First Class Outline
I.Questionaire, Questions to think about
II. What is economics?
III. What is economic analysis of law?Law as incentive system. Two views of a parking ticket.
A.consequences of laws: Examples
1. Freedom of contract. Lease restriction. Non-waivable liability--malpractice or product. Noncomp agmt.
2.Marginal deterrence--deterring into murder.
3.Criminal vs civil on reporting crimes.
4.Liability as an incentive system--seller & buyer.
B.What the laws should be:
1.Explaining efficiency
a.Maximizing total value (Marshall v Pareto)
b.Does interpersonal by $. Agmt against, for.
c.Accepts revealed preference.
2. Using efficiency as a normative criterion.
3. Arguments for, against?
4. Alternative maximands?
C.What the laws will be.
1.Posner conjecture. Why?
2.Alternative conjectures. Becker mkt for legislation.
IV.Topics (first bunch, largely areas I have worked in)
A.Coase theorem: defining property rights.
B.Intellectual property--the problem, possible solns.
C.Optimal punishment theory, incl marginal deterrence
D.Civil vs Criminal law, private enforcement, punitive damages
E.Negligence, the Hand formula, and all that
F.Contract Law: Mistake, damages for breech, etc.
G.Measuring damages--human. corporate.
H.Freedom of Contract, pro and con
I.The economics of litigation and judging
J.The Law and Economics of Marriage
Second Class
There will be a break at 4:50. Class this friday?
I. Review from first class:
A. What is economics?
B. What is economic efficiency?
1. Define
2. Revealed preference problem
3. Interpersonal comparison problem
4. Defense
a. As a utilitarian proxy
b. As a "best we can get" bargain--power also uneven
c. As better than the alternatives--we know how to get it.
C. Three projects
1. What are the consequences of legal rules?
2. What should the rules be? (in order to be efficient?)
3. What will the laws be? (efficient?)
4. In this class efficiency for 2, (3); other possibilities exist.
II. The problem of defining property rights:
A. How are they bundled?
1. Land includes??? How high, how bright, how loud, ...
2. What rights to defend? Dynamite story.
3. What rights against violators--damages or injunction
4. Branches of law included here? Nuisance, trespass, damages, ...
B. How are they acquired? Homesteading, adverse possession, patent, ...
III. The problem of externalities:
A. The problem
B. The Pigouvian solution
C. Two versions--regulation and tort law. Does it matter which?
IV. The Coasian approach: Three steps. Railroad story. My version.
A. Nothing works.
1. Railroad and wheat farmer:
a. Inefficiency
b. Pigouvian solution (= tort damages)
c. Coasian critique:
(1) Joint product. Clover. Confectioner.
(2) Lower cost avoider should avoid, but ...
(3) Won't if the other is liable.
2. Possible property definitions
a. Farmer owns, protected by injunction--no sparks, even if efficient
b. Farmer owns, protected by damages--no clover, even if efficient
c. Railroad owns (injunction? Property rights over locomotive)--sparks even if inefficient
d. Railroad owns, farmer can ban but then owes damages
3. No legal rule is efficient for all cost functions.
B. Everything works.
1. Bargaining either direction in railroad farmer case.
2. Coase Theorem--always get to efficient result, but ...
3. Which efficient result depends on rule, but ...
4. Not if owners are not the relevant consumers.
C. It all depends--transaction costs
1. Consider different rules, considerfor each the case where its direct result is inefficient so it must be modified by contract.
2. Railroad vs farmer, absolute farmer rights, holdout problem
3. Absolute railroad rights--public good problem
4. Damages case: Can we measure damages?
D. Spaghetti diagram.
V. More examples:
A. Resort and factory.
1. Small numbers, both solutions work, and ...
2. Pigouvian tax overdeters
3. Many resorts, problem ...
B. Air pollution in L.A.--damages (or regulation) or nothing.
C. Airports and sound pollution.
D. Farmer and Cattleman (Coase)
VI. Other lessons in the piece
A. The best available option may be short of full efficiency.
B. Externalities are frequently uncompensated because of state action.
C. Which may sometimes be a good thing.
September 20
I. Review
A. Economic efficiency and Pigouvian approach
1. The problem
2. Pigou's solution
3. Seen as an information issue--vs direct regulation
4. Seen as a property rights issue--tort liability for what?
5. Damages or fines--does it matter? Discuss.
a. Incentive to avoid the harm (Coase)
b. Incentive to sue.
B. Coasian approach
1. Pigou is wrong because the problem is a joint product. So nothing works.
2. Pigou ignores the possibility of negotiation (or assumes cases where it is not possible?). Everything works.
a.The Coase Theorem
b. All outcomes are efficient, but ...
c. Not the same if wealth differences are large.
3.Transaction costs block negotiation, so ...
a. Different starting points may lead to different ending points, or
b. Different costs of getting there.
c. So property rights definition matters, but what is right depends on transaction costs.
4. Anti-Utopian. The best solution may be imperfect.
5. Informational issue--who decides what?
a. Best information is the party, acting where private cost equals social cost.
b. Next best is the court ruling on this case?
c. Worst is the constitutional rule, but ...
d. Court disputes are expensive.
e. So a bright line rule may be better, especially if ...
f. low transaction costs for the private parties.
II. Coase and the Indians--Martin Bailey article.
A. Is private property a good thing?
1. Yes--you only plant a crop if you can harvest
2. No--if optimal scale is large, coordination or investment issues small.
B. How do primitive societies deal with these issues?
1. Private property in land being used for agriculture, or predictable small game.
2. Public property in land hunted over for large, stochastic beasts.
3. Joint property in the animal where joint inputs are important.
4. Private property almost always in final goods, except occasional insurance exception.
III. Calabresi and Melamed
A. the issue--who has rights, how are they protected.
1. Like bundling, different expression. Who--or holder of what other right?
2. Adds the third category of non-waivable rights.
B. Criteria: "what are the reasons ...?"
1. Economic efficiency
2. Distribution
3. Justice
4. Anything missing?
a. An optimistic account--only morally defensible reasons.
b. How about the interest of those making the rules? Outcome of a political market. Barbers
c. How about moral objectives other than justice (or does it include everything)? God's will?
5. A society can, does, ...
C. Application of Coasian approach:
1. Cost born by person best able to make the analysis (but he may not be the lowest cost avoider)
2. Lowest cost avoider (is that the same thing?)
3. Person best able to locate and transact with 1,2
4. May get suboptimal result--so compare to direct regulation.
5. Argument against direct regulation. Driving case. Pollution case.
a. Lots of variables, hard for outsider to observe, so ...
b. Impose costs, let the decider evaluate, but ...
c. May be undoable (judgement proof), or expensive (risk aversion, litigation costs)
d. Is "prevent not punish" an argument?
D. Distributional Arguments
1. Concedes unworkability of equality, but ...
2. Notes that societies have distributional goals. Is this true?
a. CAB, steel tariff example. Does not look like "society."
b. Individuals have distributional goals.
c. Is it useful to separate self interest from the other ones?
3. Is this discussion relevant to legal rules?
a. No--we can do redistribution on the side.
b. Yes--if some of our preferences are not by people but by legally cognizable roles.
c. Pornography? Nude posters in public places? Information about me?
4. Inalienability.
a. Some initial allocations are effectively inalienable--injunctive right to freedom from pollution.
b. Some are made inalienable. Votes. Place in a public school. Voucher vs grant arguments. Why?
