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  1. Analisi economica del diritto. • 1) Una introduzione storica: come si sono sviluppati i “Nirvana” economici e giuridici • 2) Verso una nuova relazione fra diritto e economia. • 3) Analisi delle posizioni legali e complementarità istituzionali.

  2. Letture scaricabili. • Nicita A., Pagano U. (2005) Law and Economics in Retrospect. In corso di stampa Brousseau E. Glachant J. M. ESNIE Textbook Cambridge Un. Press. • Pagano U. (2005) Legal Positions and Institutional Complementarities. In corso di stampa in Nicita Pagano Legal Orderings and Economic Insitutions. Routledge. • Pagano U. Diritto in Boitani e Rodano (1995) Relazioni Pericolose. Laterza, Bari.

  3. The common ethical roots of law and economics:the existence of God-given natural laws. From Aquinas’ Summa Theologica: “The rational guidance of created things on the part of God, as prince of the universe, has the quality of law…..this we can call the eternal law”. “The participation in the eternal law by rational creatures is called natural law”. “Law must have as its proper object the well-being of the whole community”. Isn’t the last quotation applicable also to Economics?

  4. The importance of the scholastic tradition From H. Berman “Law and Revolution”(p. 9) (The revolution is that of the Pope Gregory VII against the Emperor) • “In the Western legal tradition law is conceived to be a coherent whole……” • “The phrase corpus juris Romani was not used by the Romans but by the twelfth - and thirteenth - century European canonists.” • “It was the twelfth-century scholastic technique of reconciling contradictions and deriving general concepts from rules and cases that first made it possible to coordinate and integrate the Roman Law of Justinian”.

  5. Natural Law and Legal Pluralism. • In the formative era of the Western legal tradition, natural-law theory predominated. It was generally believed that human law derived ultimately from, and was ultimately to be tested by, reason and conscience. • This theory had a basis in Christian Theology as well as Aristotelian philosophy. But it had also a basis in the history of the struggle between ecclesiastical and secular authorities, and the politics of pluralism. • Legal pluralism was a common legal order containing diverse legal systems (church vs. crown, crown vs. town, town vs. lord, lord vs. merchant). • Legal Pluralism was a source of freedom and of legal sophistication and was a decisive factor in the foundation of Universities and the origin of Western Science.

  6. Typical questions: • Which Court had jurisdiction? • Which law was applicable? • How were different legal differences going to be reconciled? Institutions, like Universities, where different approaches could co-exist, were needed and founded in that age. This method of formulating and discussing different hypothesis and checking their validity of “natural laws” was extended from law to medicine and to other disciplines.

  7. Classical British positivism and the separation between law and ethics • “Every law and rule …is a command”. • “The science of jurisprudence (or, simply and briefly, jurisprudence) is concerned with positive laws, or with laws strictly so called, as considered without regard to their goodness or badness”. John Austin (1790–1859) “The Province of Jurisprudence Determined”. “A law may be defined as assemblage of signs declarative of volition conceived or adopted by the sovereign in a state, concerning the conduct to be observed in a certain person or class of persons, who in the case in question are supposed to be the subject of his power”. Jeremy Bentham (1748–1832) “Of Laws in General”.

  8. Kelsen (1881-1973): Pure Theory of the Law • “The pure theory of law separates the legal completely from the moral norm and establishes the law as a specific system independent even of moral law”. • “The law, or the legal order, is a system of legal norms. The first question we have to answer, therefore, is this: What constitutes the unity in diversity of legal norms? Why does a particular legal norm belong to a particular legal order? A multiplicity of norms constitutes a unity a system, an order when validity can be traced back to its final source in a single norm.” Morality ≠ Validity≠ Efficacy

  9. Walras Elements of Pure Economics. • From Smith onwards also Political Economy had been following a similar path of separation of morality that achieves its clearest expression with the concept of Pareto efficiency. • Particular instructive is the case of Walras’ Pure Economics that, well before Kelsen’s Pure Theory of Law, was sharply distinguished from moral considerations. However, Walras believed in two basic principles of natural law: • Everyone belong to himself or herself. • All the other natural resources belong to everybody.

