Economic Analysis of Law

Spring 2007

 

1/9/07

 

v      Mechanics

¯       Midterm

¯       Final

¯       Case

¤          Any case past or present

¤          That wasnÕt argued on economic terms

¤          And isnÕt in my book or PosnerÕs

¤          Oral or written

¤          Due in or after the week in which the relevant part of the law is discussed.

¯       Readings

¤          My book

á          Virtual footnotes

á          My problem

¤          At least one article, perhaps a few

v      What is economics?

¯       A way of understanding behavior

¤          Based on the assumption of rationality

¤          Meaning that individuals have objectives

¤          And tend to choose the best way of achieving them.

¤          Not that they are perfect cold blooded calculators.

¯       Examples

¤          Rational baby

¤          Rational cat

¯       Lessons

¤          Rationality doesnÕt have to come from calculation

á          It might be produced by evolution (babies and cats)

á          Or selection (CEOÕs).

á          Or trial and error (my route home).

¤          The assumption doesnÕt have to be entirely true to be useful

á          People make mistakes, but É

á          Unless you have a theory of mistakes

á          It makes sense to assume rationality and allow for sometimes being wrong.

á          You may know yourself well enough (Posner story). Theory of other people.

á          For one theory of mistakes, see the article on economics and evolutionary biology on my web page.

v      What does it have to do with law?

¯       Law as incentive

¤          If we have this legal rule, how will people behave?

¤          Consider expanded discovery in civil litigation

á          An incentive not to keep some kinds of records

á          Maybe not to ask some questions

á          Also a way of raising costs to your opponent

¤          Consider legal rules making homeowners civilly or criminally liable for injuring robbers

á          It might make them less likely to use deadly force, or É

á          More likely

á          My Philadelphia story

¤          Consider civil forfeiture

á          The idea

á          Might make innocents more careful about how their property is used, but É

á          Might also give law enforcement agents an incentive to target valuable property.

á          BensonÕs result on the effect of legal changes.

¤          So economics provides a way of predicting the consequences of law

á          Assuming rationality of potential criminals, but also of É

á          Litigators

á          Cops, É

¤          Forward not backward looking

á          The central question is not Òhow ought the mess to be settledÓ but É

á          How will the way we settle this mess affect the behavior of people in the future

á          ÒClean up your own messÓ as an economically efficient rule.

¯       Predicting and explaining what the law is

¤          Posner conjecture:

á          Legal rules are designed to maximize the size of the pie

á          Which he calls wealth maximization

á          And I call economic efficiency.

á          And which will be explained and discussed in more detail later.

¤          Why would it be true?

á          Because it is one of the few good things judges can do, so they do it?

á          Because of some invisible hand mechanism? Inefficient rules lead to litigation which leads to a change in the law?

á          Neither is very convincingÑwill come back to them at the end. But É

¤          Has created a project that has played a central role in law and econ

á          Figure out, in each case, what legal rules would maximize efficiency

á          Compare it with the legal rules that exist

¤          In the final chapter I try to sum up the evidence on whether the conjecture is true, but É

¤          True or false, it has led to a lot of interesting work.

¯       Recommending what the law should be

¤          If you think economic efficiency is a reasonable thing for the law to aim it

¤          Then you can reverse the argument above

¤          Figure out what the law should be and if it isnÕt try to change it.

¯       Of these three projects

¤          The first is the least disputableÑfigure out consequences

¤          The second is an empirical conjecture

¤          The third ultimately a normative project. But easily confused with the second.

¤          Note that one could believe that the law is efficient but shouldnÕt be, or isnÕt but should.

¯       One interesting feature of the project is that it tends to unify the law

¤          We see the same economic analysis appearing

¤          Across all of the standard categories of the law.

v      Law, economics and justice

¯       Many people think law can best be explained and judged in terms of justice

¯       The approach in this book almost entirely ignores such considerations

¤          Most strikingly, in giving the same weight to costs and benefits of criminals as to costs and benefits to victims

¤          In part because deciding who is a criminal requires a theory of what the law should be

¤          Which is one of the things we are trying to produce

¤          In part because one interesting result of the project is seeing how much of what we think we favor because it is just in fact is efficient.

¤          And in part because I donÕt think we have an adequate theory of justice.

v      What economists can learn

¯       Abstract theory can make quite serious mistakes

¤          PropertyÑI own the land or I donÕt own the land

¤          ContractÑI agree to do X

¯       Looking at the real world application of the theory may highlight those mistakes

¤          Just what rights do I own with regard to the land

¤          What counts as violation of the contract, what are the penalties?

¯       And sometimes the result is better theory

¤          CoaseÕs ÒThe Problem of Social CostÓ

¤          Came in part out of Coase looking at law cases and

¤          Demonstrated that the approach to externalities generally accepted by economists was fundamentally wrong

¤          Making it one of the most cited articles in modern economics

¤          Stigler story about U of Chicago.

v      Road map to the course

¯       Two approachesÑorganized by economics or by law. Do both.