(1) Paternalism--we know someone elses interest better than he does
(2) Our interest is not his--for good or bad reason. Schooling vs vouchers vs cash. x2
IV. How to protect entitlements?
A. Only property rules? But what if transaction costs of efficient transfers are high?
1. Eminent domain case (buying the land for the park)
2. Taxation case (raising the money).
3. Accident cost. either ...
a. Require permission for probabilistic injury, or ...
b. Impose criminal liability for actual. Why?
4. Redistributional reasons. "Compensation given as varied with society's distributive goals, and cannot be readily explained in terms of giving the victim ... an .. equivalent of the price at which he wuld have sold." Is/Ought to be muddle here--maybe the real reason was lobbying by the plaintiff's bar.
5. Live issue of whether this is an efficient form of redistribution. Ackerman, Ng, etc.
B. Inalienable entitlements?
1. As a solution to external costs (but why not have Pigouvian solution instead?)
a. Where we know the answer is no transaction, or ...
b. Where "external costs" are "moralisms," "non-monetizable."
(1) Is this an example of good law or ...
(2) The result of ignorance and demagoguery
(3) or imposition of moral values at the cost of economic efficiency?
c. Transplant technology. How many tens of thousands ... Discuss.
(1) Is it plausible that this is the efficient answer?
(2) Is it plausible that it is inefficient but the right answer?
d. Why Bork is not a libertarian. Discuss.
2. Self paternalism. But then at some point I, not the society, should choose.
a.Christmas club.
b. Health spa membership.
c. Are there any examples justifiable on these bases where I never choose?
d. Note that this cuts the opposite way from refusing to allow sales into slavery.
3.True paternalism. Is there a rule utilitarian case against considering it a legitimate basis for laws?
4. Distributional arguments: Baby buying.
a. Leaves out the cost to those who do not get babies
b. Leaves out the large dead weight cost--buyers pay more, sellers get less.
C. Their version of the Coasian pollution analysis:
1. Property right if transactions are easy, given to whoever is most likely to want to end up with it.
2. Liability right if transactions are hard. Problem is
a.cost of measuring valuoe, etc. (them)
b.rent seeking cost (me)
3. Distributional problems that they hint at--they give an incentive for actors to try to influence the law.
4. Fourth alternative. Factory example--is wrong. The poor do not own the factory!
D.Why punish thieves?
1.indefinable "Kicker"???
2. Optimal punishment is calculable, but complicated, as we will soon see.
3. Depends also on whether criminal or civil.
4. Basic argument is that we prefer property to liability rule where transactions are cheap. Accident vs crime is an important distinction here.
V. The Fable of the Bees
VI. Value of life, limb, etc.
[Hirshleifer, Kitch (1980)]
I.Review: makeup oct 6 rm 285 Karen
A. Primitive societies:
1. There are advantages to simple private property, but also ...
2. advantages to sharing rules and to commons.
3. Primitive societies have legal rules at least roughly adapted to these advantages.
B. Calabresi and Melamed: Property, Liability, Inalienability
1. Property means courts do not have to measure value. Use market instead.
2. Liability where transaction costs are prohibitive--auto accidents.
3. Inalienability where:
a. True paternalism
b. Maybe self-paternalism
c. External costs, hard to measure (moralism?), we know the answer.
d.Note setting tax vs setting amount of pollution distinction.
4. Distributional arguments for rules.
a. Misses Ng point--how general is it?
b. Are there good examples? Their pollution, baby buying are not.
II. Intellectual Property: The problem. Princess Bride
A. The coordination problem.
B. The private property solution
C. Problems with applying it to intellectual property.
1. Drawing lines. The floating island story. Bounding ideas.
2. Who gets the ownership, how?
D. Allocating property.
1. The homesteading problem--inefficiently early settlement in order to establish a claim.
2. One solution--divide up everything at the beginning. Auction it off. Problems?
3. Intellectual property problem--no map at the beginning!!! Can't do it.
4. Produced item solution--producer gets it. How we allocate cars.
a. So should all patents, copyrights be perpetual?
b. But ...
5. There is a commons of "inventions to be made," hence a commons problem.
E. So two problems with the property solution: Defining and allocating. Alternative solutions?
1. The commons. Used for a lot of intellectual property--language.
a. Too little incentive to produce
b. Too much incentive to protect
c. Difficulties in contracting for and controlling information.
d. May still be the least bad solution.
2. State production--NSF. Prizes? Standard problems with socialism.
III. Intellectual Property: The institutions
A. Copyright: "Writings"
1. Easily optained, long term protection.
2. Not just literal writings. Also includes:
a. recordings, pictures, and ...
b. computer programs, including object code operating system programs.
3. Covers literal infringement, derivative works (translation, sequel)
4. Somewhat vaguely defined non-literal infringement, as for example:
a. Superman case
b. Whelan v Jaslow--structure of a program
c. Lotus v Paperback--menu tree
B. Patent: "Inventions"
1. Hard to obtain, short term protection.
a. Must be useful (weak requirement--but non-existent for copyright)
b. Novel (also exists for copyright)
c. Non-obvious (used to be flash of invention).
d. Covers much more than literal copying.
C. Trade Secret--not quite property.
1. Defines rights against otherwise illegitimate acts (theft, contract violation, ...)
2. One case (Dupont v Christopher) carries it beyond that.
IV. The readings:
A.Kitch: The prospect theory of patents.
1. Prospects--as a way of both rewarding and establishing property rights.
a. Digression--optimal boundaries. Geometrical or geological?
b. Monopoly cost or property efficiencies? Prospects and patents. Demand curve. Explain.
2. Evidence that prospect element is important:
a. Attempt to force early claiming of patents.
b. Patent covers much more than actually invented.
(1) He says "more than reward requires."
(2) How does he know?
3. Arguments that it is useful
a. Patent owner can coordinate future research within his realm
b. Can make investments in unpatentable research, marketing, etc.
c. Can contract without the problem of losing the secret.
d. Can use licensing, etc. to avoid duplication.
e. Avoids the costs of secrecy.
4. Policy implications.
a. Modern courts are misled by looking only at the reward theory, with monopoly a cost.
b. Prospect theory explains limited term--old technology has been investigated.
c. Unification of patents may be desirable.
d. Disclosure is simply to define boundaries--real disclosure occurs later from private interest.
5. Problems:
a. Does not solve rent seeking--one big prize. Early reduces it--maybe too much.
b. What about auctioning in advance (Brenner proposal).
B. Landes and Posner:
1. (Digression on moral rights. Explain the argument)
2. Need for copyright to pay fixed cost of creating the work.
3.Alternatives to copyright:
a. Technical. U.S. vs Britain story.
b. Other incentives--moral or reputational. Shareware and Tolkien
c. Contractual. Copyright as a substitute for unenforcable contracts.
4. Disadvantage--cost of enforcement. Lower use of existing books.
5.Disadvantage given that writings are inputs to writing. Licensing possible but costly.
6. The law
a. Independent invention allowed. No free ride. But software?
b. Expression not idea. Transaction costs. Commons. Fuzzy boundaries. Computer standard.
7. Rent seeking from compensation above cost of production???
C. Friedman, Landes and Posner: Trade Secret Law
1. As a supplement to patent law, for inventions too small, too big, or where PTO is wrong.
2. Does a better job of proportioning reward to when invented.
3. Reduces secrecy costs somewhat.[got to about here]
0: Possible paper topics.
I. Review
A. Intellectual Property: The problem.
1. The coordination problem.
2. The private property solution, and Problems with applying it to intellectual property.
a. Drawing lines. The floating island story. Bounding ideas.
b. Who gets the ownership, how?
