Economics of Law: Analyzing Incentives and Outcomes

1. Econ 522Economics of Law Dan Quint Fall 2009 Lecture 1

2. I’m Dan Quint, this is Econ 522, Economics of Law • Class website: http://www.ssc.wisc.edu/~dquint/econ522 • If you’re not yet registered, put your name and info on yellow pad • If you haven’t taken Econ 301, talk to me after class

3. Some more logistics • Teaching Assistant: Chao • Sections on Fridays, starting next week • Questions about section – talk to Chao • Office hours • Me: Wednesdays, 1:30-3:30, other times by appointment • Chao: Mondays, 10-11 and 2:45-3:45 • Attending lecture (I recommend it)

4. Grades • Grades are based on • occasional homeworks (probably 3 or 4) – 20% total • two midterms – 20% each • final exam – 40% • Midterms tentatively scheduled for Oct 13 and Nov 5 • Final is December 17 • Please let me know EARLY if… • you have an exam conflict, or • you’re a McBurney student and need special accommodations

5. Readings • Textbook: R. Cooter and T. Ulen, Law and Economics • Another book I like: D. Friedman, Law’s Order • Additional readings (links on syllabus)

6. Warning: THIS IS A HARD CLASS • This class is really about how to think like an economist • I see economics as a set of tools/a way to analyze problems, not a collection of “right answers” • Nothing you can memorize to do well if you don’t “get it” • (Not trying to scare everyone off, I’d just rather say this now than after the first midterm)

7. What is“Law and Economics”?

8. What is Law and Economics? • unsatisfying answer: “thinking about the law like an economist” • microeconomics is about how people respond to incentives • we’ll be using microeconomics (including a little bit of game theory) to analyze laws and legal systems • the incentives they create • and the actions and outcomes they lead to

9. How do economists look at the law differently than lawyers? • suppose something has happened • when a lawyer sees the case, the “damage is already done” • all that’s left is to assign blame, and maybe punish someone or have someone give money to someone else • this is interesting to the people involved, but not interesting to economists

10. So what part of the law is interesting to economists? • before the incident happened, lots of decisions were made • expectations/beliefs about what will happen after the fact influence these decisions • these decisions have an impact on outcomes • and these decisions therefore affect how much value is created (or destroyed) by society • which is very interesting to economists

11. So conceptually, ECONOMISTS (us) LAWYERS the law something happens litigation outcome actions/decisions

12. How economists think about the law differently – example You live in a state where the most severe criminal punishment is life imprisonment. Someone proposes that since armed robbery is a very serious crime, armed robbers should get a life sentence. A constitutional lawyer asks whether that is consistent with the prohibition on cruel and unusual punishment. A legal philosopher asks whether it is just. An economist points out that if the punishments for armed robbery and for armed robbery plus murder are the same, the additional punishment for the murder is zero – and asks whether you really want to make it in the interest of robbers to murder their victims. Friedman, Law’s Order, p. 8

13. Of course, there’s a lot that leaves out

14. Outline of the class

15. Course outline… • Property law • what things can be owned? • what can (and can’t) owners do with their private property? • Contract law • what can and can’t we contract on? • what constitutes a legal contract? • what happens if one of us doesn’t live up to our end of a contract? • what “default rules” stand in for terms we don’t specify?

16. Course outline… • Tort law • who’s responsible for accidents? what do they owe? • The legal process itself • what is the goal of the legal system? how do we achieve it? • Criminal law • other topics if there’s time

17. A bit of history

18. A bit of history • Two great Western legal traditions of the last millennium • Common Law • Civil Law

19. The Common Law • originated in 12th century England,under King Henry II • still the basis for legal system in manyEnglish-speaking countries • new laws enacted by legislature • judges interpret law, relying heavily on precedent • so common law rooted in common practices, except where it’s been changed by legislation

20. The Civil Law • persists today in most of Western Europe, Central and South America, parts of Asia • originated following French Revolution • revolutionaries felt judges, like the king, were “corrupt and worthless” • Napoleon commissioned a group of legal scholars to draft a new set of laws – the Napoleonic Code • less reliance on historical norms and precedents

