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OPTIMAL TITLE SEARCH

MATTHEW BAKER, THOMAS J. MICELI, C. F. SIRMANS, and GEOFFREY K. TURNBULL*

Abstract
In the United States, title to land is protected by a system of public records that
would-be buyers must consult in order to ensure that they are dealing with the true
owner. Search is a costly process, however, especially as one goes back in time and
the records deteriorate. This paper uses a sequential search model to determine how
far back in time buyers should search. We find that, in general, search of the entire
record is not optimal, which implies that optimal search does not establish title with
certainty. We test the model using state statutes and search guidelines that limit the
required length of title search. Our results show that the search limits vary across
states according to the predictions of the model.

I. Introduction

An often neglected but nonetheless important aspect of market exchange


is the question of whether the seller of a good is the true owner. For many
goods, possession is sufficient to establish ownership, but for others, like
land, elaborate systems have arisen to protect the rights of owners and prevent
fraudulent conveyances.1 In the United States, the predominant system is the
recording system, which requires maintenance of a public record of land
transactions to serve as evidence of title. By consulting this record, would-
be purchasers can ensure that they are dealing with the true owner and thereby
minimize the likelihood of a future claim against the title. As John Cribbet
notes, a purchaser would be “most foolish to invest his money without a
careful check at the appropriate offices in the county courthouse.”2
Searching title records is a costly process, however, especially as one goes
back in time and the quality of the records deteriorates. The question therefore

* Assistant Professor, Department of Economics, United States Naval Academy; Professor,


Department of Economics, University of Connecticut; Professor, Department of Finance and
Real Estate Center, School of Business Administration, University of Connecticut; and Pro-
fessor, Department of Economics, Georgia State University, respectively. We acknowledge the
very helpful comments of Eric Posner and an anonymous referee.
1
For a general discussion of alternative systems for establishing and protecting ownership,
see Douglas Baird & Thomas Jackson, Information, Uncertainty, and the Transfer of Property,
13 J. Legal Stud. 299 (1984).
2
John E. Cribbet, Principles of the Law of Property 293 (2d ed. 1977).

[Journal of Legal Studies, vol. XXXI (January 2002)]


䉷 2002 by The University of Chicago. All rights reserved. 0047-2530/2002/3101-0007$01.50

139

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140 the journal of legal studies

is, how far back should a purchaser search? The trade-off is the increase in
certainty of ownership from search of an additional record against the cost
of the additional search. In this paper, we develop a model of sequential
search based on this trade-off in order to derive the optimal length of title
search. We show that it generally is not optimal to search the entire record;
in this sense, optimal search does not establish ownership with certainty.
Most states provide guidelines, some in the form of statutes, that effectively
limit the required length of title search.3 We use the optimal search model
to identify key empirical factors that predict a longer or shorter optimal search
for potential buyers. Following the law and economics paradigm, if legal
institutions governing land transfer are shaped by efficiency, then we expect
that state title search requirements will vary cross-sectionally according to
the predictions of the model. Our empirical results, based on cross-state data,
show that this appears to be the case.
The paper is organized as follows. Section II sets up the general model.
Section III determines the optimal length of title search and derives com-
parative statics. Section IV describes the data and conducts the empirical
analysis. Finally, Section V concludes.

II. The Model


Consider a buyer who is contemplating the purchase of a parcel of land
that is offered at a fixed price. Suppose, however, that there is some uncer-
tainty about whether the title to the land is clear. The buyer can determine
the status of the title only by searching the public record, which extends
back T years, where T could be large. Since search is costly, the problem
for the buyer is to decide how far back to search and whether or not to buy
the parcel depending on the outcome of the search.
For simplicity, we assume that the title is either clear or defective. Ob-
viously, this abstracts from differences in defects, which can take multiple
forms and pose different threats to the buyer’s claims on the land. We will
assume, however, that discovery of any defect is sufficient to deter the buyer
from purchasing the parcel. The buyer can establish that the title is clear
only by searching the entire record, but the title is defective as soon as any
claim is found.
Let V p net value of the land with a clear title;4 v p net value of the land
if there is a title defect, where V 1 v; and R p return from buyer’s next-best
investment.
The difference V ⫺ v { k 1 0 is the cost of repairing the defect.5 More

3
The statutes are referred to as Marketable Title Acts. See Jesse Dukeminier & James E.
Krier, Property 711 (4th ed. 1998); and Cribbet, supra note 2, at 324.
4
Specifically, V is net of the cost of compensating the owner.
5
We assume that the buyer bears the risk of a defect and also receives the surplus if the
title search reveals no defects.

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optimal title search 141

specifically, k may be thought of as the value of a third party’s claim against


the parcel (when one exists), which the buyer must pay to extinguish the
claim.6 We further assume that

V 1 R 1 v. (1)

This reflects the fact that the buyer prefers to purchase the parcel in question
to his next-best option if the title is known to be clear, but he prefers his
next-best option to the parcel if the title is defective. Specifically, R 1 v
implies that R 1 V ⫺ k, or that the buyer prefers his next-best option to buying
the parcel and compensating the claimant.
Note that R 1 v provides the motivation for searching the title. In particular,
if R ! v, the buyer would prefer the parcel to his next-best option, even if
the title is known to be defective. In that case, title search serves no allocative
purpose in the current model.7
The buyer will not necessarily want to establish the status of the title with
certainty because search of the record is costly. In particular, let c(t) be the
marginal cost of searching the tth year’s record, where t p 1, … , T indexes
years backward in time (that is, t p 0 is the present and T is the last year
for which records exist). We assume c (t) 1 0, reflecting the assumption that
the quality and accessibility of records decrease as one searches further back
in time.
Prior to searching a record, let p be the probability that a defect will be
found in that year. We assume that p is constant over time, both for simplicity
and because there seems to be no reason to believe that p varies systematically
as one goes back in time.8 Assume that searching the records for a given
year reveals any defects with certainty.9
The literature on the economics of search has established that a sequential