  10. The main proposition of Pure Economics. Production in a market ruled by free competition “will give the greatest possible satisfaction of wants within the the double condition, that each service and each product have only one price in the market, namely the price at which the quantity supplied equals the quantity demanded and that the selling price of the products be equal to the cost of services employed in making them”. (Walras, Elements of Pure economics)

  11. Pure economics and natural law • This double condition was also necessary for commutative justice that implied that individuals would not change their wealth because of unjust exchanges. • But if the achievement of the greatest satisfaction was compatible with commutative justice it would have sustained any initial distribution of resources including that consistent with the natural laws of distributive justice. • Thus, Walras pure economics was sharply separated from distributive natural lawsbut it was used to show that these laws were consistent with the maximization of material welfare.

  12. Pure EconomicsandPure Law. • The separation of both disciplines from ethics went together with the separation between law and economics. • Pure economics concentrate on the internal consistency (equilibrium) and “efficiency” of the decentralized decisions of maximizing individuals. • Pure law concentrated on the validity of laws, that is the internal consistency (equilibrium?) of legal systems that were assumed to stem from a single authority or from a single grundnorm. The two disciplines seemed to live into separate pure Nirvanas and, besides their purities, only a formal analogy seemed to relate them. But there were also some hidden relations between the two Nirvanas…..

  13. Two related Nirvanas? • Pure Economics assumes well defined and complete rights that are exchanged and enforced by a third party. Thus the Economic Nirvanarequires a Legal Nirvana. • Pure Law assumes that the legal ordering could be completed and made consistent by a single agent or on the basis of a set of basic norms without limitations due to bounded rationality, cognitive ability, failure of collective action and other limits due to the scarcity of resources. In other words the Legal Nirvanarequires an Economic Nirvana.

  14. Coase and the fall of the Economic Nirvana. • Coase observed that in the world of pure economics all decisions were coordinated by prices at zero costs. • In this world firms would not exist. We would live in what became later the world of the “Coase theorem”. • In the world of the Coase theorem all possible externalities, including those related to economies and diseconomies to scale would have been internalized by market transactions. • Firms, state regulation and other arrangements can only appear in a word where no alternative institution is available at zero costs. • There is noEconomic Nirvana: all institutions are costly.

  15. Fuller and the fall of the Legal Nirvana. • Fuller defined law as the enterprise to subject to rules human behaviour. • This enterprise is too costly to be carried out by a centralized ordering. • The costs of Law can and are in fact decreased by decentralizing its enterprise to a plurality of orderings. • Unions, Churches and Universities have their internal orderings. Firms themselves can also be seen as private orderings. • There is noLegal Nirvana:completeness, unity and consistency can possibly be the aim of a legal ordering but they cannot be taken for granted.

  16. The firm as a private ordering In a firm a central authority replaces markets (and state authorities) in enforcing and co-ordinating the relations among the agents. However central governance has the disadvantage that the agents will exercise their influence on the central authority to enhance their privileges. In order to work well firms need to develop adequate forms of Private Ordering. Fuller: the firm as a decentralization of the public ordering Coase: the firm as a centralization of market transactions Coase Fuller

  17. The economic consequences of Justice • In a Coase-theorem world with zero transaction costsattributing the rights to a particular individual has no “economic” consequences. In any case rights will flow to the individual who values them the most. We are in a Legal and Economic Nirvana where judges can ignore the economic consequences of their decisions. • In a world with positive transactions the decisions of the judges have economic consequences because rights will not necessarily flow efficiently to the individuals who value them the most. According to Posner (and to much classical Chicago, law and economics) in this case judges should allocate rights, according to criteria of economic efficiency to the individuals who value them the most.