B. Allocating property.
1. The homesteading problem--inefficiently early settlement in order to establish a claim.
2. One solution--divide up everything at the beginning. Auction it off. Problems?
3. Intellectual property problem--no map at the beginning!!! Can't do it.
4. Produced item solution--producer gets it. How we allocate cars.
a. So should all patents, copyrights be perpetual?
b. But ...
5. There is a commons of "inventions to be made," hence a commons problem.
C. So two problems with the property solution: Defining and allocating. Alternative solutions?
1. The commons. Used for a lot of intellectual property--language.
a. Too little incentive to produce
b. Too much incentive to protect
c. Difficulties in contracting for and controlling information.
d. May still be the least bad solution.
2. State production--NSF. Prizes? Standard problems with socialism.
D. Intellectual Property: The institutions
1. Copyright: "Writings"
a. Easily optained, long term protection.
b. Not just literal writings.
c. Covers literal infringement, derivative works, somewhat vaguely defined non-literal infringement, as for example:
(1) Superman case
(2) Whelan v Jaslow--structure of a program
(3) Lotus v Paperback--menu tree
2. Patent: "Inventions"
a. Hard to obtain, short term protection.
3. Trade Secret--not quite property. Defines rights against otherwise illegitimate acts
E. Kitch: The prospect theory of patents.
1. Prospects--as a way of both rewarding and establishing property rights.
2. Evidence that prospect element is important:
a. Attempt to force early claiming of patents.
b. Patent covers much more than actually invented.
3. Arguments that it is useful
a. Patent owner can coordinate future research within his realm
b. Can make investments in unpatentable research, marketing, etc.
c. Can contract without the problem of losing the secret.
d. Can use licensing, etc. to avoid duplication.
e. Avoids the costs of secrecy.
4. Problems:
a. Does not solve rent seeking--one big prize. Early reduces it--maybe too much.
b. What about auctioning in advance (Brenner proposal).
F. Landes and Posner:
1. Need for copyright to pay fixed cost of creating the work.
2. Disadvantage--cost of enforcement. Lower use of existing books.
3.Disadvantage given that writings are inputs to writing. Licensing possible but costly.
4. The law
a. Independent invention allowed. No free ride. But software?
b. Expression not idea. Transaction costs. Commons. Fuzzy boundaries. Computer standard.
II. The economics:
A. Incentive: full value if no commons problem, less if commons (copyright v patent)
1. Note that this is much more true for literal copying than for
2. Broader applications of copyright.
B. Willingness to give: easy if no commons problem, hard if blocks others.
C. Breadth of protection:
1. Narrow is easier to define, enforce for copyright, may well be enough. But ...
2. Broad (idea) if Kitch is correct about prospect function in patent--much less important in copyright?
D. Computer programs.
1. Reasoning by analogy vs reasoning by function
2. By analogy, machine language system software is a cam
3. But it goes in the writings box.
4. Not so clear for broader protection.
E. Protection for standards?
1. Incentive to create a good standard
a. Unimportant if very elastic supply.
b. Apple interface
c. Qwerty v Dvorak
2.Incentive to manage a standard (prospect): Apple. but ...
3. Transaction costs of using licensing, and if not met
4. Inconsistent standards.
5. Rent seeking is possible even w/o protection, due to first mover advantage. Maybe.
III. Hirshleifer:
A. How can they creator of information get paid for it?
B. By using it to speculate. Explain speculation
C. No direct link between cost and value. Potential inefficient speculation
D. Note that this is quite different from the standard non-economic attack on speculation.
IV. Economics of Crime: The framework
A. Criminals and victims are rational.
B. Crime is bad because it is inefficient:
1. Isn't theft simply transfer, hence a wash? No.
2.A steals from B what is worth more to B, ... and
3. A spends resources stealing, B spends resources protecting
4. Property regime more efficient--back to Calabresi and Melamed.
5. Criminal law is a system of Pigouvian taxes! (Civil law too?)
C. The social control variables are expenditure on enforcement, structure of punishments.
D. The social loss function is: Social Loss =
[Damage to victims - Benefit to criminals] + Enforcement cost + Punishment Cost
1. Note that benefit to criminals of their crimes, and cost of their punishment, are included.
a. Should not be because criminals are evil?
b. Should be--evil is endogenous in the analysis.
2. What is punishment cost? Fine v execution v imprisonment.
a. fine costless, execution 100%, imprisonment 150%
b. [Kill them all?]
c. [Repulsion? Inefficiency? Controlling a bureaucracy.]
E. The project is to find the values of the control variables that minimize loss.
V. Becker Article:
A. The pioneering article. But aimed at economists, mathematical.
B. The results on risk aversion are wrong--my unpublished piece on reserve.
VI. My article:
A. The formal analysis: Simple model: <P>=damage.
1. Deter all inefficient and only inefficient crimes.
2. Implies that the limit on <P> is set by desire not to deter too much ...
3. Murder and rape??? Worried about too few!!!
4. Theft--is there any real chance that theft is more efficeint than purchase?
5. What is wrong? Leaving out the cost of crime prevention!
B. Fancy model:
1. Cost of enforcement increases with probability and number of offenses
2. Inefficiency of punishment increases with size of punishment
3. Find the optimal punishment/probability pair for each level of deterrence.
4. You now have a cost of deterrence function, increasing in P, O held constant, but ...
5. O decreases as P increases, so.
6. TC may increase or decrease, depending on elasticity.
7. Giving optimal punishment> or< damage done.
8. Combines two intuitions. Punishment=damage, enough punishment to deter.
I. Review:
A. The assumptions: Rational actors
B. The problem: Minimize the cost of crime by setting punishment and enforcment.
C. The cost: Damage to victim-benefit to criminal+enforcement cost+punishment cost
1. Note that criminal counts too--and should. Morals are endogenous
2. Enforcement cost rises with probability but also with number of offenses, so ...
3. May fall with increased probability due to deterrence.
4. Punishment cost is again a net--increasing punishment pushes towards more costly punishment.
D. Simple model--if you ignore enforcement and punishment cost, <P>=Damage.
1. Pigouvian tax.
2. Explain the marginal offender. Would be deterred if punishment +1 cent.
E. Fancy model: Where deterring one more offense costs just what it is worth.
1. It is worth damage-gain to criminal = damage-<P>!
2. It costs increase in enforcement+punishment cost for change that deters one more crime
3. If that is positive, then only deter very inefficient offenses
4. If negative, deter even some efficient offenses
5. Combines two intuitions. Punishment = damage and enough to deter.
II. Applications
A. Should the rich pay higher fines or get shorter jail terms?
1. Intuiton.
2. Disprove in simple model, but ...
3. Fancy model maybe.
a. Some offenses (utility not $) need more to deter
b. Cheaper to punish the rich.
B. Should the punishment depend on the victim?
1. Simple model, obviously if the criminal knows.
2. Fancy model, yes if the criminal knows.
3. Simple model, yes under uncertainty.
4. Fancy model, maybe under uncertainty.
5. Applies in general to deterring imperfectly informed actors.
a. Gets the expected punishment weighted by actors probability
b. But may not be the optimal way of getting that expected punishment
c. And expected harm may not = optimal expected punishment.
d. Can do better with perfectly informed court, but ...
e. Maybe not with real court.
f. Why not base on real probabilities rather than subjective?
(1) Implies based on what is, but ...
(2) You are trying to modify the behavior of people who do not know that.