6
We also include in k any transaction costs involved in paying compensation.
7
One might argue that title search would still allow the buyer to lower the sale price if a
defect is found (assuming that the asking price reflects the expected risk). Symmetrically,
however, we would also expect the seller to be able to raise the price if no defect is found
(assuming that the buyer cannot conceal the result of the search). The buyer in this case receives
no expected benefits from the search. As a result, we assume the buyer bears the full risk of
the search. (This is the reason for the above assumption of a fixed sale price.) Another possible
motivation for title search, not pursued here, is to ascertain the status of title prior to improving
a piece of land. For a related analysis, see Thomas J. Miceli & C. F. Sirmans, The Mistaken
Improver Problem, 45 J. Urban Econ. 143 (1999).
8
Below, however, we let p be a function of the level of development in a given jurisdiction.
9
Clearly, this abstracts from omissions in the record that could lead to future claims against
the title. See, generally, C. Denton Bostick, Land Registration: An English Solution to an
American Problem, 63 Indiana L. J. 55 (1987). We ignore this problem for simplicity, although
it could easily be included without altering the basic results. In effect, it would represent a
background risk that could not be eliminated by search. Insuring against this risk is the function
of title insurance. See Cribbet, supra note 2, at 297.

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142 the journal of legal studies

Figure 1.—The buyer’s search problem

procedure is generally optimal.10 This approach also seems to fit the way
title searchers actually proceed. In particular, the searcher begins with the
most recent record (t p 1) and then searches backward in time, usually
stopping short of searching the complete record. The problem is to determine
when to stop searching. Figure 1 shows the structure of the search problem
at an arbitrary point t in the process, assuming that no defect has been found
in the previous t ⫺ 1 records.
Starting at the top of the tree, the searcher either searches one more record,
which yields an expected return of EVS (t ⫺ 1), or he can stop and buy the
parcel, which yields an expected return of EVN (t ⫺ 1). If he searches one
more record, he finds a defect with probability p and no defect with prob-
ability 1 ⫺ p. If he finds a defect, then according to equation (1) he should
stop and invest in his next-best option, yielding R. If he finds no defect, he
continues optimally, which yields an expected return of EV*(t).
The preceding argument implies that search continues until one of three
things happens:11 (1) the searcher finds a defect, (2) the searcher inspects all
T records, or (3) the searcher stops searching at some t* ! T. Our analysis
will focus on when each of the last two outcomes is the result of an optimal
title search.
In order to characterize the optimal search process, we first need to derive
an expression for EVN (t). Recall that this is defined to be the expected value
of the parcel after t records have been examined, assuming that no defect
10
See, for example, Michael Rothschild, Models of Market Organization with Imperfect
Information: A Survey, 81 J. Pol. Econ. 1283 (1973); and Steven A. Lippman & John J.
McCall, The Economics of Job Search: A Survey, Part 1, 14 Econ. Inquiry 155 (1976).
11
This assumes that it is optimal to begin searching in the first place. We state the condition
for this to be true below.

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optimal title search 143

has yet been found. This expression is easily derived as follows. In period
t p T ⫺ 1, all but the last record have been searched. The last search there-
fore reveals either that there is a defect or that the title is clear. Thus,
EVN (T ⫺ 1) p pv ⫹ (1 ⫺ p)V. (2)
Now move forward to t p T ⫺ 2. In this period, two records are left to
be searched. Thus,
EVN (T ⫺ 2) p [ p ⫹ p(1 ⫺ p)]v ⫹ (1 ⫺ p) 2 V, (3)
where the expression in the square brackets represents the probability that a
defect is found in either the next-to-last or last record and (1 ⫺ p) 2 is the
probability that no defect is found in either of the last two periods.12 Gen-
eralizing, we have

[冘
T⫺t⫺1

EVN (t) p
tp0
]
p(1 ⫺ p)t v ⫹ (1 ⫺ p) T⫺tV. (4)

Note that this expression is increasing (stepwise) in t. That is, EVN (t)
becomes larger the fewer records there are left to be searched, given that no
defect has been found to date. Further, EVN (T ) p V; that is, if no defect has
been found after searching the entire record, the title is clear. Finally, we
assume that

[冘
T⫺1

EVN (0) p
tp0
]
p(1 ⫺ p)t v ⫹ (1 ⫺ p) TV ≥ R, (5)

which implies that the searcher prefers to purchase the parcel in question
over his next-best alternative even before he has begun searching the record.13
This reflects the notion that most title search is triggered by an individual’s
interest in purchasing a parcel of land. Title search therefore potentially
prevents the transaction from occurring.14

III. Optimal Search


Given the definition of EVN (t), we can now characterize optimal search
for the potential buyer. We first consider the case where it is optimal to search

12
Note that the time until a defect is first found is therefore a random variable with a
geometric probability distribution.
13
Note that EVN(0) approaches v as T approaches infinity. However, EVN(0) is strictly greater
than v for finite T. Thus, equation (5) will hold for small enough T given V 1 R.
14
It is conceivable that a prospective buyer could search the title of a parcel that he would
not buy initially (that is, equation (5) does not hold) in hopes that he would discover no defects
and eventually find the parcel desirable (that is, EVN(t) 1 R for some t given that EVN(t) is
increasing in t). This scenario seems less plausible and also presents some analytical difficulties
without yielding significant insights, so we do not pursue it here.