  18. Judges al wealth maximizers? • According to Posner, Judges, aware of the economic consequences of their actions should behave like quasi-markets attributing the rights to the individuals who in a world of zero transaction costs would have acquired them. • They apply the Kaldor criterion according to an allocation is efficient if the gainers could have compensated the losers. • He claims that this is consistent with an intuitive view of justice. If avoiding some damages is very costly for some agents and not costly for the others, the latter are guilty for the damages.

  19. Fading boundaries? • Posner view is extreme. Clearly, in most cases, economic efficiency cannot be only criterion for the administration of justice. But it shows how difficult is to separate efficiency and justice considerations in a world of positive transaction costs. • The impossibility of defining sharp boundaries becomes even more clear when we accept Fuller’s view (and also Hayek’s and Bruno Leoni’s views!): all sorts of public and private orderings co-exist in the economy and they all face the problem of compromising efficiency and (other types) of justice considerations.

  20. Posner’spublic orderingNirvana. In spite of these interesting implications for the activity of the judiciary, Posner pushes to extreme consequences the economists’ implicit assumption of a legal Nirvana where judges can efficiently fix the problems of the market economy. This assumption implies that the judiciary is not limited by any form of “economic” scarcity (both in terms of cognitive and physical resources).

  21. Williamson:a symmetric private orderingNirvana? • While Williamson rejects the idea of an efficient public ordering, he assumes that private orderings can efficiently fill the gaps that are left open by the incompletness and the efficiency of the public ordering. • Firms and the organizations of private governance are explained by their efficiency attributes. They fix the problems due to the incompletness of “public domain” contracts.

  22. Posnervs.Williamson. • There is an evident (and explicit!) contraddiction between Williamson NIE and Posner’s law and economics: each one is making a Nirvana assumptions about one different domain. • The Nirvana domain is fixing the inefficiencies of the other domain and, therefore, there is no feed-back of its inefficiency on the other domain. • In both cases there is no mutual interaction between the possible inefficiencies of the two domains. The Nirvana domain does best whatever the other domain does.

  23. The institutional complementarities research programme. • No institutional domain has Nirvana characteristics. All institutions are humans made and they are limited by several types of economic scarcity. • The agents of each domain take as given institutional parameters the arrangements of other domains. • Multiple equilibria can characterise the mutual interactions among different domains. • The interactions can be usefully expressed in terms of institutional complementarities.

  24. The nature of institutional complementarities. • The existence of institutional complementarities implies that individuals of each can do better if their decisions fit the arragements taken in other domains. • Institutional complementarities are strong when, independently of the degree of rationality of the agents, the mismatch between the domains cannot last over time. • Institutional complementarities are weak when rational individuals will have a tendency to make the two domains fit each other. Observe that, even when different domains fit, we may be in a situation of inefficiency if they can fit each other in multiple ways.

  25. Legal positions and institutional complementarities. • In the paper that has been indicated as the background reading of this talk we consider two major examples of strong and weak institutional complementarities. • Legal positions are claimed to be characterised by strong institutional complementarities. • The relations between legal entitlements, taken as a whole, and the technology of production is claimed to be characterised by weak institutional complementarities. • In this talk I will concentrate on the first case. I will have the time to consider the other cases in my other seminars.

  26. Strong Complementarities and Social Scarcity. In some cases the existence of some arrangements in certain domains is a necessary condition for the feasibility of other arrangements in other domains. These extreme cases of complementarity are more common than one may expect. Legal relations are cases of strong complementarity related to the problem of social scarcity. Ex-ante an individual may expect to have a right even if nobody else perceives the corresponding duty. However, ex-post, one can benefit from a right only if somebody else is accepting to perform the corresponding duties and give up the related liberties.