C. Payne v Tennessee--what is the court doing?
1. Economic argument above? But ...
2. Denies it. legal rules?
3. Generic victim version? or ..
4. Collateral damage version.
III. Other stuff:
A.Consensual murder argument
B. Why not always use execution lottery instead of imprisonment? Kill them all.
1. Subtle costs of execution?
2. The virtues of Inefficiency? Controlling a bureaucracy.
3. Slave labor and related issues.
IV. Marginal deterrence: Dropping one simplifying assumption.
A. The Problem: Punishment for one offense affects supply curve for other offenses:
1. What to steal. Sheep/lamb. TV set. Smash a window? Trash the place?
2. Killing the victim. Murder+robbery.
3. Armed robbery
4. General issue of common inputs.
B. The Questions: Does intuition survive analysis?
1. Ought the more serious crime to have the more serious punishment?
2. Does the possibility of the more serious offense reduce the optimal punishment for the less serious.
3. In all this, note distinction between punishment and effective punishment.
C. The formalism: Figure 1. Explain. Figures do everything, further math ornamental?
D. The first case: Two alternative crimes.
1. Is effective punishment increasing in damage? Not in general. Depends on what it takes to deter as well. If you cannot deter, you do not want to punish (insane). Figure 2.
2. But yes if benefits are ordered like costs.
3. Does each offense push away the punishment for the other? Not in general, because the existence of one crime affects the shape of the supply curve for the other.
E. Multiple alternative crimes: Essentially the same results. Note that negative results generalize automatically.
F. Killing the victim:
1. We always want effective punishment higher for the combined crime.
2. In which case the combined crime never occurs, so is irrelevent to cost, except that ...
3. We are choosing on the basis of cost for simple crime, but ceiling is max punishment for complicated.
G. General substitute case--leave out.
H. Different cost functions:--leave out.
I. Punishment and Effective punishment:
1. Which is our question? Effective punishment.
2. Implication carries over to actual punishment only where cost fns the same for both crimes.
J. Dangerous assumptions:
1. If punishment cost zero or fixed proportion of punishment, then ...
2. You are always in the corner at maximum punishment, so
3. If you want to get the result for actual punishment, you have a problem ...
4. Which they eliminated by another artificial assumption,
5. Making their results entirely and unnecessarily artificial.
K. Bottom line:
1. We show how to analyze the problem
2. Analysis gives a more complicated picture than intuition, but ...
3. Increasing effective punishment where damage and benefit increase, cost functions the same, still survives.
I. Review: Crime so far
A. The assumptions:
1. Rational actors
2. The problem: Minimize the cost of crime by setting punishment and enforcment.
3. Consensual murder argument
B. The cost: Damage to victim-benefit to criminal+enforcement cost+punishment cost
1. Note that criminal counts too--and should. Morals are endogenous
2. Enforcement cost rises with probability but also with number of offenses, so ...
3. May fall with increased probability due to deterrence.
4. Punishment cost is again a net--increasing punishment pushes towards more costly punishment.
C. Simple model--if you ignore enforcement and punishment cost, <P>=Damage.
D. Fancy model: Where deterring one more offense costs just what it is worth.
1. Marginal criminal intuition.
2. Marginal cost may be < or >0
3. Combines two intuitions. Punishment = damage and enough to deter.
II. Applications
A. Should the rich pay higher fines or get shorter jail terms?
1. Some offenses (utility not $) need more to deter
2. Cheaper to punish the rich.
B. Should the punishment depend on the victim? Ex post or ex ante.
1. Obviously if the criminal knows the damage.
2. What about imperfect knowledge? Simple yes, complicated maybe
3. Applies in general to deterring imperfectly informed actors.
C. Payne v Tennessee--what is the court doing?
1. Economic argument above? But ...
2. Denies it. Equal protection? McClesky.
3. Generic victim version? or ..
4. Collateral damage version.
D. Why not always use execution lottery instead of imprisonment? Kill them all.
1. Subtle costs of execution?
2. The virtues of Inefficiency? Controlling a bureaucracy.
3. Slave labor and related issues.
III. Marginal deterrence: Dropping one simplifying assumption.
A. The Problem: Punishment for one offense affects supply curve for other offenses:
1. What to steal. Sheep/lamb. TV set. Smash a window? Trash the place?
2. Killing the victim. Murder+robbery.
B. The Questions: Does intuition survive analysis?
1. Ought the more serious crime to have the more serious punishment?
2. Does the possibility of the more serious offense reduce the optimal punishment for the less serious.
3. In all this, note distinction between punishment and effective punishment.
C. The formalism: Figure 1. Explain. Figures do everything, further math ornamental?
D. Alternative crimes.
1. Is effective punishment increasing in damage? Not in general. Depends on what it takes to deter as well. If you cannot deter, you do not want to punish (insane). Figure 2.
2. But yes if benefits are ordered like costs.
3. Does each offense push away the punishment for the other? Not in general, because the existence of one crime affects the shape of the supply curve for the other.
E. Killing the victim:
1. We always want effective punishment higher for the combined crime.
2. In which case the combined crime never occurs, so is irrelevent to cost, except that ...
3. We are choosing on the basis of cost for simple crime, but ceiling is max punishment for complicated.
F. Bottom line:
1. We show how to analyze the problem
2. Analysis gives a more complicated picture than intuition, but ...
3. Increasing effective punishment where damage and benefit increase, cost functions the same, still survives.
IV. Private Enforcement of Law:
A. Becker Stigler argument:
1. General case for enforcement as economic activity, cost benefit constraints.
2. Case for salary pattern as enforcement, given dismissal as the only punishment.
a. Simple argument--infinite bond, 0 probability
b. Malfeasance by state, wealth constraints.
3. Or permit bribes, cut salary! Depends on the right laws, bribes.
a. One limit--perfect court, bounty hunter enforcers, good.
b. Other limit--all property rights up for grabs, bad.
4. Punishment =D/p
5. Sounds exotic--isn't it just reinventing the civil law?
a. With initial right to victim.
b. Good for incentive to report the crime, etc., but ...
c. Problem in incentive to prevent it? See my analysis.
6. Why do we have civil and criminal law?
B. Landes Posner argument:
1. Historical move from private to public, efficient. Why not always public?
2. My version of their argument.
a. Non-optimal enforcement is correct, but ...
b. Overenforcement is an artifact.
3. Their solution--government or tax. Incentive problem.
4. Their efficient world argument: We observe a tort/crime distinction
a. Where prob=1 at low cost, private optimal. But ...
b. Incentive to inefficient litigation? Is p=1?
C. My Argument:
1. The problem is a single control variable to set p and P for optimal (p,f) and <P>: Figs 1,2.
2. Solution: Set <P>, let enforcer choose p,P
3. Profit/offence = <P>-Punishment cost - enforcement cost, so ...
4. firm picks (p,P) to minimize Punishment cost+enforcement cost, maximize profit. States sets optimal <P>
5. What if the price of the offense is negative?
a. If pre-selling, specific deterrence work, fine, otherwise ...
b. System breaks down.
c. Alternative explanation of our (or optimal) crime/tort split?
d. Note the Icelandic system, in a small, identifiable population.
e. Subsidize sale of offenses to bring price >0. Ineff self protection.
6. Defensive expenditures. If private good, then optimal here.
7. Incentive to misrepresent p by enforcement agents.
a. To understate so as to increase fine, or ...
b. To overstate so as to meet requirement.
