Transcript Is the common law efficient?

Is the common law efficient?
•The conjecture: Posner
–Common law can be best explained as
–That set of legal rules
–That maximizes economic efficiency
•Might be supported either theoretically
–By showing reasons to expect that judges
–Would end up making decisions in a way
–That moved the law towards efficiency
•Or empirically
–By showing that the existing pattern of common law
–Fits the prediction of the conjecture
–Which one would do by, for any legal issue, by
•Figuring out what the economically efficient rule would be
•And comparing it to the actual rule that exists
•In the common law
•Note that Posner limits the conjecture to common law
–Others might apply it to legislated law or administrative rule or norms
–As well as or instead of to common law
Theoretical Argument: Judges
• Judges trying to do the only good they can
– In many cases, judges at most set part of the terms of an interaction
– Cannot redistribute among groups of people because
– other terms adjust in response
• If the courts are pro-tenant, supply and demand for housing
• Moves rents up
– Less true for criminal law or tort law between strangers
• But even with theft, the rent seeking argument suggests
• That harsher penalties for theft might
• Make even most thieves better off
– So increasing the size of the pie the only good thing left to do. But …
• Do they know it is the only good they can do?
– Most people don’t believe that, and lots of opinions
– Sound as though judges don’t believe it. Also
• Do they want to do good instead of do justice? And …
• Do they know how to do it?
– Figuring out what legal rules maximize efficiency isn’t always easy
– And it isn’t clear judges have any special expertise in doing so
Theory: Invisible hand mechanism
• Ordinary markets tend to give efficient outcomes
– Not because anybody is seeking efficiency
– Or knows how to get it, but
– As an unintended result of individuals seeking their own
welfare
• Perhaps there is some similar mechanism in the
production of law
• For example, if the court establishes an inefficient rule
– Parties keep trying to contract around it
– Which generates new cases, some of which give different
rules
– The process continues until the rules are efficient
Hard to make this rigorous
• It applies to only some parts of the law
– Tort law yes
– Administrative law yes--but see below …
– Criminal law? Probably not.
• Efforts to litigate to change the law face the public good
problem
– Consider a legal rule that harms one of me, benefits a hundred of you
• Assume it's efficient--your benefit>my harm
• I still want to change it, so spend money litigating it
• And I have (say) fifty times as much at stake as the one person on the other
side
– Consider a legal rule applying to an administrative agency
• The agency only has to win the case once
• And it has much more at stake than a single regulatee
– So instead of efficient rules, we would expect
• Rules that transfer from dispersed to concentrated interests
• Just as with legislation--tariffs, for example.
Empirical argument
• General structure seems to fit, at least roughly
– Property+contract to produce and allocate goods
– The way rights are bundled in real property
• What starts in the bundle--rights that are most valuable together
• Mechanisms for rebundling
– “Make the victim whole” in tort looks like the Pigouvian rule
• With negligence as a solution to dual causation problems
• And strict liability for ultrahazardous activities to deal with cases where
unobservable precautions are important
– Differences between patent and copyright roughly fit
• But those are established mostly by legislation
• And so not evidence for the Posner thesis
• Some details seem to fit
– Defense of necessity: special case efficient crimes
– Forseeability: no point in an incentive to avoid something when you have
no way of knowing it will happen. Falling safe.
– Restriction of freedom of contract in salvage cases
– When easements enforceable against innocent purchaser
• But …
Inefficient Rules of the Common Law
• Retreat from freedom of contract
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Penalty clause unenforceable
No organ sales, no legal adoption market, …
No enforceable waivers in product liability … but.
Arbitration contracts may let parties get around the
restrictions
• Treatment of value of life in common law
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Set at zero in tort, because your claim died with you
Altered by legislation to be the value of your life to others
Ought to be the value of life to you & others
“Hedonic damages”
• Failure to make tort claims marketable
– As a solution to “can’t afford a lawyer”
– And a possibly better alternative to class actions
Many we can’t tell
• Coming to the nuisance defense?
– Yes--easier to move things before they are built
– No--pig farmer shouldn’t be able to effectively claim all
– The neighboring land which is going to be suburb eventually
• Himalayan photographer vs eggshell skull
– The arguments are the same
– Take your victim as you find him-> right average damages
– Only liable for the usual value gives the incentive to the person who
knows this is a special case
– In each case, Posner looks at the argument that justifies the legal rule
that exists, misses the other one
• My whole chapter on crime/tort
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Where I repeatedly show a way of doing something
Then a problem that way raises
Then a way of dealing with that problem
Then … through seven rounds
Verdict on Judge Posner?
• Truth of the Posner thesis? Jury still out
– Some parts of the common law fit
– Some don’t
– For many the efficient rule is sufficiently unclear
• That one can “prove” the existing law is efficient
• By suitably selecting one’s arguments
• And may, if you believe it is true
• Usefulness of the Posner thesis? Yes
– The question “what is the efficient rule?”
– Helps convert legal theory into a unified problem
– Where the same argument apply to a wide range of
legal rules
Hence the economic analyst can move
easily not only within common law
fields but between them. Almost any
tort problem can be solved as a
contract problem, by asking what the
people involved in an accident would
have agreed on in advance with regard
to safety measures if transaction costs
had not been prohibitive. ...