21. So to sum up… Civil Law • orig. 18th century France • persists in Western Europe and some other places • based on “ancient sources and pure reason” (group of scholars with blank slate) • legal arguments appeal directly to interpretation of the law itself, and to commentary which clarifies its meaning Common Law • orig. 12th century England • persists in U.S., U.K., other English-speaking countries • based on existing practices and social norms • arguments focus on legal precedents, and why particulars of past cases make them relevant to current case

22. Whaling

23. A nice example of how the common law responds to local norms and practices • Question: who owns a dead whale? • 1700s-1800s – whales hunted for oil, bone, other valuable products • a captured whale could be worth 3-4 times a typical family’s yearly income • conflicts would sometimes arise over ownership

24. What’s the problem? It frequently happens that when several ships are cruising in company, a whale may be struck by one vessel, then escape, and be finally killed and captured by another vessel…. [Or] after a weary and perilous chase and capture of a whale, the body may get loose from the ship by reason of a violent storm; and drifting far away to leeward, be retaken by a second whaler, who, in a calm, snugly tows it alongside, without risk of life or line. Thus the most vexatious and violent disputes would often arise between the fishermen… - Melville, Moby Dick

25. Robert Ellickson (1989), A Hypothesis of Wealth-Maximizing Norms: Evidence from the Whaling Industry • Examines 12 British and American court rulings where ownership of a dead whale was contested • In each case, the local whaling industry had established norms which were well-suited to that environment • And in each case, the common-law court ruled in accordance with the existing norms

26. One norm: “fast fish/loose fish” • Discussed in Moby Dick • Established by British whalers in Greenland fishery • Prey were right whales – relatively slow and docile • Hunting was done by harpoon attached to whaling boat by rope • A harpooned whale attached to a boat was a “fast fish” and belonged to the boat it was attached to • If the whale broke free, or had not yet been harpooned, it was a “loose fish” and other ships were free to pursue it

27. A different norm: “iron holds the whale” • The rule in fisheries where sperm whales were hunted • sperm whales swim faster, dive deeper, fight harder • hunted with harpoons attached to “drogues” • sperm whales swim in schools • The rule that developed: “iron holds the whale” • if you harpoon a whale first, you own it… • …as long as you remain in “fresh pursuit”

28. Clear tradeoff between the two rules • “Iron holds the whale” is more complicated • What if a whale is found with multiple harpoons in it? • What constitutes “fresh pursuit”? • “Fast fish/loose fish” is a simpler, “bright-line” rule • Less ambiguity, should lead to fewer disputes • But wouldn’t work well with sperm whales • Too dangerous to hunt sperm whales with harpoons tied to boat • Wasteful to let rest of a school swim away while trying to secure first whale • Tradeoff between simpler rule versus better incentives

29. A third norm developed where finback whales were hunted • Finbacks are extremely fast swimmers • 19th-century whalers hunted them with “bomb lances” • Dead finbacks would sink, wash up on shore days later • Norm developed that original killer and the finder of the whale would split it • Ghen v Rich (1881)

30. Conclusions from Ellickson • Ellickson’s emphasis: in each location, norms developed which were well-suited to that environment • My point: in each case, the judge ruled according to the local custom

31. So that’s whaling law • To connect it to more modern concerns… • Brian Gray (UC Hastings) wrote a legal brief using same principles to determine ownership of a souvenir baseball • Ownership of Barry Bonds’ 73rd home run ball was disputed • Alex Popov had the ball in his glove first, but lost it in the scrum • Patrick Hayashi ended up with the ball, both wanted it

32. Gray’s legal brief captures essence of common law: “Simply put, the Court should adopt a rule of first possession for baseballs that recognizes the longstanding customs and practices of baseball fans who for more than seventy years have competed to catch and gain title to baseballs that leave the field of play… With these principles in mind, the Court should define the law of first possession of baseballs… by answering two questions: First, what is the custom, practice, and understanding of baseball fans about first possession and title to baseballs that enter the stands? Second, should the rules as practiced in the stands be modified to minimize the risk of violence, misconduct, and tortious behavior?” (in the end, ball was sold for $450,000, proceeds were split 50/50)

33. So that’s a bit of law • Next week, we’ll do some economics • If you’re not registered, make sure your name’s on the yellow pad • If you haven’t taken Econ 301 (or equivalent), please come talk to me • Have a good weekend, see you Tuesday