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144 the journal of legal studies

the entire record. Suppose that the searcher, employing his optimal search
strategy, has reached record t p T ⫺ 1 and has found no defects. The question
is whether he should search the last record or stop. His return from stopping
is given by equation (2). In contrast, the expected value of searching the last
record is
EVS (T ⫺ 1) p pR ⫹ (1 ⫺ p)V ⫺ c(T ), (6)
which reveals the status of the title with certainty. Thus, if no defect is found,
the buyer purchases the parcel, but if a defect is found, he invests in his
next-best option.
It is optimal to search the last record if EVS (T ⫺ 1) 1 EVN (T ⫺ 1), which
yields the condition
pR ⫹ (1 ⫺ p)V—c(T ) ≥ pv ⫹ (1 ⫺ p)V (7)
or
p(R ⫺ v) ≥ c(T ). (8)
The left-hand side represents the marginal benefit of one more search. It
equals the probability of finding a defect times the savings from investing
in the next-best option rather than buying the parcel with a defective title.
Searching the last record is optimal when this benefit exceeds the marginal
cost of search.
The preceding is a special case of the general search rule under which
t* ! T is the last record that the searcher inspects. Using the above defini-
tions, the expected value of searching record t*, given no defects in the
previous t* ⫺ 1 records, is
EVS (t* ⫺ 1) p pR ⫹ (1 ⫺ p)EV*(t*) ⫺ c(t*), (9)
where
EV*(t*) { max [EVS (t*), EVN (t*)] (10)
is the expected value of continuing to search optimally thereafter. If instead
the searcher stops after inspecting t* ⫺ 1 records, his return is simply
EVN (t* ⫺ 1). Since t* is the last record searched (by definition), then
EV*(t*) p EVN (t*). (11)
Substituting this into equation (9), we obtain the conditions for t* to be the
last record searched:15
pR ⫹ (1 ⫺ p)EVN (t*) ⫺ c(t*) ≥ EVN (t* ⫺ 1) (12)

15
We assume that when indifferent, the buyer searches.

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optimal title search 145

Figure 2.—The optimal stopping time

and
pR ⫹ (1 ⫺ p)EVN (t* ⫹ 1) ⫺ c(t* ⫹ 1) ! EVN (t*). (13)
Using the definition of EVN (t) in equation (4), equation (12) simplifies to
p(R ⫺ v) ≥ c(t*), (14)
which has the same form and interpretation as equation (8). Repeating this
process for equation (13) yields
p(R ⫺ v) ! c(t* ⫹ 1). (15)
Figure 2 illustrates this result. (In the graph, t is treated as a continuous
variable for simplicity.) Note that the marginal benefit of searching one more
record is constant over search time, given the time invariance of the variables
R, v, and p. However, the marginal cost of search increases with the length
of search for the reasons noted above. Thus, search ends when the marginal
cost equals the marginal benefit. It follows that search commences in the
first place if
p(R ⫺ v) 1 c(1). (16)

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146 the journal of legal studies

If equation (16) does not hold but equation (5) does, then the buyer purchases
the parcel without inspecting the record at all.
Comparative statics follow directly from equations (14) and (15) and are
readily seen using Figure 2. As the left-hand sides of equations (14) and (15)
increase, the marginal benefit of additional search increases, leading to an
increase in the optimal length of search, t*. Thus, records are searched further
into the past as (1) p, the probability of a defect, increases, (2) R, the next-
best option, increases, or (3) v, the value of the parcel with a defective title,
decreases. Note that a decrease in v is equivalent to an increase in the cost
of a defect, k, holding V fixed (and recalling that k { V ⫺ v). Therefore, the
buyer will search further back the costlier a defect is. Alternatively stated,
the buyer will search back further if the expected value of the claim is larger.
To this point, we have defined t to be the number of records searched,
rather than the number of years. Some jurisdictions, however, will have more
entries or records per year becaues of, for example, higher rates of devel-
opment. To allow for this, let n be the number of title-related records per
year in a given jurisdiction, which is viewed as a parameter by individual
searchers. If t* is the optimal number of records to search (as derived above),
then the optimal number of years to search, denoted y*, must satisfy t* p
ny*, or
y* p t*/n. (17)
It follows that jurisdictions with greater historic rates of land development
(that is, those with higher n) should have shorter optimal search periods
measured in years, ceteris paribus.
Higher land development rates, however, might also generate an indirect
offsetting effect on the optimal search period. Specifically, higher develop-
ment rates create more opportunities for errors to enter the record.16 In this
case, p would be an increasing function of n in equations (14) and (15),
making the numerator in equation (17), t*, a decreasing function of n. This
implies that a greater number of title-related records per year, n, leads to a
longer optimal search period, y*, thereby offsetting the direct effect of n in
shortening the search period through the denominator of equation (17). The
overall impact of development is therefore ambiguous.
As an illustration of the preceding analysis, consider the following nu-
merical example. Let V p 500, v p 300, R p 350, and p p .01. Given these
values, the expected marginal benefit of search is p(R ⫺ v) p 5. If we let
the cost function be given by
c(t) p ct 2, (18)
then we can use equations (14) and (15) to determine the optimal stopping

16
See Jeffrey M. Netter, Philip Hersch, & William D. Manson, An Economic Analysis of
Adverse Possession, 6 Int’l Rev. L. & Econ. 217 (1986).