  27. First order jural positions Example 1: boat in danger. Boats that are in danger enjoy some legal right to be helped by other ships. This right is necessarily correlated with the duty of other boats not to leave when another ship is in danger. This duty does also necessarily entails that other boats do not have the liberty to leave and that boat that is danger is not exposed to the liberty of other boat of refusing help. Hohfeld W. N. (1919) Fundamental Legal Conceptions Commons J. R.(1924) Legal Foundations of Capitalism

  28. Second order jural positions Example 2: liberty of speech If, because of the existence of a Bill of rights the State has no power to change legal entitlements and restrict my liberty of speech (Simmonds, 1986 p. 132), this means that in this respect I have no liability towards the state or, in other words, an immunity against its power that is correlated to the corresponding disability of the State.

  29. Hohfeld vs Commons. According toHohfeld first order and second order relations should necessarily fit as logical necessities. In Commons’ approach the expectations of the individuals could differ widely ex-ante and the purpose of law was to make ex-ante claims and expectations consistent with each other. Second order relations are used to make first order relations fit. Both public and private orderings contribute with authorised and authorative transactions to this goal. Mismatch between legal positions is always costly. There is clearly institutional complementarity between the legal positions occurring in the different domains and consistency makes individuals better off. However consistency is a logical necessity only ex-post.

  30. Legal Positions and Social Scarcity. The ex-ante mismatch of legal claims is not only possible but also very likely. Legal positions are characterised by the fact that the same relation must be consumed with opposite signs by different individuals. Legal relations involve the consumption of positional goods like power and status. While ex-ante legal disequilibrium is likely it is very likely to occur because positional goods are a case that is polar to public goods.

  31. Public and Positional Goods Pure private good: other individuals consumes a zero amount of what each individual chooses to consume. Pure public good: each agent must consume the same positive amount that other agents decide to consume Pure positional good: given the consumption choice of an agent, the other agent must consume a corresponding negative amount of what the other agent chooses to consume.

  32. Legal Relations and the Oversupply of Positional Goods While public goods are undersupplied, positional goods suffer from the opposite problem and they are oversupplied. As Bobbio has pointed out the oversupply of rights and liberties that are not matched by the corresponding duties and exposure to liberties is (in spite of Kelsen) an intrinsic characteristic of the productions of laws.

  33. Private property and institutional complementarities The right of exclusive use of assets by some individuals has to be correlated to the duties of others not to consume these resources. 2) The liberty that the owners have to choose among different uses of the resources is to be correlated to the exposure of others to these liberties. 3) The power that the private owner has to transfer her title has to be aligned to the liability that the other agents have towards these transfers of property. 4) The immunity of the owner against having his title altered or transferred by the act of another is to be aligned to the disability of others to perform these acts. Ex-ante the legal positions defining private property may be inconsistent.Ex-post they become identities.

  34. An example: the elettricity industry. Besides private property competitive markets rely on other characteristics. Individuals must have the liberty to enter any market which means that no incumbent has the right to exclude other individuals from other markets and they must be exposed to this liberty. When this liberty does not exist the value of property goes down: there is no clearcut distinctions between the characteristics of the markets and the nature of property. In the case of elettricity industry this liberty and the simple exposure to it are not enough. Entrants have also a right to be connected to the network which requires the active cooperation of the incumbent. Incumbents must not simply be exposed to the liberty of the entrants but have a correlative duty to act to provide interconnection.Legal disequilibrium may easily arise: If Liberties and Rights of the entrants are set up in Brussels at community level The corresponding exposures and duties are articulated at national level.

  35. The limits of private property. Like the Coasian firm, in a world of zero transaction costs, the main advatage of private property disappears. Private property entails the liberty to change the use of goods without having to transact with other individuals - an advantage that only holds in a world of positive transaction costs. In a world of positive transaction costs private property may be advantageous even when there is a limited exposure of the other individuals to the “liberties” of the owner. At the same time the labour contract cannot be considered as a “temporary private property” of somebody else labour. This is efficient only in the standard neoclassical model where leisure and not work enters the utility fuction so that the workers can sell their labour and be indifferent among its uses.