D. My Icelandic
I. Review: Private vs Public Enforcement
A. The idea
1. Bounty hunter, or ...
2. Civil law
B. The sophisticated problem--optimal enforcement.
1. Landes Posner argument
2. Friedman reply
3. Is present civil law enforcement efficient?
a. Probability not unity
b. Litigation is expensive
C. The less sophisticated problem--judgement proof defendants.
1. Why it is a problem--no incentive to go after them.
2. Friedman model--implies negative price, requires private good deterrence to work.
3. Public solution--back to bounty hunting. Consistent with DF soln? Sort of.
4. Private solution--Fewer judgement proof criminals. But ...
5. Slavery/transplant problem. With pure civil system? With public jail alternative?
D. Advantages
1. General efficiency advantage of private production
2. Eliminate the legal assymmetry between police and criminals
3. No honor among thieves--opportunities for betrayal.
4. Do we want the law enforced?
II. Punitive Damages: Civil or criminal?
A. The Law: For some deliberate or reckless acts.
1. No legal rule on how much
2. Earliest case against govt censorship/harassment--18th c. King's Messengers
3. Becoming very common in modern cases
B. The puzzles:
1. Why more than compensation (efficient punishment argument)
2. Why does the extra go to the victim?
C.Six theories of...
1. No such thing--confusion for non-pecuniary damages. Insult cases.
2. To express moral outrage ... non economic argument?
3. To compensate for low probability of catching--like criminal. (L&P)
4. Where damages are hard to measure and the act is almost certainly inefficient (L&P)
5. Where supply of offenses is elastic (my argument)
a. Because litigation costs are substantial (about 50%) ...
b. If deterrence is small, we want punishment<damage. Only easily measurable ... no multiplier
c. For standard accidental tort deterrence is small. (Is this right? Different margins)
d. For intentional tort, deterrence may be large.
6. To prevent strategic assault (my other argument)
a. The economics of bullying
b. With fully compensatory damages, does not work, but ...
c. Traditional damages are not, should not be, fully compensatory. Also attorney's fees.
d. So threats may work. Consider equivalent in policing. Seizing a computer.
e. English case. Lots of "insult" cases. Status in traditional society.
III. Transferable Torts:
A. Effect on size of average judgement--increases
1. Because plaintiffs are relatively risk averase and ...
2. Need the money now, and ...
3. Unskilled in hiring lawyers
B. Effect on efficiency
1. More efficient litigation and settlement
2. Higher <P> may be more or less efficient
C. Effect on fairness
1. Reduces difference in outcome by plaintiff characteristic
2. As does marketability in general
3. Information cost much less for a price than for a quality
D. Arguments against
1. Gullible plaintiffs? Easier to gull on one settlement offer than a choice of prices.
2. More litigation
3. Less settlement? Or more. Why do cases ever get tried?
4. A market in pain and suffering.
I. Punitive Damages: Civil or criminal?
A. The Law: For some deliberate or reckless acts.
1. No legal rule on how much
2. Earliest case against govt censorship/harassment--18th c. King's Messengers
3. Becoming very common in modern cases
B. The puzzles:
1. Why more than compensation (efficient punishment argument)
2. Why does the extra go to the victim?
C.Six theories of...
1. No such thing--confusion for non-pecuniary damages. Insult cases.
2. To express moral outrage ... non economic argument?
3. To compensate for low probability of catching--like criminal. (L&P)
4. Where damages are hard to measure and the act is almost certainly inefficient (L&P)
5. Where supply of offenses is elastic (my argument)
a. Because litigation costs are substantial (about 50%) ...
b. If deterrence is small, we want punishment<damage. Only easily measurable ... no multiplier
c. For standard accidental tort deterrence is small. (Is this right? Different margins)
d. For intentional tort, deterrence may be large.
6. To prevent strategic assault (my other argument)
a. The economics of bullying
b. With fully compensatory damages, does not work, but ...
c. Traditional damages are not, should not be, fully compensatory. Also attorney's fees.
d. So threats may work. Consider equivalent in policing. Seizing a computer.
e. English case. Lots of "insult" cases. Status in traditional society.Dueling?
II. Transferable Torts:
A. Effect on size of average judgement--increases
1. Because plaintiffs are relatively risk averase and ...
2. Need the money now, and ...
3. Unskilled in hiring lawyers
B. Effect on efficiency
1. More efficient litigation and settlement
2. Higher <P> may be more or less efficient
C. Effect on fairness
1. Reduces difference in outcome by plaintiff characteristic
2. As does marketability in general
3. Information cost much less for a price than for a quality
D. Arguments against
1. Gullible plaintiffs? Easier to gull on one settlement offer than a choice of prices.
2. More litigation
3. Less settlement? Or more. Why do cases ever get tried?
4. A market in pain and suffering.
III. Negligence v Strict Liability:
A. The background: Tort damages and the hand rule.
1. Carroll Towing leads to the hand rule for defining negligence.
a. Looks like an efficient rule.
b. It is never in my interest to be negligent (given perfect courts)
c. So damages will never be awarded.
2. Equivalent approach to contributory negligence.
3. Level of precautions vs level of activity.
4. Single sided v double sided accidents.
5. Error and litigation costs are initially assumed away
B. Shavell argument: Single sided accidents between strangers.
1. Both rules lead to efficient precautions, but ...
2. Only strict liability leads to efficient level of activity.
3. Variant where the tortfeasor is producing a good for sale
C. Single sided accidents between contractually linked parties:
1. Buyer and seller or employer and employee.
2. With full information, rule does not matter, nor is liability necessary.
3. Without full information, strict liability is again efficient, but ...
4. So is freedom of contract, if mean risk is known. If it does not lead to strict, ...
D. Double sided accidents
1. Negligence yields eff care for both, eff activity for victim.
2. Strict plus contributory negligence defence yields eff care for both, eff activity for tortfeasor.
3. Choose according to which inefficiency is more costly: Explanation of strict for ultrahazardous.
4. Double sided liability does it--but moves us outside of tort law.
5. Between buyer and seller
a. With full info, everything is eff except for level of use by customer
(1) Efficient under negligence or no liability, but ...
(2) Not under strict, even with contributory
b. With average level of risk known,
(1) Strict liability with contributory negligence, w/o level of use problem, works
(2) Negligence works if level of negligence is the same for all sellers (Shavell misses this)
(3) Strict with contributory does not work for durables, level of use.
E. Should level of activity be included in the definition of negligence?
1. Yes, given the assumption of perfect courts, but ...
2. It may be harder for the court to measure or find the optimum for.
F. Is the hidden variable really the ability of the court?
1. My improved version of liability--kill them all.
2. My improved version 2--everyone in the region pays.
3. Wrong because of ...
a. Enormous litigation costs
b. Enormous error costs
4. Two approaches to measuring costs and values:
a. Court estimates
b. Set a price, see if people buy.
5. Fundamental problem--can you use second and better method for everything?
a. The answer appears to be no. Property v liability.
b. But you can divide the problem, and use better method for harder part.
See my: Review of Economic Analysis of Accident Law, by Steven Shavell. Journal of Political Economy 97 (1989).
c.
IV. My scheme for efficient litigation of mass toxic torts.
I. Review:
A. Criminal and civil standards of proof--eff v ineff punishment
B. Negligence v Strict Liability:
1. The background: Tort damages and the hand rule.
2. Shavell argument: Single sided accidents between strangers.
a. Both rules lead to efficient precautions, but ...
b. Only strict liability leads to efficient level of activity.
3. Single sided accidents between contractually linked parties:
a. With full information, rule does not matter, nor is liability necessary.
b. Without full information, strict liability is again efficient, but ...
c. So is freedom of contract, if mean risk is known.