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optimal title search 147

TABLE 1
Numerical Example of Optimal Search Time

c t* T EVN(0)
.05 10 10 480.88
.025 14 20 463.58
.01 22 30 447.94
.005 31 40 433.79
.0025 44 50 421.00
.001 70 60 409.43
70 398.97
80 389.50
90 380.95
100 373.21

Note.—V p 500, v p 300, R p 350, p p .01.

time for different values of the parameter c. The results are shown in Table
1. They show that the optimal search time is decreasing in c. Table 1 also
shows the value of EVN (0) for different values of T. Note that condition (5)
is satisfied for all T, implying that in this example, the expected value of the
parcel prior to search exceeds the buyer’s reservation price.

IV. Empirical Analysis


In this section, we explore the empirical implications of the model by
using cross-state data. Most states have guidelines, established by statute or
less formally, dictating how far back a title search should extend. For example,
several states have enacted Marketable Title Acts, the purpose of which is
to limit title searches to a reasonable length. They accomplish this by extin-
guishing most interests in land not recorded during the statutorily specified
period.17 (In this sense, they function like statutes of limitations.) In states
without statutes, local bars or title insurers often set search lengths. In these
states, prior interests are not eliminated by law, leaving the risk of loss on
the purchaser and ultimately the title insurer.18 If anything, guidelines in these
states should therefore be more responsive to economic factors.
Several points warrant emphasis in order to draw the connection between
the theoretical model and the empirical study. First, although we have char-
acterized the optimal search procedure from the buyer’s perspective, it is
also the socially optimal search procedure given that the buyer internalizes
the value of any claim through k, the cost of repairing the defect. In this
sense, the optimal search length balances the value to would-be purchasers
17
Excepted interests include mineral rights, easements, interests of persons in possession,
and claims of the federal government. See Dukeminier & Krier, supra note 3, at 711 & 717.
18
See Paul Goldstein, Real Estate Transactions: Cases and Materials on Land Transfer,
Development, and Finance 266 (1980).

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148 the journal of legal studies

of quieting title against the value of any third-party claims. Our hypothesis
is that state search guidelines embody this social trade-off.
Second, the typical potential buyer does not conduct the title search; most
do not have the expertise. This creates a potential principal-agent problem.
The information and skill asymmetry make it difficult for the buyer either
to stipulate a search requirement or to verify that the search covers the agreed-
upon time period. A statutory search requirement resolves both problems for
the buyer. The presence of insurance further insulates buyers from the need
to worry about optimal search. As noted above, however, title insurers have
a strong interest in ensuring that the search is optimal. They can do this by
setting the guidelines themselves in the absence of a statute or by exerting
political pressure on legislatures to establish efficient guidelines.19
Finally, search requirements are statewide, not transaction specific. Clearly,
the optimal search length can vary across individual properties even within
a single jurisdiction. However, our data do not permit analysis below the
state level. We do not offer a formal model of search demand aggregation,
but instead envision the search requirement as reflecting the interplay of
coincident and competing interests in the political process. Factors that lead
to a longer or shorter optimal search for individuals will therefore likely lead
to a longer or shorter aggregate search requirement to the extent that the
political process reflects social welfare.

A. Single-Equation Model
We first consider a single-equation model. The dependent variable is
SEARCH, which is defined to be the state’s established length of title search
(measured in years). Table 2 reports the lengths of title search for the states
in our sample using data drawn from Kenneth Boackle.20
Some states have no set length but instead require that the entire title
history of a parcel of land be searched back to the state’s date of patent.21
In terms of the theory, this represents a corner solution for which condition
(8) holds. For these states, we define the required length of search as the
difference between 1990 and the date of patent.22 Other states specify a range
19
We do not seek to model the process by which they exert this pressure but instead conjecture
that they have sufficient political influence that the statutes will tend to reflect their interests.
We used a dummy variable to test whether search lengths set by statute differed from those
set by nonstatutory means and found no significant effect.
20
Kenneth F. Boackle, Real Estate Closing Deskbook: A Lawyer’s Reference Guide and
State-by-State Summary (1997).
21
These states are Alaska, Arizona, California, Florida, Idaho, Kansas, Montana, Nebraska,
Nevada, North and South Dakota, Oregon, Texas, and Washington.
22
The United States acquired Alaska in 1867 in the Alaska Purchase. Arizona, California,
and Nevada were acquired in the Mexican cession of 1848. Florida was ceded from Spain in
1819. Idaho, Oregon, and Washington were acquired through the Oregon Compromise in 1846.
Kansas, Montana, Nebraska, North Dakota, and South Dakota were all acquired in the Louisiana
Purchase of 1803. The United States acquired Texas in 1845.

