Costs

Judicial practice has adhered to obligational formalism for several decades, and maintaining this tradition is conducive to safeguarding legal stability. By mandating public notice and registration, obligational formalism multiplies the channels through which third parties acquire information, enabling them to be promptly apprised of property rights alterations, thereby protecting their legitimate rights and interests. Furthermore, this paradigm features straightforward procedures and is readily accessible to the general public, facilitating more convenient transactions for parties. Since no legal framework can flawlessly resolve all grievances, the law should fine-tune and continuously perfect the system while preserving obligational formalism as the baseline.

As demonstrated by the preceding micro-economic analysis, proving a third party’s good faith regarding defects in prior transactions is fraught with evidentiary difficulties in court, and a mismatch between the appearance of right and the true status of rights is a commonplace reality in commerce. Inspired by the doctrine of the abstractness of real juristic acts, an objective standard for determining good faith can be established. Current judicial interpretations require the transferee to be “without knowledge and without gross negligence”⁵, which, however, fails to satisfy the cost-benefit principle in judicial practice.

Therefore, it is proposed that the standard be amended as follows: in the course of a transaction, if a third party acts in reliance upon the publicly noticed status of rights, and there is a lack of objective evidence demonstrating that the third party actually knew at the time of the transaction that the noticed status was inconsistent with the true status, the third party shall be deemed to be in good faith. By establishing a more lucid and definite objective standard, the law can significantly alleviate the transferee’s burden of proof and judicial adjudication costs. It can also effectively secure transaction safety and the predictability of the legal environment without introducing the principle of abstractness.

4.3 Adhering to Efficiency Improvement Under Path Dependency

Although the dichotomy between real and creditors’ rights constitutes a core pillar of property theory in the civil law system, it is by no means the only viable institutional choice. From the perspective of comparative law, the common law system evolved in its own unique historical environment; despite its lack of reliance on a strict division between real and creditors’ rights (Wu, 2011, p. 3), it has nevertheless fostered highly developed commercial trade. This demonstrates that different property rights transfer paradigms are functionally interchangeable in terms of their economic objectives.

Consequently, the perfection of the property rights transfer paradigm should transcend purely doctrinal disputes over models and pivot toward a functionalist, systemic inclusivity. In terms of rule design, the traditional principle of numerus clausus (the statutory determination of property rights) should be moderately relaxed. Under complex modern commercial transactions, a rigid real-obligational dichotomy frequently exhibits a deficit in flexibility and may even stifle institutional innovation. For instance, regarding emerging property rights such as data usufructuary rights or the pledge of carbon emission rights, if market participants are barred from creating them via contract solely due to the constraints of the numerus clausus principle, they will be forced to opt for inefficient alternative workarounds, thereby engendering efficiency losses.

Therefore, function-oriented legal interpretation should be permitted in specific domains to mitigate the transaction costs precipitated by institutional rigidity. Meanwhile, institutional perfection should be grounded in the functional commensurability among different paradigms. The preceding analysis demonstrates that obligational formalism possesses a profound path dependency within China’s legal soil, and its total social benefits surpass those of proprietary formalism when resolving typical issues such as unauthorized disposition. Since varying paradigms can accomplish comparable economic functions, the current focus should not be a blind pursuit of the abstractness of German-style legal technique, but rather an enhancement of the flexibility within the existing framework of obligational formalism.

5 Conclusion

The debate over the merits of different property rights transfer paradigms is no longer a purely dogmatic issue in jurisprudence. From the perspective of law and economics, this article demonstrates the necessity of China’s continued adherence to obligational formalism at both macro and micro levels. The paradigm of obligational formalism is the product of decades of native practice in China, playing an irreplaceable role in regulating transactional relations (Wang, 1997). Research indicates that a blind pivot toward proprietary formalism would not only generate colossal systemic negative externalities but would also fail to effectively enhance macro-efficiency. Under micro-scenarios such as unauthorized disposition, the benefit-cost ratio of obligational formalism remains far more optimal. Consequently, Chinese civil law should maintain obligational formalism as its baseline, reconstruct the concept of acts of disposition, and adhere to a functionalist transformation grounded in path dependency.

Re-examining this controversy further prompts a reflection on the limits of applying interdisciplinary methodologies within the realm of traditional civil law. The advantage and justification of integrating law and economics into civil law research lie in its capacity to shatter the enclosed conceptual-deductive system of traditional jurisprudence, thereby introducing real-world principles—such as efficiency, institutional costs, and externalities—into normative evaluations. Evaluating the merits of legal rules requires not only verifying their internal consistency but, more importantly, scrutinizing their social efficacy and resource allocation efficiency.

However, the absorption of external disciplines by legal scholarship must never degrade into superficial instrumentalism. If law and economics is narrowed down to mechanical mathematical models or game-theoretic deductions—divorced from actual forms of social transactions and judicial realities—such research will inevitably degenerate into a mere tool for endorsing a priori stances. In the process of constructing an independent knowledge system of Chinese jurisprudence, the application of law and economics must transcend simple model calculations and precisely grasp its original theoretical intent and applicable boundaries. Only by carefully integrating the economic paradigm with civil law dogmatics—while respecting institutional path dependency and remaining cognizant of local legal practices—can scholars avoid instrumental misuse, thereby genuinely achieving the objectives of theoretical increments and institutional innovation in civil law.

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