4. Double sided accidents
a. Negligence yields eff care for both, eff activity for victim.
b. Strict plus contributory negligence defence yields eff care for both, eff activity for tortfeasor.
c. Choose according to which inefficiency is more costly: Explanation of strict for ultrahazardous.
d. Between buyer and seller, level of use problem.
e. Double sided liability does it--but moves us outside of tort law.
5. Should level of activity be included in the definition of negligence?
C. Is the hidden variable really the ability of the court?
1. My improved version of liability--kill them all.
2. My improved version 2--everyone in the region pays.
3. Wrong because of ...
a. Enormous litigation costs
b. Enormous error costs
4. Two approaches to measuring costs and values:
a. Court estimates
b. Set a price, see if people buy.
5. Fundamental problem--can you use second and better method for everything?
a. The answer appears to be no. Property v liability.
b. But you can divide the problem, and use better method for harder part.
D. My scheme for efficient litigation of mass toxic torts.
II. Damages for breach of contract: General issues
A. Why not
1.always compel performance? Because it may be inefficient. Also, how? Criminal?
2. Require consent of other party for breach? Bargaining costs plus risk.
3. Fully specify contract? Not enough fine print in the world. Not everything is public.
B. Three alternative damage rules:
1. Expectation damages--make the victim as well off as if no breach
2. Reliance damages--make the victim as well off as if no contract
3. Restitution--cancel payments
4. No damage.
5. Liquidated damages--agree on damages in advance.
a. Should such an agreement be enforcable?
b. Should it be made?
III. Shavell paper:
A. Assumptions
1. No contingent provisions
2. Either party may have reliance expenditures, after formation before performance
3. Uncertainty is then resolved for both parties.
4. Parties either perform or breach.
5. Both parties know all the relevant functions, probabilities, but not outcomes.
6. Note that contract formation is
a.always honest--fraudulent contracts are a different issue.
b. unaffected by damage rule! See my paper.
7. Reputational effects are ignored.
B. Decision to breach and measure of damages: Breach if better off by doing so.
C. Damages and reliance
1. If I default, I lose my reliance--and whether I default may depend on the damage rule.
2. How is the probability of breach by the other party affected by the damage rule?
3.How do my damages depend on my level of reliance?
4. How does my leve of reliance affect his probability of breach via affect on damages.
D. Efficient reliance and breach:
1. Breach, if doing so is efficient (value to buyer less than avoidable cost to seller), given reliance.
2. Rely at that level which is efficient, given the probability of breach above.
3. Note why efficient level of reliance depends on probability of breach.
E. Formal model briefly explained. r, theta, p(theta), breach set B.
1. Note that probability dist of contingency is exogenous, but r and B are endogenous.
2. My return is integral over theta, weighted by probability and outcome.
3. nash equilibrium--explain. Need it because each person's behavior conditional on the other.
4. Alternative--I will do x if you do y. But requires observability, negotiation--assumed away.
F. One party chooses reliance, one breach:
1. For example--seller invests pre-production, buyer might default.
2. Formal: B*(r) p. 475, r*
3. Expectation damages gives efficient breach, but over reliance.
4. Reliance damages gives too much breach and over reliance.
a.because expectancy>reliance.
b. This depends on no uncertainty for the relying party, hence non-negative return from contract.
c. Second reason to over rely is to compel performance!
5. With no damages, payment at performance, efficient reliance but ineff breach.
6. Conclusion: Expectation>reliance, indeterminate wrt restitution.
G. One party chooses both. Expectation damage rule is efficient.
H. Both parties doing both--harder.
I. Other roles of damages--risk allocation.
J. Limited information of the court.
K. Does not discuss liquidated damages--argument implies
1. Freedom of contract, but ...
2. Parties might want to make damages depend on facts observed after contract signing.
IV. My Paper
A. Assumptions
1.No level of reliance, measurement problems
2. Reliance (fixed) is by seller, breach is by buyer.
B. The puzzle--why are reliance and expectation measures different? Profit not = 0?
1. Imperfect competition--monopoly profit.
2. Uncertainty--profit is zero ex ante but not ex post.
C. The mistake: Two margins. Expectation for one, Reliance for the other.
D. Imperfect competition:
1. Inefficient purchase is the standard monopoly inefficiency. Because of marginal profit.
2. Under reliance, he breaches too often just as he buys too little to start with.
3. Expectation gives efficient breach, but ...
4. May or may not be on net superior to reliance. Because ...
5. Reliance satisfies the efficient allocation between two markets condition.
6. Freedom of contract not necessarily a good thing--discriminatory pricing.
a. Completely free contract may be less efficient than exp, reliance
b. Choice between exp, reliance is made correctly for the special cases I analyze.
E. Uncertainty in cost of production.
1. With symmetric information, cost imposed by buying then breaching reflected in price.
2. With assymmetric information, reliance gives right incentive on that margin, wrong on breaching margin.
I. Review: Damages for breach
A.General issues
1. Why not always compel performance? Require consent of other party for breach? Fully specify contract?
2. Alternative damage rules:
a. Expectation damages--make the victim as well off as if no breach
b. Reliance damages--make the victim as well off as if no contract
c. Other formulas--no damage, give money back, ...
d. Liquidated damages--agree on fixed damages in advance. On damage rule in advance?
B. Shavell paper:
1. The central issues are inefficient reliance and inefficient breach.
2. Expectation rule gives you efficient breach but inefficient reliance--insured against breach.
3. Reliance rule gives you both inefficient.
4. A fixed damage rule (none, liquidated, give back the money) gives efficient reliance, ineff breach, ... unless
5. It is a liquidated damages rule set at the right level--which requires advance info.
6. Other roles of damages--risk allocation.
7. Limited information of the court.
C. My Paper
1. The central issue is inefficient breach vs inefficient formation of the contract
2. The puzzle--why are reliance and expectation measures different? Profit not = 0?
a. Imperfect competition--monopoly profit.
b. Uncertainty--profit is zero ex ante but not ex post.
c. Both raise contract formation questions.
3. The mistake: Two margins. Expectation for one, Reliance for the other.
4. Imperfect competition:
a. Expectation gives efficient breach, but ...
b. Reliance satisfies the efficient allocation between two markets condition.
c. Freedom of contract not necessarily a good thing--discriminatory pricing.
5. Uncertainty in cost of production.
a. With symmetric information, cost imposed by buying then breaching reflected in price.
b. With assymmetric information, reliance gives right incentive on that margin, wrong on breaching margin.
II. Proper damages for death or injury--the problem.
A. The context: Damages as a Pigouvian tax, incentive for efficient precautions.
1. Mainly in the tort context, but ...
2. Government decisions (road building, etc.) require value of life figures. What should they be?
3. As do calculations of optimal criminal penalties?
B. Two approaches:
1. "Make the victim whole." "Price he would sell at."
a. For life, might be infinite, will be huge.
b. For some injuries, will be huge or infinite (blindness)
c. Answer feels wrong, does not describe how we make fully internalized decisions.
2. 10,000x(price for 1/10000th probability of injury). But why?
C. Where does the infinity come from?
1. Not infinite value of life, but ...
2. Low value of money to a corpse, or ...
3. TV sets to a blind man.
D. One problem is an inefficient allocation (blind man)
E. One is an extreme variant of the MV of money problem with efficiency.
III. The conceptual solution
A. Think of the problem ex ante (as an individual does in his choices).
B. What would I have to be paid to take the risk? But ...
C. Still uncompensated individually--marshall but not pareto.
IV. The Institutional solution
A. Set a level of damages for life, such that ...
B. I am equally well off ex ante, given that I can transfer money across outcomes
C. By selling insurance on myself.
D. Equivalent to ex ante compensation, with the market doing the calculations.
I. Review:Proper damages for death or injury--the problem.
A. Damages as an incentive for efficient precautions.
B. "Make the victim whole." "Price he would sell at."
a. For life, might be infinite, will be huge.
b. For some injuries, will be huge or infinite (blindness)
c. Answer feels wrong, does not describe how we make fully internalized decisions.
d. Where does the infinity come from?
