• I. Three projects:
  • A. The effect of legal rules.
  • B. Explaining legal rules.
  • C. Choosing rules

   

• II. Ideas:
  • A. Efficiency.
    • 1. Simply thought of as size of the pie, but ...
    • 2. that is not an adequate explanation when the pie we are measuring consists of everything that happens to everyone.
    • 3. The question "what is the efficient rule and is it the same as the actual rule" then ends up as the center of our enquiry.
  • B. Why things are inefficient: Externalities and related problems.
  • C. And what you can do about it:
    • 1. Direct regulation
    • 2. Pigouvian tax
    • 3. Property rights, transactions and transaction costs
  • D. Relates to our three projects because:
    • 1. The tendency of markets to produce efficient outcomes is important to understanding what will happen--for example, that contract terms will be efficient wrt the parties, so restrictions tend to make the parties worse off.
    • 2. Efficiency is a conjecture for explaining common law rules, and ...
    • 3. A candidate for recommending rules.

     

• III. Coaseian lessons: A way of thinking about these issues:
  • A. What we own are not things but rights.
    • 1. We can transact over rights, so ...
    • 2. The question is not merely who ought to end up with the right to do what, but ...
    • 3. Who should start with it, given that we don't know who should end up with it but do know a good deal about how rights can move from one person to another.
    • 4. Which depends on transaction costs
  • B. There is no reason to expect that any of the solutions will give us a fully efficient outcome.
    • 1. In particular, the Pigouvian won't, in general.
    • 2. Nor will the regulatory
    • 3. Nor the Coaseian

     

• IV. We should be thinking in terms of three mechanisms for dealing with problems:
  • A: Regulation
    • 1. EPA regulations, etc., but also ...
    • 2. Negligence rules.
    • 3. More generally, any mechanism which depends on the regulator knowing how the regulatee ought to behave (in our context, what behavior is efficient) and making it costly for him not to behave that way.
  • B. Pigouvian:
    • 1. damages
    • 2. effluent fees, traffic tickets
    • 3. More generally, any mechanism that forces one of the people causing some costly outcome to bear the cost, giving him an incentive to adjust his behavior accordingly.
    • 4. Where damages also reduce the incentive of the victim, who is usually also a cause.
    • 5. Fines don't reduce it, but don't give the proper incentive, unless
    • 6. Both parties are fined (examples?)
  • C. Coaseian (property rights, transactions):
    • 1. Typically associated with a property right, since the right is then moved to its highest valued use by transactions, but ...
    • 2. One could use a property right to impose a regulatory solution--if transaction costs were so high that whoever started with the right ended with it.
    • 3. And one can transact over liability rights--I might agree not to sue you in exchange for a payment, for example.
    • 4. Generally, any mechanism where we move towards the efficient outcome via bargaining among the affected parties.
    • 5. The norm for most of the economy--ordinary property--and one option for externalities, etc.
    • 6. Note that it includes cases where we bargain once to get a permanent solution--for instance, the factory buys the resort.

     

• V. Insurance issues: allocation of risk runs through much of the law.
  • A. Risk spreading.
  • B. Moral hazard--or more generally, the affect of risk allocation on the incentive to take efficient precautions to prevent the undesirable outcome.
  • C. Adverse selection--more generally, the effect of risk allocation if a transaction occurs on the incentive to make efficient transactions.
  • D. These desiderata may pull in opposite directions.
  • E. In which case you either settle for the least bad solution, or ...
  • F. Bring in additional mechanisms. For example:
    • 1. Reputation plus caveat emptor solves moral hazard on both sides--if consumers are well informed.
    • 2. Liability plus insurance combines optimal moral hazard incentives with optimal risk spreading in the case of liability for death or crippling injury.
  • G. Note that we have a choice in dealing with such problems among the three approaches described above:
    • 1. Regulatory approach--producers will take the following precautions (OSHA).
    • 2. Pigouvian approach: The legal rule is caveat emptor (or caveat venditor, or some mix).
    • 3. Coaseian approach: Freedom of contract. Waivers and guarantees both enforced.
  • H. And note that which makes sense depends largely on transaction costs:
    • 1. In the product liability context, they are low, so there is a strong argument for freedom of contract.
    • 2. But in the tort context, transactions are usually so costly that they don't occur, so we are stuck with the Pigouvian solution