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optimal title search 149

TABLE 2
Search Length in Years

State Search Length State Search Length


Alabamaa 50 Nevadab 142
Alaskab 123 New Hampshire 35
Arizonab 142 New Jersey 60
Arkansas 40 New Mexico 30
Californiab 142 New York 40
Coloradoc 187 North Carolinaa,d 35
Connecticutd 40 North Dakotab 187
Delaware 60 Ohiod 60
Floridab,d 171 Oklahomad 30
Georgia 50 Oregonb 144
Idahob 144 Pennsylvania 60
Iowad 40 Rhode Island 50
Kansasb 187 South Carolinad 40
Kentuckya 50 South Dakotab 187
Louisiana 65 Tennesseec 30
Maine 40 Texasb 145
Maryland 60 Utah 40
Massachusettsd 50 Vermontd 40
Michigand 40 Virginia 60
Minnesotad 40 Washingtonb 144
Mississippid 75 West Virginia 60
Missouri 45 Wisconsind 60
Montanab 187 Wyomingb 187
Nebraskab 187

Source.—Kenneth F. Boackle, Real Estate Closing Deskbook: A Lawyer’s Reference Guide and
State-by-State Summary (1997), various pages, and personal interviews (see note c below).
a
Average over a range.
b
Search back to patent.
c
Obtained from personal interviews.
d
Set by statute.

of possible search lengths, which vary by type of property or by region; for


example, the search length in Alabama varies from 40 to 60 years. For these
states, we use the average specified search length across property types or
regions.
Boackle does not give information on the search length in five states:
Colorado, Hawaii, Illinois, Indiana, and Tennessee. Through personal phone
interviews with industry employees, we were able to ascertain with reason-
able accuracy the search length in Colorado and Tennessee. In the three
remaining states, however, there were rather wide differences of opinion as
to what exactly constituted a legally reasonable search. When asked what
they felt a reasonable search to be, industry employees gave a range of
answers. For example, some gave standards measured in years, while others
said that a reasonable search went back three previous owners or even that
a reasonable search varied with market conditions and type of property. Of
course, a search covering the whole record (back to patent) would certainly

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150 the journal of legal studies

TABLE 3
Summary Statistics for the Single-Equation Model Data

Variable (N p 42) Mean Standard Deviation Minimum Maximum


SEARCH 87.05 57.24 30 187
TITLECOST 388.60 143.48 136.00 764.00
RISK 500.95 254.10 100.00 1,218.00
TURNOVER 3.26 .59 2.35 4.96
%DEVELOPED .07 .06 .01 .28

meet any standard in these states, but it would not reflect the outcome of a
cost-benefit calculation. For these reasons, we exclude these three states from
the analysis as possessing indeterminate search lengths.
As for the independent variables, the theoretical model identifies several
key determinants of optimal search length: the probability of an error oc-
curring in the title record (p), the costs of repairing an error in title (that is,
the value of protecting the claimant’s rights) (k), the cost of searching titles
(c), and the number of titles that need to be searched per year (n). We construct
empirical proxies to capture the effects of each of these factors on the title
search period. Table 3 reports summary statistics for all of the variables used
in the single-equation model.
The variable RISK is included as an explanatory variable in the SEARCH
equation to capture the expected cost of a defect, which equals the probability
of an error occurring in the title record times the cost of repairing the defect.
This variable is defined as the sum of the owners’ and lenders’ premiums
for title insurance for a $50,000 parcel of land and is calculated from the
title insurance rates reported by Boackle.23 The rationale for using this var-
iable is the fact that the title insurance premium should reflect the market
pricing of the risk of a defect. To the extent that higher title insurance rates
reflect greater risk of title errors (that is, higher p), and/or a greater cost of
repairing a defect (that is, higher k), they should lead to a longer search. We
therefore expect to find a positive coefficient on RISK in the SEARCH
equation.
We include each state’s developed land as a percentage of total land in
the search equation as an additional measure of the likelihood of error. The
variable %DEVELOPED is defined as the percentage of nonfederal acres in
a state that are developed and was obtained from the 1990 census. The
requisite information for calculating this variable is not available for Alaska,
so we exclude Alaska from the data set.
As noted above, higher development rates lead to more frequent property
23
Boackle, supra note 20. Two states, Iowa and Missouri, do not have information on title
insurance rates, so these states are not included in the data set.

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optimal title search 151

transfers and thus to a greater likelihood of errors.24 Commercial real estate


transactions in particular are generally more complicated than other types of
land sales, especially agricultural land sales, which may amplify the prob-
ability of errors. Further, there are more likely to be easements on property
in developed areas, rendering title records more vulnerable to important
omissions. Finally, the Comprehensive Environmental Response, Compen-
sation, and Liability Act of 1980 greatly increased the liability of property
owners for damages and cleanup costs due to hazardous waste. As Boackle
notes, “Virtually every transaction involving commercial property . . . will
prompt the question of hazardous waste.”25 Thus, higher rates of development
in a state may lead to greater risks because of the increased possibility of
hazardous waste contamination. On the basis of these factors, we anticipate
a positive coefficient on this variable.
The variable TITLECOSTS is included in the SEARCH equation as a
measure of the costs of conducting a title search. A 1980 Real Estate Set-
tlement Procedures Act (RESPA) publication contains results of a Housing
and Urban Development survey of state-by-state closing costs in 1979.26 This
publication reports average title charges by state, which include the costs of
conducting a title search. Comparable data were not available for 1990, so
we included these numbers as the best measure for the costs of title search.
The optimal title search model predicts that these costs will have a negative
effect on SEARCH.
The final variable in the SEARCH equation is TURNOVER, which is an
index measuring the total number of titles that must be searched per year
for an average property. We include this variable to capture the role of n in
the theoretical search model. Basically, the TURNOVER variable is an es-
timate of the average number of times a house existing in 1990 has changed
hands over the previous 40 years. This variable is constructed as follows.
Our calculation takes into account both the variation in the age distribution
of houses and variation in the turnover rate. For each state, we employ
U.S. census data on the historical evolution of the owner-occupied housing
stock and data on recent movers as a percentage of the population in the
state. To begin, we obtain data on recent movers back to 1960. We use the
percentage of recent movers at the end of each decade as an estimate of the
average rate of turnover during the decade. For example, if 10 percent of
homeowners in a particular state were identified as recent movers in the 1970
census, then we infer that about 10 percent of the 1970 housing stock changed
hands during the year. Assuming that the percentage of recent movers at the
end of the decade is reasonably close to the percentage of recent movers
throughout the decade, then the average house changed hands approximately