¯       First half: by economics

¤          Efficiency

¤          Externalities

á          Two approaches

á          Using the theory to design legal rules

á          In particular, decide who has what rights and how protected

á          Property rule vs liability rule.

¤          Economics of risk

¤          Ex Post/Ex Ante enforcement

¤          Game Theory

¤          Value of life

¯       Midterm

¯       Second half: by law

v      Property

v      Intellectual Property

v      Contract

v      Family Law

v      Tort

v      Crime

v      Antitrust

¯       Extra stuff

v      Some Very Different Systems of Legal Rules

¯       Saga period IcelandÑpure tort on steroids

¯       18th c. England

¯       Shasta CountyÑnorms as a substitute for law

v      The Tort/Crime puzzle

v      Is the Common Law Efficient?

1/11/07

 

v      Review

¯       Course mechanics

¤          Midterm

¤          Final

¤          Either brief written or oral econ defense of one side of a case.

¯       What is economics?

¤          The approach to understanding behavior that starts by assuming

¤          Individuals have objectives

¤          And tend to choose the acts that best achieve them

¯       What does it have to do with law?

¤          Law as incentive

á          Suppose

á           

¯       One important concept in the field as it has developed is

¤          Economic efficiency

¤          Aka value maximization

¤          As a conjecture about the pattern of the common law

¤          Or a proposal for what the law ought to be

v      What is efficiency?

¯       The problem:

¤          Any change in legal rules (or anything else)

¤          Affects lots of people in different ways

¤          Making some better off and some worse off

¤          Is there any way of summing?

¯       MarshallÕs answer

¤          Determine, for each person

¤          How much he would pay to get the change (+) or prevent (-)

¤          Sum those numbers

¤          If positive, an improvement

¯       Misunderstandings

¤          We donÕt determine it by asking but by how people act

á          For instance, if I offer you an apple for a dollar and you buy it

á          That is evidence that the apple was worth more to you, less to me

á          Hence that, if nobody else was effected, that change was an improvement

¤          We are talking about changes in value to people, not flows of money

á          Apple case, same nbr of dollars before and after, but improvement

á          Same improvement if I lost the apple and you found it

á          Or if you stole it.

¯       Problems

¤          We are judging by actions but people may not know what is good for them

á          Insulin to a diabetic is valuable

á          And heroin to an addict

á          And potato chips and spare ribs to me

á          As shown by their actions

¤          We are only allowing for values to humans

á          Perhaps there are things that matter whether or not they matter to people

á          Redwood trees. Live oak in my back yard. Lightning bolt

á          Mona Lisa?

¤          We are ignoring the different amounts of happiness measured by a dollar.

á          Most obviously, rich vs poor

á          Less obviously, ascetic vs materialist.

v      Answers to problems

¯       People may not always know, but what alternative is there on which we can base legal rules?

¤          Someone else not only may not know what is good for me, he may make the decisions in his interest rather than mine.

¤          Expertise I can always borrow.

¯       Other values

¤          Might be real, but É

¤          Except as they are valued by people

¤          How are they going to affect human action?

¤          The tree canÕt sue.

¯       Rich/poor etc. Arguably the strongest.

¤          One answer  is that courts donÕt have much power to redistribute.

á          Consider court that routinely favors poor tenants

á          The result is to raise the cost of landlords who rent to them

á          And ultimately to make housing less available or more expensive to poor people

á          Consider Ch1 discussion of nonwaivable warranty of habitability

¤          Another version is that redistribution through the tax system makes more sense.

¤          MarshallÕs was that for most issues it averages out.

¤          Final answer is that it is much easier to see how to create institutions to maximize value than to maximize happiness

á          Value demonstrated, in comparable form, by market acts

á          Every time I buy an apple

á          So a market gives us a way of maximizing value. BookÑw third party.

á          How do you demonstrate utility of an apple.

v      Conclusion

¯       Considered as a normative criterion, efficiency is a proxy for utility/happiness

¤          Used because it is much easier to implement

¤          And the legal rules that maximize it are close to those that would maximize happiness.

¯       Considered as a predictive criterion, efficiency is probably better than happiness

¤          What affects legislatures is how much money they are offered to vote for a bill

¤          What affects litigation is how much people are willing to spend

¤          Only if judges are deliberately trying to do good might happiness make more sense, assuming they could separately maximize it.

v      Note for economics students

¯       Two other concepts of efficiency in the textbook

¤          Pareto efficiency

¤          Hicks/Kaldor efficiency

¯       For reasons I donÕt use either, see my webbed price theory chapter on efficiency.

v      Alternatives?

¯       Can you offer a better general criterion of goodness?

¯       How would you operationalise it?

¯