George Mason School of Law

1. George Mason School of Law Contracts I Paternalism I F.H. Buckley fbuckley@gmu.edu

2. Free bargaining makes people better off… • Provided that we assume that their choices satisfy the assumptions of rational choice

3. Rational Choice: Six Assumptions • Full Information

4. Rational Choice: Six Assumptions • Full Information • Choices are Freely Made

5. Rational Choice: Six Assumptions • Full Information • Choices are Freely Made • Non-satiation

6. Rational Choice: Six Assumptions • Full Information • Choices are Freely Made • Non-satiation • Completeness or comparability

7. Rational Choice: Six Assumptions • Full Information • Choices are Freely Made • Non-satiation • Completeness or comparability • No third party effects (externalities)

8. Rational Choice: Six Assumptions • Full Information • Choices are Freely Made • Non-satiation • Completeness or comparability • No third party effects (externalities) • Perfect rationality

9. Rational Choice: Six Assumptions • Full Information (later) • No mistakes • No misrepresentations • And no informational asymmetries

10. Rational Choice: Six Assumptions • Full Information • Choices Are Freely Made (later) • No duress

11. Rational Choice: Six Assumptions • Full Information • Choices Are Freely Made • Non-satiation • More is always better

12. Non-satiation: B > A Good 1 More is always better B A Good 2 0

13. Non-satiation: B > A Good 1 More is always better B YB A YA YB > YA Good 2 0 XA XB XB > XA

14. Non-SatiationIs this the same thing as saying “Greed is good”? Michael Douglas as Gordon Gekko in Wall Street

15. Non-SatiationHow would you define greed? Michael Douglas as Gordon Gekko in Wall Street

16. Is it a matter of how avidly one pursues money? Leisure Work

17. Is it a matter of how avidly one pursues money? Leisure Surfer ● A Scrooge McDuck ● B Work

18. Is it a matter of how avidly one pursues money? Leisure Just where would one put lawyers? ● A ● B Work

19. Is it a matter of how avidly one pursues money? Leisure Is there a golden mean? ● A ● B Work

20. Notorious workaholics

21. Is what you do with the money relevant? Spending on Charity Personal Consumption

22. Is what you do with the money relevant? Spending on Charity Benefactor’s consumption at A ● A Greedhead’s consumption at B ● B Personal Consumption

23. Or is it what you pursue? Non-material Goods Material Goods 23

24. Rational Choice: Six Assumptions • Full Information • Choices Are Freely Made • Non-satiation • Completeness or comparability

25. Comparability: No incommensurabilities No black holes

26. IncommensurabilityTragic Choices • Sophie’s Choice • You are a member of a hospital’s ethics committee. You have to choose between allocating a kidney to an alcoholic former sports idol or a mother of two.

27. Rational Choice: Six Assumptions • Full Information • Choices are Freely Made • Non-satiation • Completeness or comparability • No third party effects (externalities)

28. Third party effects: Bargaining with a third person Mary Representing Ann’s utility on a third dimension. (Please put on your 3-D glasses now.) Ann Bess

29. Third party effects: Bargaining with a third person Mary The intersection of the three indifference curves in three dimensional space is the “bargaining core” Ann Bess

30. What happens if third parties can’t be joined? • Paretian norms don’t work—if it’s an external cost • Externalities and Tort Law

31. But nearly everything has third party effects… • Do we then abandon the concept of efficiency? • A more relaxed standard: Kaldor-Hicks efficiency • A transformation is Kaldor-Hicks efficient when the winners could compensate the losers (“Potential Pareto-Efficiency”) and satisfy Paretian standards

32. Examples of Kaldor-Hicks Efficiency • It is proposed to abandon steel tariffs that impose costs of $10B on the economy but provide steel manufacturers with a gain of $1B. • The bankruptcy of a failing business imposes a cost to shareholders of $1M, but provides a benefit of $5M to creditors.

33. Explaining Kaldor-Hicks:C is Pareto-inferior to A Moving from A to C makes Mary worse off Bess A  C  Mary

34. But C is Kaldor-Hicks Efficient to A 1. At C Bess is on IC and better off than she is at A on IA Bess A  C  IC IA Mary

35. C is Kaldor-Hicks Efficient to A 2. At C Bess could give up CB roses to move to B and be on IB, where she would still be better off than she was on IA Bess A  B C   IB IC IA Mary

36. C is Kaldor-Hicks Efficient to A 3. At B Mary would be no worse off than at A. Bess A  B C   IB IC IA Mary “Potential Pareto-superiority”

37. Kaldor-Hicks EfficiencyC is Pareto-inferior to A but Bess could make it Pareto-superior by transferring wealth to Mary Bess A  B C   IB IC IA Mary “Potential Pareto-superiority”

38. Examples of Kaldor-Hicks Efficiency • It is proposed to abandon steel tariffs that impose costs of $10B on the economy but provide steel manufacturers with a gain of $1B. • The bankruptcy of a failing business imposes a cost to shareholders of $1M, but provides a benefit of $5M to creditors.

39. Examples of Kaldor-Hicks InEfficiency • The bankruptcy of a failing business imposes a cost to shareholders of $10M, but provides a benefit of $5M to creditors.

40. Rational Choice: Six Assumptions • Full Information • Choices are Freely Made • Non-satiation • Completeness or comparability • No third party effects (externalities) • Now—Perfect rationality

41. Relaxing the Rationality Assumption:Transitivity: A Technical Definition • If A is preferred to B and B is preferred to C, then A is preferred to C • A}B, B}C A}C

42. Relaxing the Rationality Assumption:Transitivity: A Technical Definition • If A is indifferent to B and B is indifferent to C, then A is indifferent to C • AB, BC  AC

43. Transitivity: A>B, B>C A>C Good 1 A B C Good 2 0

44. Transitivity: Indifference curves can’t touch If a ~ c and c~ b, then a ~ b. But b > a Good 1 A violation of transitivity b · · a · c Good 2 0

45. Relaxing the rationality assumption:Paternalism • Suppose that, lacking perfect rationality, we knew that our choices might harm us. • Might we not, in such cases, wish to let the paternalist choose for us?

46. Relaxing the rationality assumption:Byron, The Prisoner of Chillon At last Men came to set me free – I asked not why, and recked not where-- It was at length the same to me, Fettered or fetterless to be-- I learned to love despair… My very chains and I made friends, So much a long Communion tends To make us what we are, even I Regained my freedom with a sigh Castle of Chillon, Switzerland

47. Infants: Kiefer • What happened?

48. Infants: Kiefer • What happened? • The Wisconsin statute’s version of restatement § 14 referred to 21 years as the standard. • Was that dispositive? • Should it have been?

49. Infants: Kiefer • What about the mature 16 year old? And the immature 25 year-old? Or the married person under the age of majority? • The evidence from criminal law.

50. Infants: Kiefer • Did the Δ know that the Π was an emancipated minor?