24
Netter, Hersch, & Manson, supra note 16.
25
Boackle, supra note 20, at 80.
26
RESPA, Real Estate Closing Costs (1980).

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152 the journal of legal studies

once during the decade, given that 10 percent of houses on average changed
hands during any year.
To transform the recent-mover information into a measure of average
turnover, we need to control for the age distribution of the housing stock.
The housing stock in 1960, 1970, 1980, and 1990 is readily available in the
census. We measure the extent to which the existing housing stock changed
hands in each of the decades 1960, 1970, and 1980 using the age distribution
of houses existing in each decade and the number of recent movers. Our
measure of turnover is computed as

TURNOVER p 8 # REMOVE 90 ⫹ 10 # REMOVE 80 [ ( )S80


S 90

⫹ REMOVE 70 ( )
S 70
S 90
⫹ REMOVE 60
S 60
S 90
, ( )]
where REMOVE is the percentage of households that are identified as recent
movers and St is the number of owner-occupied housing units existing in
1990 that were also part of the housing stock in decade t. (We weight
REMOVE90 by 8 instead of 10 to take into account that the 1990 census
defined recent movers differently than did previous censuses. Prior to 1990,
the census defines recent movers as those who moved into their houses within
the previous 12 months; the 1990 census, on the other hand, defines recent
movers as those who moved within the previous 15 months.) The constructed
measure ranges in value from a maximum of 4.96 for Wyoming to a minimum
of 2.35 for Massachusetts, with a mean value of 3.24.
The predicted effect of TURNOVER on the optimal search length is am-
biguous, given the offsetting effects of n. On the one hand, a greater TURN-
OVER indicates that more records must be searched per year, which tends
to shorten the optimal search duration. On the other hand, a greater TURN-
OVER reflects a greater volume of market activity for a given stock of
housing. As described above, this implies that errors in the title record are
more likely, which tends to increase the search length in the theoretical model.
We estimate the following SEARCH equation using ordinary least squares:

log (SEARCH) p b 0 ⫹ b1 log (RISK) ⫹ b 2 log (TITLECOST)


⫹ b 3 log (TURNOVER) ⫹ b 4 log (%DEVELOPED) ⫹ ␧.

(19)
The estimates are presented as model I in Table 4.
The empirical model fits the data fairly well (the adjusted R 2 p .48), and
the estimated parameters have the expected signs. The RISK variable is

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TABLE 4
Estimated Models

I II III IV V VI
OLS OLS Iterated 2SLS Iterated 2SLS Right Censored Right Censored (2SLS)
(N p 44) (N p 37) (N p 35) (N p 35) (N p 44) (N p 35)
Estimation Coefficient t Coefficient t Coefficient t Coefficient t Coefficient t Coefficient t
Dependent variable p log(SEARCH):
Independent variables:
CONSTANT 3.39* 2.23 4.48* 2.57 4.48* 2.57 2.72 1.23 3.47 1.36
log(RISK) .47** 2.76 .47⫹ 1.96 .47⫹ 1.96 .65** 2.68 .56* 1.81
log(TITLECOST) ⫺.63* ⫺2.50 ⫺.76* ⫺2.43 ⫺.76* ⫺2.43 ⫺.85* ⫺2.26 ⫺.738* ⫺1.90
log(TURNOVER) 2.20** 3.50 2.20** 3.19 2.20** 3.19 3.40** 3.64 3.103** 3.13
log(%DEVELOPED) .31⫹ 1.86 .41* 2.14 .41* 2.14 .43* 1.86 .428* 1.76
2
R .53 .50 .50 . . . . . .
Adjusted R2 .48 .43 .43 . . . . . .
Dependent variable p log(RISK):
Independent variables:
CONSTANT 4.89** 12.73 5.648** 5.70 4.84** 11.73 4.839** 11.73
log(SEARCH) . . . ⫺.409 ⫺1.02 . . . . . .
log(TURNOVER) 1.05* 2.71 1.999⫹ 1.80 1.03* 2.54 1.030* 2.54
log(%DEVELOPED) .12 1.38 .148 1.07 .09 1.04 .090 1.04
log(MARKETSHR) ⫺.76⫹ ⫺3.17 ⫺.735⫹ ⫺1.96 ⫺.81** ⫺3.19 ⫺.809** ⫺3.19
PRICECOMP ⫺.20⫹ ⫺2.03 ⫺.339⫹ ⫺1.92 ⫺.25* ⫺2.35 ⫺.246* ⫺2.35
COSTINCLUDE .67** 6.08 .674** 3.72 .62** 5.18 .615** 5.18
NARROWACT ⫺.36* ⫺2.68 ⫺.325 ⫺1.61 ⫺.37* ⫺2.75 ⫺.373* ⫺2.75
PRESEARCH .005 .05 .080 .51 .05 .42 .045 .42
2
R .78 .57 .79 .7886
Adjusted R2 .73 .44 .73 .7337

Note.—OLS: ordinary least squares; 2SLS: two-stage least squares. N is the number of states in the sample.