C. Also gives an inefficient allocation (blind man)
D. Think of the problem ex ante (as an individual does in his choices).
1. What would I have to be paid to take the risk? But ...
2. Still uncompensated individually--marshall but not pareto.
E. The Institutional solution
1. Set a level of damages for life, such that ...
2. I am equally well off ex ante, given that I can transfer money across outcomes
3. By selling insurance on myself.
4. Equivalent to ex ante compensation, with the market doing the calculations.
II. Intro: Three issues:
A. The implication of selection of disputes for inferences about the legal system
B. The implication for the choice between the English and American rules
C. The implications of the analysis for rationality, and problems in statistics.
III. Priest-Klein
A. General problem of selective observation. 20-20 hindsight. Popn density.
B. Litigated cases, Appeals. Not a representative sample.
C. Their initial model
1. Litigation only due to differing opinions. No Bilateral Monopoly Breakdown
2. Y=H(X) is the strength of plaintiff's case
3. Iff Y>Y*, plaintiff wins.
4. Parties have symmetric, unbiased estimates with the same distribution.
a. Why unbiased? If biased, ...
b. Rational expectations
5. Stake identical--just the damage payment.
D. Bayesian problem
1. Their analysis
2. Why it cannot be right
3. Why it is about right.
4. Why it could be right with redefinition.
5. Why all this fine stuff matters.
E.Conclusion:
1. Random errors will have a much bigger effect if Y near Y*
2. So litigated cases are selected from close cases. Figure 5.
3. Handicapping sports events.
4. Ratio of wins goes to 50% as variance goes to zero.
F. Change assumptions: Assymmetric stakes: in suit, not in settlement.
1. Pinto example
2. If defendant's stakes are higher, then
3. Litigation more likely when defendant likely to win.
4. More defendant victories observed.
5. Less litigation. Litigation "costly" from the parties standpoint.
6. Reverse for opposite case.
G. Apply their model to change over time.
IV. Donohue
A. Question: Does the British rule increase or decrease the probability of settlement?
1. Posner version 1--it increases, by making variance higher, trial less likely.
2. Posner Shavell--it decreases
3. Donohue--Coase theorem says nodifference.
B. Explain the Posner-Shavell result
1. Litigation only occurs if each party is relatively optimistic. (Start with identical p)
2. In which case increasing the stake reduces the bargaining range.
C. Coase Theorem
1. Assume the parties are free to bet that they will win!
2. Under the assumptions, if British rule->trial, under U.S. rule they will make the bet!
3. Because: British outcome>Settlement>U.S. outcome. All measured by net subjective gain.
4. Why not bet twice as much? Ten times as much?
5. Why do people ever have differing probabilities? Where bets are cheap, only due to risk aversion?
D. Fine points:
1. Risk aversion: Raises cost of British and of bet.
2. Higher litigation costs ditto.(Two possible reasons, only one if fixed litigation award)
3. Transaction costs:
a. Without side payment
b. With side payment. Like settlement.
c. Why no such bets? In either direction?
E.Recursive argument
1. Litigants have missed this
2. Posner and Shavell have missed this--in their interest to do so? Coase has the patent.
3. Both are evidence that profitable opportunities remain untaken
4. Will this article change that?
F. My fine points:
1. Hand tying not to bet, vs not to litigate.
2. Winner's curse. Betting in a randomly observed world.
3. Dead weight cost of the stock market?
V.Posner:
A. Slides over breakdown problem. Game theory and bilateral monopoly. sketch.
B. No model of litigation expenditures. Game theory problem.
C. Increasing stakes--while what holds constant? Risk aversion explanation.
D. Pretrial discovery:
1. Why is compulsion necessary?
2. Rule 35 and the market for lemons.
E. Indemnity--the English rule
1. Why reasonable expenditure, not actual expenditure.
VI. Misc:
A. Game theory
B. My model of litigation: A new argument for the adversary system
1. Litigants have private information.
2. Litigants spend resources getting information, through away bad information.
3. Advantage of Inquisitorial--all information kept. But ...
4. Advantage of adversarial--incentive to reveal via expenditure.
5. The optimal decision rule is designed to exploit this.
6. Innocent spends enough to prove he is innocent, guilty spends nothing. no errors.
I. Review:
A.Intro: Selection of disputes, English and American, Rationality.
B. Priest-Klein
1. Litigation only due to differing opinions. No Bilateral Monopoly Breakdown
2. Parties have symmetric, unbiased estimates with the same distribution.
a. Why unbiased? If biased, ...
b. Rational expectations
3. Stake identical--just the damage payment.
4. Bayesian problem: Explain
a. Why it does not much matter for their conclusion
b. Why the concept matters for a theory based on errors alone
5. Random errors have a much bigger effect if Y near Y*
6. So litigated cases are selected from close cases.
7. Ratio of wins goes to 50% as variance goes to zero. Not proven.
8. Change assumptions: Assymmetric stakes: in suit, not in settlement.
a. Suppose defendant's stakes are higher
b. Makes litigation always more attractive than with symmetrical stakes
c. More so the more likely defendant is to win.
d. Litigation more likely when defendant more likely to win.
e. More defendant victories observed.
9. Apply their model to change over time. Patterns of informational error.
C. Donohue: Does the British rule increase or decrease the probability of settlement?
1. Posner version 1--it increases, by making variance higher, trial less likely. risk aversion.
2. Posner Shavell--it decreases
a. Litigation only occurs if each party is relatively optimistic. (Start with identical p)
b. In which case increasing the stake makes litigation more attractive.
3. Donohue: Coase Theorem
a. Assume the parties are free to bet that they will win!
b. If U.S. would settle, UK litigate, then change the rule and litigate.
c. Because: British outcome>Settlement>U.S. outcome. All measured by net subjective gain.
4. This is never observed. Are people irrational? Are L&E scholars irrational?
D. My fine points:
1. Hand tying not to bet, vs not to litigate.
2. Winner's curse. Betting in a randomly observed world.
3. Dead weight cost of the stock market?
4. Relevance to Priest-Klein. You must put breakdown back in to have any litigation!
E. My model of litigation: A new argument for the adversary system
1. Litigants have private information.
2. Litigants spend resources getting information, through away bad information.
3. Advantage of Inquisitorial--all information kept. But ...
4. Advantage of adversarial--incentive to reveal via expenditure.
5. The optimal decision rule is designed to exploit this.
6. Innocent spends enough to prove he is innocent, guilty spends nothing. no errors.
II. My piece:
A.Three criteria of efficiency. Are Marshall and Kaldor equivalent?
1.No.
2.Why they must be.
B. The Economics of Altruism
1. What is a utility function.
2. Becker's description of altruism
3. Altruistic equilibrium--Indifference curve diagram and verbal explanation.
C. The counterexample.
D. Which criterion is relevant where?
1. Utilitarians should go with Marshall--happiness is happiness
2. Veil of ignorance people ditto.
a. Utilitarian argument for egalitarianism
b. Plus Becker Altruism argument for egalitrianism, but ...
c. Both limited by dead weight costs of transfoer
d. Of both sorts--excess burden and political rent seeking.
e. Constitutional rules--whole system, or possibility of transfer.