     

• VI. Ex ante/Ex Post another issue that runs through the law.
  • A. Simple question: Speed limits vs punishment for being in an accident.
    • 1. Ex post better utilizes the actor's private information--I know I'm not paying attention but the cop doesn't.
    • 2. Ex ante permits the use of smaller punishments applied more often.
    • 3. So you always use some ex post, but when the size of ex post gets big enough so that punishment costs start to shoot up, you may start adding in some ex ante.
    • 4. Which is how we handle traffic accidents.
  • B. The same analysis explains the paradox of redundant causation: Two hunters independently and accidentally shoot a third.
    • 1. On the fact of it, neither should be liable, since neither did marginal damage.
    • 2. But that is not what actually happens, nor should it be.
    • 3. Because we know that we underpunish the tort of accidentally shooting people, since adequate punishment would be (impossibly?) costly, and ...
    • 4. Punishing people in the two bullet case imposes an additional incentive not to take actions that might lead to shooting someone.
    • 5. In other words, the two bullet outcome is a signal of behavior that you want to punish ex ante, and you do so by punishing the (harmless) two bullet case ex post.
  • C. And explains why we punish unsuccessful attempts:
    • 1. Again, in a world of costless punishment we are better off only punishing successful attempts.
    • 2. But in a world of costly punishment we add an ex ante punishment for trying to kill you, measured by the unsuccessful attempt, to the ex post punishment for succeeding.
    • 3. And, in fact, "attempts" are criminal but are not normally tortious.
    • 4. Which fits the fact that tort law uses more efficient punishements than criminal law and (more important) punishments whose inefficiency does not rise with their size (i.e. litigation cost as a fraction of amount at stake probably does not increase with amount at stake).

     

• VII: Property:
  • A. Why are (and should be) some things property, some commons?
    • 1. Because of costs associated with defining, defending, transacting over, obtaining
    • 2. Balanced against cost of inefficient production, overuse, etc. if things are not property
  • B. One application is in understanding property rights in primitive societies.
  • C. Another is to intellectual property. In particular:
    • 1. Why have long protection given easily for copyrights.
    • 2. Short protection with difficulty for patents.
    • 3. Treat computer programs as writings.

     