  36. Private property and capitalism. The genuine neoclassical solution would involve that there is a price for each use of labour. There is no symmetry between capital and labour (despite Samuelson). For capital the price is the same in each use!!! The “symmetric” treatment of capital and labour makes labour a fictious commodity over which temporary private property can be defined. It does not describe an unqualified economic Nirvana but the Nirvana for capitalism! Workers cooperatives have been ofter claimend to be alternative to this model. If capital has no preferences for its use in production choosy labour should hire malleable capital! There are well-known limitations with this solution and other alternative have involved the unbundling and the redistribution of the rights that define classical capitalism.

  37. Models of capitalism and social scarcity 1) Classical capitalism Liberty of the employers vs. workers' rights to care about the allocation of their work. No private exercise of this liberty without a damaging exposure to this liberty. Complete liberty to use machines. 2) Company workers' capitalism. Right to a job of unspecified definition in a particular company. The liberty of capitalists to use their machines with all possible workers is umbundled and redistributed as a job right for the present workers of the firm. 3) Unionised workers' capitalism. Exclusive right to job of specified definitions in all the companies. The liberty of the capitalists to employ their machines workers with all sorts of qualifications is unbundled and redistributed as job right for the workers belonging to a certain craft.

  38. Each one of the model of capitalism that we have just considered is defined by different domains such as markets for capital and market for labour that must fit each other according to the tough conditions of the strong institutional complementarity due to social scarcity. There is no Nirvana domain that, independetly of its historical evolution involves an overall efficient solutions for all of them. There is not even a relative Nirvana because each model of capitalism may end up developing particular comparative institutional advantages due to the symbiotic relations between its system of rights and its technology. The curiosity for this institutional diversity may perhaps compensate us for all the lost Nirvanas of Law and Economics!

  39. A more general definition of institutional complementarities. It is desirable to capture the case of complementarities by referring to a more general case where the institutional arrangements occurring in one domain are simply favouring the institutional arrangement in another domain but they are not a necessary condition for their (ex-post) existence. Samuelson statement: “In a perfectly competitive economy it doesn't really matter who hires whom...." It implies a double neutrality. Technology does not influence rights. Rights do not influence technology. One may want challenge this statement by observing that some technological arrangements do simply favour some property rights and other organizational safeguards and vice versa (and not that the former are impossible when the latter do not exist).

  40. The Notion of Institutional Complementarity (Aoki, 2001) • Economic agents face different domains of games in selecting their choice in a given institutional framework; choices in one domain act as exogenous parameters in other domains and vice-versa EXAMPLE: • two domains of choices X and Y; {X1, X2} and {Y1, Y2}, with agents i choosing in X and agents j choosing in Y, according to their utilities (respectively, u for i and v for j). • a) for agent i • b) for agent j • There can be one Nash equilibrium, but also two pure Nash equilibria (institutional arrangements) for the system as (X1,Y1) and (X2,Y2). • When such multiple equilibria exist, we say that (i) X1 and Y1 are institutional complements; (ii) X2 and Y2 are institutional complements.

  41. Different cases of “weak” complementarities Property rights and technology. Skills and Intellectual Property Rights. Financial Structure and Specificity of the Investments.

  42. New Institutional theory has emphasized that owners of specific and hard-to-monitor resources tend to acquire rights and safeguards more than the owners of general purpose and easy-to monitor resource. This claim can be stated as: (1) In the property right domain, a property right system PC is marginally better than another property right system PL if the corresponding technology Tc instead of the technology TL prevails in the technology domain. Where Tc: a technology where capital is intensively used as a specific and hard to monitor resource TL: technology where labour is intensively used as a specific and hard to monitor resource PC : a governance system where the owners of capital have strong rights and safeguards PL : a governance system where workers have strong rights and Safeguards.