3. For predicting political pressures ditto.
4. But Kaldor for predicting voluntary altruism in the simple case, Coase theorem results.
E. Gift taxes:
1. From a utility definition of income, tax gifts and give no deduction. (or deduction and no tax. difference?)
2. From an efficiency standpoint?
a. Standard excess burden argument
b. Applied to transfers
c. Don't tax, subsidize. Follows from our argument above.
III. I Gave Him the Best Years of my Life
A. marriage as a long term contract
1. To encourage and protect investment in firm specific capital
2. And to insure
3. Why are the terms not more specific?
a. Complicated and hard to define
b. Or monitor
c. Like employment contracts.
B. Divorce Law
1. Old version. Only fault, settlement unfavorable to the party at fault.
a. Strategic degradation of quality--Islamic story
b. Coase theorem--mutual consent with forged fault
c. But social sanctions both ways.
2. New version: Unilateral divorce
a.alimony may or may not be a damage payment.
b. Approaching an unenforcable contract.
C. The marriage and remarriage market
1. A barter market--market for husbands and market for wives simultaneous.
2. Claim--women depreciate faster as wives than men as husbands.
a. Hard to test--no observed price. Husband's income? Wife's income?
b. Ratio of women/men increases with age (differential mortality rate)
c. Effect stronger for unmarried, since more and more are married as age increases.
d. Women get the children, which make them less attractive spouses to other men.
e. Popular culture recognizes that men prefer younger women.
f. Biological reasons--child bearing declines with age, income providing rises.
3. Alternative version of the claim--women preform early, men late, in marriage contract.
D. Easy divorce and appropriating quasi-rents.
1. Explain a quasi rent.
2. Obvious problem within marriage.
3. Result is inefficient as well as unjust?
a. Coase theorem to prevent breakup?
b. But inefficient investment decisions, plus bargaining problems.
4. Children as hostages?
a. Depends on visitation problems
b. Empirical result might mean:
(1)Work as hostages
(2) Are evidence of a stable marriage
(3) Coase theorem with appropriation by husband.
5. Bride price, dowery, etc. as enforcement mechanism
a. Requires that the husband has alienable property (lots of it)
b. Does not constrain wife unless they both have it
c. Reintroduces the problem of observing breach.
d. Unromantic? Use some originality, be symmetric.Propose against yourself.
6. Possible responses to a world without enforcable marriage contracts
a. Timing--marry a man on the way down.
b. Lower marriage specific investment.
(1) Have fewer children
(2) Have more job skills, hire more homemaking.
E. Legal protections
1. Prenuptual contracts.
a. Hard to specify damages contingent on state of the world
b. Hard to prove who defaulted
c. May be hard to enforce.
2. Divorce law
a. Unilateral divorce, like employment at will, inappropriate with sunk specific costs.
b. Mutual consent divorce: Hard to enforce specific performance.
(1)Breach without divorce is possible, destroys the other parties quasi rents
(2) So mutual consent may be obtained to expropriation that has already happened.
(3) Incentive to opportunistic breach--Islamic story?
3. Indissoluble marriage
a. Solve some of the problems above, but ...
b. Eliminates efficient breaches
c. Permits informal breach without remedy--victim has nothing to sell breacher.
4. Court determined divorce and settlement:Measuring, monitoring, enforcing problems.
Law and Economics: Preliminary Outline
Recommended Books:
D. Friedman, Price Theory: an Intermediate Text
R. Posner, Economic Analysis of Law
These are or will be on reserve.
8/30 What is economic analysis of law?
9/6 No Class--Instructor out of town
9/13 How should property rights be defined
9/?? and protected
9/20 Intellectual property
9/27 Optimal punishment
10/4 Marginal deterrence
10/11 Why do we have both civil and criminal law?
10/18 Punitive damages
10/25 Strict liability vs negligence
11/1 Contract law: Mistake, damages for breach, etc.
11/8 Measuring Damages
11/15 The case for and against freedom of contract
11/22 The economics of litigation and judging
11/29 The Law and Economics of Marriage
12/6
Some Questions to think about
1. What ought the legal system to maximize? Is that the right question to ask, and if so what is the answer?
2. What are the essential differences between civil offenses and criminal offenses?
3. What are the essential differences between the legal treatment of civil offenses and criminal offenses?
4. Does your answer to 3 make sense, given your answer to 2? Does your answer to 2 make sense, given your answer to 3?
5. Make a list of the most important alternative legal rules for handling marriage and divorce, actual or proposed, and briefly describe what is wrong with each.
6. Two parties clearly specify their mutual legal obligations in a contract. List several situations where the contract will not be enforced. Is this a good thing--would it be "better," "juster," "more efficient," ... if the contracts were enforced?
7. How ought the damages for killing or injuring someone to be calculated? Why is this the right way?
8. Is it in the interest of judges to make just decisions? Efficient decisions? Why? If your answer is "no," how is it in the interest of judges to act?
Law and Economics: Preliminary Syllabus
Recommended Books:
D. Friedman, Price Theory: an Intermediate Text
R. Posner, Economic Analysis of Law
These are or will be on reserve.
8/30 "Law and Economics" from the New Palgrave
(Posner Chapters 1,2; Friedman Chapter 1)
9/6 No Class--Instructor out of town
9/13 Ronald Coase, "The Problem of Social Cost," 3 Journal of Law and Economics 1 (1960).
(Posner 3, Friedman ...)
9/20 Guido Calabresi & Douglas Melamed, "Property Rules,
Liability rules and Inalienability: One View of the Cathedral"; "On the Approximate Optimality of Aboriginal Property Rights."(Makeup session)
9/27 Edmund Kitch, "The Nature and Function of the Patent System," 20 JLE 265 (1977), Landes and Posner, "An Economic Analysis of Copyright Law," 18 JLS 325 (1989), Friedman, Landes and Posner, "Some Economics of Trade Secret Law."
10/4 Becker, Gary S., "Crime and Punishment: An Economic Approach," Journal of Political Economy 76 (1968) pp. 169-217. D. Friedman, "How Should Punishment Depend on Characteristics of the Criminal and the Victim"
10/11 David Friedman and William Sjostrom, "Hanged for a Sheep-The Economics of Marginal Deterrence," Journal of Legal Studies forthcoming.
10/11 Becker, Gary S. and George J. Stigler, "Law Enforcement, Malfeasance, and Compensation of Enforcers," 3 Journal of Legal Studies 1 (1974). Landes and Posner, ...,David Friedman, "Efficient Institutions for the Private Enforcement of Law." Journal of Legal Studies, June 1984.
David Friedman, "Private Creation and Enforcement of Law: A Historical Case." Journal of Legal Studies, March 1979.Shukaitis, Marc J., "A Market in Personal Injury Tort Claims," Journal of Legal Studies XVI (2) June 1987, pp. 329-349.
10/18 Friedman, "An Economic Explanation of Punitive Damages."
10/25 Strict Liability vs Negligence
11/1 Shavell, ""; Friedman, "An Economic Analysis of Alternative Damage Rules for Breach of Contract,"
11/8 Friedman, "What is Fair Compensation for Death or Injury?"
11/15 Freedom of contract
11/22 George Priest and Benjamin Klein, "The Selection of Disputes for Litigation," 13 JLS 1 (1984), Richard Posner, "What do Judges Maximize?"
11/29 Lloyd Cohen: "Marriage, Divorce, and Quasi Rents; or, "I Gave Him the Best Years of My Life,""Journal of Legal Studies, June 1987.