• VIII: Contract
  • A. Initial puzzles:
    • 1. Why have contracts? Because transactions occur over time, and the parties are locked in once the process starts.
    • 2. Why have state enforced contracts? Because although other mechanisms exist and are often functional, even superior (diamond market in NY), they don't cover all of the relevant situations.
    • 3. Why have contract law--instead of simply enforcing all contracts as written?
      • a. Because we need some way of knowing if a contract exists. One sided, no consideration, mistake, fraud, incapacity, duress...
      • b. And of filling in the blanks,
      • c. And we may not want to enforce all contracts as written. Economic argument in favor of doing so--but exceptions for third party effects, infants, senile, ...
  • B. Making sense of duress
    • 1. Real duress. Enforceability helps you when you need to pay off the mugger, but makes mugging more likely. Whether it is desirable depends on the relative size of the two effects. Ransome in war. Surrender mechanisms in animals.
    • 2. Sinking ship case. Not real duress, but bilateral bargaining with high costs and no clearly efficient rule.
    • 3. Form contracts.
      • a. Even without bargaining, incentive to write them efficiently.
      • b. Provided that the other party either reads them or knows your reputation.
      • c. And there are lots of good, innocent reasons to use form contracts.
  • C. Filling in the blanks.
    • 1. Parties will tend to bargain to the efficient (for them) outcome, so ...
    • 2. Fill in with efficient rules if you want to produce what they would have agreed to, or ...
    • 3. If you don't want them to have an incentive to write longer contracts next time.
    • 4. But one can think of reasons why some judges might reject that argument.
  • D. Our analysis of insurance helps tell us how to draft and fill in the blanks where the issue is allocation of risk.
  • E. What about the result of breach?
    • 1. No damages or specific performance throws us back on Coaseian bargaining to get the efficient outcome.
    • 2. Expectation or reliance damaages are Pigouvian solutions, each of which results in some inefficiencies for reasons implied by Coase's critique of Pigou.
    • 3. Liquidated damages pushes the Coaseian bargaining to before there was a contract, when there is less of a bilateral monopoly problem--but at the cost of requiring you to set the damages without the information provided by what happens between contract formation and breach.
    • 4. Penalty clause is essentially a contractual property rule--like specific performance, but weaker.
  • F. Marriage contract:
    • 1. Exists because of sunk costs, relationship specific investments (esp children).
      • a. Presumably became less important as those decreased, but ...
      • b. Still a lot of puzzles and alternative theories as to why the drastic changes of the past fifty years happened.
    • 2. Economics of wedding rings.
    • 3. Problems of designing the contract.
      • a. The usual problems with all the breach alternatives.
      • b. Made harder by the fact that performance is hard to measure.
      • c. And the contracts are made by inexperienced amateurs.
  • G. Adoption, regulation of sex, etc.
    • 1. Interesting commodification argument, but ...
    • 2. Seems to fly in the face of first amendment principles.
    • 3. Do children impose net externalities? Not clear.

     

• IX. Tort Law
  • A. What is is: Private action for a wrong.
  • B. Four issues
    • 1. What makes it wrongfultort involves a violation.
    • 2. Causation: What does it mean to say A caused the harm?
    • 3. Liability--strict liability, negligence, contributory negligence, etc.
    • 4. Damages--how calculated?
  • C. Wrongful ultimately means "undesirable of a sort best handled by tort law!"
  • D. Causation ultimately means: Causally related in a way such that making the causer liable has good consequences. Hence not in the coincidental causation case, yet (paradoxically) in the redundant case. Many other puzzles such as probabilistic cases.
  • E. Liability: Different rules involve different ways of solving the dual causation problem by combinations of regulatory and Pigouvian approaches. Coasian approach largely out because of high transaction costs for many (but not all) tort situations. Objective--optimal precautions, supply of accidents etc.
  • F. Damages. Simple rule--damage done.
    • 1. Analysis becomes more complicated with undertainty conviction, costly punishment and apprehension.
    • 2. Which may, or may not, explain punitive damages. Lots of possible explanations, none of which fit perfectly what we observe.
  • G. Damages for loss of life--read my article.

     

• X. Crime:
  • A. Like tort, but enforced by the state.
  • B. Raises issue of optimal enforcement, punishment, given that both are costly.
  • C. And the further complications if we allow for the incentives of the enforcers--which may be an argument against efficient punishments.
  • D. Gets us into the question of why have criminal law.
    • 1. Best answer: Judgement proof defendants, negative price offenses.
    • 2. Solved by making deterrence a private good.
    • 3. But not for anonymous victim offenses.
  • E. Ethics:
    • 1. We don't like criminals.
    • 2. Should their gains count? Yes because ...
    • 3. But not liking them is rational--piling moral sanctions on because other punishments are costly, hence lower than we would like.

     

• XI. Antitrust law
   
• XII. Alternative institutions:
  • A. What we are used to is not the only option.
    • 1. Iceland at one extreme
    • 2. 1th c. England
    • 3. Shasta County
  • B. All teach us lessons about the options and their problems.

     

• XIII. Is the common law efficient? The draft of my Posner article is available to any of you who are interested.
  • A. A very productive conjecture.
  • B. No good theoretical arguments for it.
  • C. Some but very fuzzy empirical evidence for it.

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