  43. Inverting the Argument. In a word of positive transaction costs the owners of resources enjoying rights and safeguards tend to become more specific and hard to monitor than those without rights and safeguards. This claim can be stated as: (2) In the technology domain a technology TL is marginally better than a technology Tc if a property right system PL instead of property right system PC prevails in the property right domain. This is an argument that has been typical emphasized by radical economists against the efficiency predictions of NIE. However, it is consistent when NIE when one assumes positive transaction costs.

  44. (1) In the property right domain a property right system PC is marginally better than another property right system PL if the corresponding technology Tc instead of the technology TL prevails in the technology domain. (2) In the technology domain a technology TL is marginally better than a technology Tc if a property right system PL instead of property right system PC prevails in the property right domain. Where Tc: a technology where capital is intensively used as a specific and hard to monitor resource TL: technology where labour is intensively used as a specific and hard to monitor resource PC : a governance system where the owners of capital have strong rights and safeguards PL : a governance system where workers have strong rights and safeguards. We can have multiple equilibria (PC, Tc) and (PL, TL ) PC and Tcand PL and TLare, in this case, institutional complements.

  45. Pagano Rowthorn 1994 (2) Inverted argument: Under capitalist ownership (PC) firms maximise: Rc = Q (k,K,l,L) - [rk + RK +wl + (H+W)L] (1) ----->(Tc) Under labour ownership (PL) firms maximise: RL = Q (k,K,l,L) - [rk + (Z+R)K + wl +WL] (2) ----- >(TL) (1) Original NIE argument: Capitalist property rights PC can prevail if Rc RL or, ZK - HL  0 (3) <----- (Tc) workers' property rights PL can prevail if RL Rc,or: HL - ZK  0(4) <----- (TL) We can have multiple self-enforcing equilibria (PC, Tc) and (PL, TL ) that are institutional complements.

  46. Conditions for organizational equilibria Let: (kc,,Kc,lc,Lc)= argmax Rc (k, K, l, L) (5) (kL, KL, lL,LL)= argmax RL (k, K ,l, L) (6) Then a firm will be in a capitalist organisational equilibrium (COE) if: ZKc - HLc 0 (7) and in a labour organisational equilibrium (LOE) if: HLL - ZKL 0 (8) Or:

  47. Multiplicity of organizational equilibria Kc/Lc  H/Z (7') KL/LL H/Z (8') Because: (H+W)/R  W/(Z+R) we have: Kc/Lc  KL/LL (9) We have therefore 3 cases: 1) Kc/Lc  H/ZKL/LL (10) (multiple organisational equilibria). 2) Kc/Lc KL/LL > H/Z (11) (only a COE exists). 3) H/Z>Kc/Lc KL/LL (12) (only a LOE exists).

  48. Organizational equilibria and complementarities a) because of (1) and (2) when a property right system PC (instead of the property right system PL) prevails, a technology Tc(characterised by a higher ratio K/L than a technology TL) does marginally better than TL. b) (3) and (4) imply that, when a technology Tc instead of a technology TL prevails PC, does marginally better than PL. Thus, the supermodularity conditions are satisfied in the model and we can have multiple organizational equilibriawhere PC is an instituional complement of Tc and PL is an institutional complement of TL

  49. Institutional Complementarity between ownership of intellectual property rights and firms capabilities.(Pagano, Rossi EJLE 2004) We interpret the NPR approach as a model of allocation of IPR. The firms and individuals that that are more capable to make investments specific to the improvement of these assets should acquire them. The argument can again be inverted: If transaction costs prevent property rights from being attributed to the “efficient owner”, whoever is the current owner will find it more convenient to invest in human capital specific to the assets. A double relation of causation should be considered. If property rights are chosen on the basis of given technologies and abilities, also the opposite is true: abilities and technologies are chosen on the basis of existing property rights HIGH FIRM CAPABILITIES AND A RICH PORTFOLIO of IPR are institutional complements. And, unfortunately also low firm capabilities and a poor portfolio of IPR are institutional complements. Firms Capabilities Intellectual Property