Significant at the 10 percent level.
* Significant at the 5 percent level.
** Significant at the 1 percent level.

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154 the journal of legal studies

positive and significant at the 1 percent level, indicating that states with
higher risks of title defects (as reflected by the title insurance premium) also
have longer search periods. The TURNOVER coefficient is positive and
significant at the 1 percent level, and %DEVELOPED is significant at the
10 percent level. Both of these results are consistent with our theoretical
argument that states with higher levels of development have longer search
lengths because of the greater likelihood of a title defect. Finally, the co-
efficient on the TITLECOST variable is negative and significant at the 5
percent level, reflecting the expected negative impact of search costs on the
length of search.

B. Simultaneous-Equations Model
Although the single-equation model performed well, there are two prob-
lems associated with our use of RISK as an explanatory variable. The first
is the possibility that RISK is endogenously determined with the dependent
variable in the SEARCH equation. In particular, title risk may be lower in
states with longer search lengths because more records must be searched. As
a result, the insurance premium would be lower. In this section, we use a
simultaneous-equations system to address this problem.
A second potential problem with the RISK variable is that the costs of
title search are included in the insurance premium in some states, while in
others the premium includes only the cost of indemnifying against title risk.
This difference in industry practice has its roots in the different organizational
structures of the title search and title insurance industries in different states.
Specifically, the Special Committee on Lawyers’ Guaranty Funds states that
“where title insurance companies gain control over title evidence, by ac-
quiring the abstract companies and maintaining the abstracting function in
their own plants for their own use, their rate system is changed to one that
includes title information procurement and examination along with the ‘pure
insurance’ in a single charge.”27 In states in which some components of
search costs are included in the premium, title insurance companies generally
maintain their own title plants.
While it is at least conceptually feasible to purge the impact of search
costs from the RISK variable and come up with a set of estimated “pure
insurance” rates for each state, information may be lost because of the dif-
ference in organizational form in states in which the search costs are included
in the premium. For example, when title insurance companies maintain their
own title plants, they may take greater care in maintaining records because
they have a vested interest in the records. Title insurance companies may
also find it easier and cheaper to search their own title plants. The other
27
Special Committee on Lawyers’ Title Guaranty Funds, The Concept, Organization, and
Operation of Bar-Related title Assuring Organizations 36–37 (1968).

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optimal title search 155

variables included in the search equation are meant to capture both the effects
of the likelihood of error as well as title search costs, so we are confident
that those variables, at least, are picking up their intended effects. Nonethe-
less, the specification of the RISK equation in our simultaneous-equations
system must take into account those factors influencing the variable RISK.
The RISK equation is specified as follows:
log (RISK) p d 0 ⫹ d1 log (SEARCH) ⫹ d 2 log (TURNOVER)
⫹ d 3 log (%DEVELOPED) ⫹ d 4 log (MARKETSHR)
⫹ d 5 PRICECOMP ⫹ d 6 COSTINC
⫹ d 7 NARROWACT ⫹ d 8 PRESEARCH. (20)
The first variable on the right-hand side is SEARCH, the length of the title
search. As noted, this variable is included in the RISK model to control for
the possibility that SEARCH directly influences title risk. The second and
third variables are TURNOVER and %DEVELOPED. These two variables
are included to control for the possibility that these variables may influence
the risk premium directly through the effects discussed above. The variable
TITLECOST is omitted from equation (20) to identify the model. This reflects
our judgment that the cost of performing a title search should not directly
influence the risk of discovering a defect.
The remaining five variables in equation (20), MARKETSHR, PRICE-
COMP, COSTINC, NARROWACT, and PRESEARCH, serve as instruments
in the simultaneous-equations model. These variables capture institutional,
technological, and business factors that may influence the risk premium in-
dependently of the impact of title search. The two variables MARKETSHR
and PRICECOMP are included to capture the effects of the title industry
market structure in each state. These variables are drawn from information
reported by Stephen Quiner.28 The variable MARKETSHR is defined as the
percentage of insurance policies written by the three largest firms in the state
in 1973. Based on the survivor principle, this variable is included in the
model to measure the potential economies-of-scale effects in the industry.
To the extent that scale economies exist, we expect a negative coefficient on
this variable.
The variable PRICECOMP is a dummy variable reflecting some interesting
results of a survey done by Quiner,29 in which people employed in the title
insurance industry were asked to assess the degree of price competition in
their home state. The value of PRICECOMP is zero if the response was
“price competition nonexistent” in the state and 1 otherwise. We anticipate

28
Stephen J. Quiner, Title Insurance and the Title Insurance Industry, 22 Drake L. R. 711
(1973).
29
Id.

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156 the journal of legal studies