Equally, almost any contract problem can
be solved as a tort problem by asking
what sanction is necessary to prevent the
performing or paying party from engaging
in socially wasteful conduct, such as
taking advantage of the vulnerability of a
party who performs his side of the bargain
first. And both tort and contract problems
can be framed as problems in the
definition of property rights; ... . The
definition of property rights can itself be
viewed as a process of figuring out what
measures parties would agree to, if
transaction costs weren’t prohibitive, ...”
Summary Comments
• Start with
– One behavioral assumption (rationality)
• Individuals have objectives
• And tend to take the correct actions to achieve them
– One conjecture about the organizing principle: Efficiency
• Legal rules are designed to maximize the size of the pie
• The degree to which everyone achieves his objectives
• End with
– A way of unifying all of law
– As solutions to a common set of problems, with a single
objective
– In different contexts
– Not only all of law today but potentially over all of time and
space
Applying ideas across legal topics
• Risk allocation: The economics of insurance
– Relevant to who bears what risks in tort
– More relevant to contract design
• Ex Ante/Ex Post
– Choice between tort and criminal law of highways
– Explaining why attempts are criminal
– Applied to contract
• Do we measure inputs or outputs?
• Especially employment contracts.
• Coase and Pigou
– Externalities, incentives, double causation, transaction costs apply to
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Pollution regulation
Defining property rights in land
Common law of nuisance
Tort law--auto accidents. Product liability.
Contract damage rules
All law in all times and places
• Becomes one problem
– Evidence and ideas from one system are relevant to all
– Including ours, now and in the future
• For example
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Shasta County and the virtues of inefficient punishment
18th century England and deterrence as a private good
Iceland and transferable torts
Classical Athens and punishing nuisance suits
19th c. Whalers and what norms will be efficient
• Future
– If surveillance makes the facts of offenses easy to know?
– If encryption and the internet make state contract
enforcement hard?
– Why technological progress could make us worse off
A Very Brief Summary
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Solutions to the coordination problem
Property, Contract Tort and Crime
Efficient Rules
Defining and allocating rights
Enforcement
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Solutions to the coordination problem
• Direct violence--might makes right
• Improved version
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Commitment strategies, mutually recognized
Property in territorial species
Norms, rights, …
Feud societies
• Could imagine a full blown modern version
• Part 3 of my first book: Machinery of Freedom
• Centralized solution: Dictatorship
– Works on a small scale, but
– Scales up very badly
• Decentralized solution
– Private property and trade, but …
– Raises a variety of problems, for which
– A legal system offers at least partial solutions
Property, Contract Tort and Crime
• Private property requires
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Definition of what it is that is owned
Way of knowing who owns it and how ownership is acquired
Mechanisms for enforcing, settling disputes
Generalized from real property to much else
Hence property law, including IP
• Important that property can be transferred
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Sometimes in complicated exchanges
We need contracts specifying terms of transfer
Mechanisms to settle disputes over their implications
Hence contract law
• Rules can be violated, so we need
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Mechanisms to make it in people’s interest not to violate the rules
Ways of settling disputes over whether they were violated
And the consequences thereof
Tort law, criminal law, courts and procedure
Efficient Rules
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Start with private property and trade, but
World doesn’t break up into wholly separate pieces
My use of my stuff effects you: Externalities
Solutions?
– Direct regulation-- “do that”
– Liability rule--pay for costs you impose
• But costs are jointly caused
• So alternatively we can
– Treat rights as property, to be defined and then transacted
over
• Works well where transaction costs are low
• But often they are not
– Do nothing
• Put up with some inefficiencies, because
• The cost of dealing with them is more than it is worth
Other pieces of the answer
• Not just the control of externalities but
• Defining what rights
– Ownership implies
– And who has them
• How to enforce rights
– Ex post vs ex ante
– Liability vs property rules
– Optimal punishment …
To build efficient law
• Choose an appropriate combination of property and liability
rules taking account of the costs of both.
• Define and bundle property rights in a way that minimizes costs
associated with defining and defending them and transacting
over them.
• Enforce the whole by some mix of public and private action
under a suitable set of rules of proof and liability.
• Throughout the project consider the incentives of all parties,
including the enforcers, transaction costs, and the problem of
using dispersed and imperfect information.
• Where possible, create institutions that make it in someone’s
interest to use such information to generate the appropriate
rules.
What We Left Out
• Even if the analysis is right, we don't have the data
– Actually calculating optimal punishments
– Would require information
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On supply curves of offenses
Damage done
Cost of punishment and enforcement
Cost of transactions
– Which we don't have
– Consider railroads, sparks, clover and spaghetti
– So we end up with qualitative conclusions at best
• Our models leave out lots of things that might matter
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No good theory of incentives of judges, cops, etc.
No adequate theory of the mechanism that generates law
Differences among offenders and opportunities in catchability
Interaction between public enforcement and reputation, norms, etc.
Imperfect information about the legal system by those it affects
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What We Can Do
• Strict liability vs negligence
– Strict liability eliminates victim incentive to avoid
– Negligence eliminates tortfeasor's incentive wrt
unobservable precautions
– So choose according to the relative importance of those
problems
Cave Canem
• Caveat venditor vs caveat emptor
– Venditor eliminates consumer's incentives to minimize the
problem
– Emptor eliminates producer's incentive wrt risks consumers
don't know
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Ex ante vs ex post
Property rule vs liability rule
Fraud on the market misuse of externality argument
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Enjoy Your Summer