TABLE 5
Summary Statistics for the Simultaneous System Data

Variable (N p 35) Mean Standard Deviation Minimum Maximum


SEARCH 84.86 57.66 30 187
TITLECOST 389.68 154.33 136.00 764.00
RISK 509.03 259.58 100.00 1,218.00
TURNOVER 3.24 .57 2.36 4.96
%DEVELOPED .08 .06 .01 .28
MARKETSHR .74 .16 .45 .994
PRICECOMP .57
COSTINC .40
NARROWACT .17
PRESEARCH .46

Note.—N is the number of states in the sample.

a negative coefficient on PRICECOMP, indicating that greater perceived price


competition is reflected in lower title insurance premiums.
While the data on the title insurance industry are old, there is little available
recent state-level information about these aspects of the title insurance
industry.30 Barring radical changes in the title industry structure over the
intervening years, however, these variables should be adequate proxies for
the intended measures. Since these market variables were not available for
all states, the sample size for the simultaneous-equations model is reduced
to 35.31
The remaining variables in the RISK equation are included in order to
capture any effects of the legal or regulatory institutions of the state on the
title insurance industry.32 The variable COSTINC is a dummy that equals 1
if title insurance companies in the state are allowed to include the costs of
their title search directly in the insurance premium; NARROWACT is a
dummy that equals 1 for those states that most narrowly define and restrict
the duties and activities of title insurers and zero otherwise. Finally, PRE-
SEARCH is a dummy variable that is included to control for another feature
of the state regulatory or institutional environment, specifically, whether or
not a state requires that a title search be completed before an insurance policy
can be issued. Summary statistics for the variables used in the simultaneous-
equations model are presented in Table 5.
30
These numbers have also been used recently by D. Barlow Burke, Jr., The Law of Title
Insurance (1986), in discussing the nature of the title insurance industry.
31
The states included in the analysis were Alabama, Arkansas, California, Connecticut,
Delaware, Florida, Idaho, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Min-
nesota, Nebraska, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio,
Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Texas, Utah,
Virginia, Washington, West Virginia, Wisconsin, and Wyoming.
32
These variables were obtained from D. Barlow Burke, Jr., The Law of Title Insurance (2d
ed. 1993).

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optimal title search 157

We first estimate equation (20) by ordinary least squares, dropping the


variable log(SEARCH). The results are presented as model II in Table 4.
This equation verifies that increases in turnover of the housing stock, or
increases in the development rate, do indeed increase the risk to title as
measured by the variable RISK. Also, RISK is smaller in states in which
pricing was judged to be relatively competitive, which is evidenced by the
negative sign of the coefficient on PRICECOMP. There is also evidence
of scale effects in the title insurance industry since those states in which
a large percentage of the policies are written by a few firms (a high value
for MARKETSHR) charge lower rates. Finally, the positive coefficient on
COSTINC reveals that including search costs in the premium generally raises
the gross title insurance premium, as expected.
Model III includes the variable SEARCH in the RISK equation and es-
timates the two equations simultaneously using iterated two-stage least
squares. The SEARCH equation appears very similar to its single-equation
counterpart, both in terms of the magnitudes and signs of the coefficients
and in terms of the significance levels. This suggests that the ordinary least
squares results were not unduely affected by the simultaneity bias from the
variable RISK. The insignificant coefficient on SEARCH in the RISK equa-
tion reinforces this point—that is, the required search duration does not appear
to affect the title insurance premium in a significant way. The other coeffi-
cients in the RISK equation also reveal the same relationships found for the
version of the equation estimated using ordinary least squares.
Models IV, V, and VI further test the robustness of the results. Model IV
drops SEARCH from the RISK equation and uses the predicted values of
RISK from the first-stage estimates of that equation when estimating the
SEARCH equation. The SEARCH equation estimates are again similar to
those in the single-equation model.
Models V and VI apply a time-duration methodology to the data, treating
the dependent variable SEARCH as the time at which a specified event occurs.
In this case, the event is “stop title search.” The states in which search goes
back to patent are treated as right-censored observations where the event
“stop the title search” never actually occurs. Model V estimates the search
equation alone, while model VI uses predicted values of RISK, obtained from
model IV.33 The coefficient estimates generated by this methodology are again
very similar to those obtained for the other specifications. The consistency
of the estimates in the search equation across the various models provides
strong evidence that state guidelines for title search are influenced by the
economic factors identified in the title search model.

33
Models V and VI were both fitted assuming that search time is lognormally distributed.

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158 the journal of legal studies

V. Conclusion
When ownership of land or any asset is uncertain, would-be buyers have
to decide how much effort to devote to learning whether or not the seller is
the rightful owner. In doing so, they balance the gains of increased certainty
against the costs of searching further back in the public title records. In this
paper, we examined the factors determining the optimal duration of title
search. The theory predicted that a buyer should continue searching sequen-
tially as long as the benefit from searching one more record exceeds the cost,
where the benefit consists of the expected gain from avoiding purchase of a
parcel with a defective title. In general, optimal search does not prescribe
that buyers should search all available records, which in turn implies that
some residual title uncertainty remains.
The comparative statistics from the model yielded several factors that affect
the optimal length of search. We used cross-sectional data on state guidelines
for title search to test the extent to which these guidelines are influenced by
the economic factors identified in the optimal search model. The estimates
were consistent with the predictions of the theory across a variety of spec-
ifications of the empirical model. The results therefore support the notion
that state title search guidelines reflect an effort to balance the marginal
benefits and costs of title search in property transfers.

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