Category: Economic Analysis of Law

2

Substance, Institutions, and the Real Value of Commercial Law Scholarship

Slums.jpgAs anyone who spends any time reading scholarship on contract law or commercial law can tell you, efficiency is a big deal. There are a lot of very smart people who spend a lot of their time worrying about whether this or that remedies rule is efficient or whether giving secured lenders complete priority in collateral is inefficient. I wonder, however, whether any of this stuff matters. What I am talking about is not the normal grumpiness that law and economics invokes in some — objections to the rational actor model, furious citations to Dworkin on the evils of efficiency as a normative criteria, or ritual invocations of various behavioral arguments — but rather the basic question of how much the content of the law matters. Imagine for a moment that you think that the primary goal of contract and commercial law ought to be the generation of wealth. Does the content of that law matter all that much?

In the context of American law this may seems like an odd question. After all, if we aren’t arguing about the content of the law, then what exactly would we be arguing about? The problem, it seems to me, is that the very success of American private law makes many of our discussions about it rather surreal. One can, of course, have lots of arguments about the extent to which the American markets that rely on American private law are efficient, or whether they would be made more efficient if we were to tweak this or that section of the Uniform Commercial Code. Yet, on the whole, it is difficult to deny that in the aggregate American markets are tremendously successful at creating wealth, indeed more wealth than has ever been seen by any society on the face of the planet ever in the history of the world. No small accomplishment that. On the other hand, there are places in the world where private law doesn’t seem to work particularly well, where whole societies are extremely poor, and the markets aren’t producing much in the way of wealth. My question, however, is the extent to which economic failure in such societies is a function of their substantive law or of their legal institutions.

Read More

1

The Law and Economics of Smoking Bans

smoking.jpgThe big news out of Philly recently is Mayor Street’s decision to begin enforcing the City’s smoking ban. But, as commentators have observed, the City isn’t putting real resources into enforcement: only two officers will be assigned to the smoking beat, and will not work after business hours. That’s City time, not Bar time. Given the miniscule probability of being caught, the $25 fine seems ludicrously low.

Nevertheless, the City is confident that the ban will have bite. Although anecdotes from Kentucky suggest otherwise, the City argues that:

“The majority of the people will comply,” [interim Health Commissioner Carmen Paris] said. “The majority of the people will put that cigarette away. Those that don’t, then the establishment owner is required to call us and file the complaint.”

Self-policing by bar owners and smokers themselves should be effective, said Joe Minott, the executive director of the Clean Air Council.

“People do it because it’s required by law,” he said. “I suspect that after a settling-in period there’s not going to be a lot of problems.”

The law and economics of the enforcement of regulatory offenses interests me. Traditional analysis would suggest that self-enforcement is unlikely (or discounts the role of social pressure). But I suspect that Philly is onto something. Because of the long, public, debate about the utility of smoking bans, most citizens know about the issue, and probably feel invested in the compromise that finally emerged from the City Council. Unlike, say, a normal low-enforcement regulation (e.g., an EPA rule, or the rule against home poker games), the smoking ban will be pushed along by significant social norms of compliance. Dirty looks, over-loud coughs, muttered comments, and (ultimately) illegal self-help will clear the air.

Theorists of deterrence might consider whether the success of low-enforcement/high-compliance rules provides a model to rescue low compliance rules where social-enforcement is possible (like anti-drug and anti-graffiti criminal codes, and plagarism in school). Maybe we need to sunset the existing criminal code every ten years, and force legislators to re-authorize the law through public debate. That debate, in turn, will increase public buy-in and lower deterrence costs. This analysis (not incidentally) explains the need to publish federal regulations, but also suggests that mere publication isn’t enough: real, political, debate is necessary to ensure that social sanctions help legal rules penetrate and affect their intended audiences.

1

Politicians Try to Make Lemonade

573707_lemons.jpg

The traditional economic analysis of law analyzes the market for lemons by assuming that folks will try to signal honesty through warranties or other contractual mechanisms, but may fail. A political case in point:

A number of Nigerian politicians have been conned out of thousands of dollars by people selling papers purporting to certify them as “corruption-free”.

The scam follows a warning by Nigeria’s anti-graft agency EFCC that anyone guilty of corruption would be banned from contesting next year’s elections.

12

Law School Admissions Standards As Law

Harvard’s decision to end its early admission program was the big story early week. As President Bok explained, the university worried about the social consequences of its admissions process:

“Students from more sophisticated backgrounds and affluent high schools often apply early to increase their chances of admission, while minority students and students from rural areas, other countries, and high schools with fewer resources miss out . . . . Others who apply early and gain admission to the college of their choice have less reason to work hard at their studies during their final year of high school.”

Harvard’s decision got me to thinking about the relationship between admissions standards at high-prestige universities and legal rules.

Both legal rules and admissions standards are conduct shaping regulations. When you set admissions standards to select for trait behavior X, the prevalence of X in the applicant universe will increase. Such an increase will not be uniform, for the reasons that Bok gives, and there will be further distortions depending on individual (or mass) psychology. But there are reasons to believe that law school admissions address a particularly sophisticated and resource-rich audience, who are well suited to governance. Thus, law school admissions are ripe for evaluation as a form of law itself.

I thought about this after talking with a friend last night who told me about business schools’ strong emphasis on community service as a part of the application of a well-rounded applicant. This probably creates a class of business school students who are more likely to be civic-minded after graduation. But it also (and more simply) results in a great deal of public service by pre-MBA types in the world. The question is: why don’t law schools use the application process to improve the world too?

You might object: “this is paternalistic social engineering.” Yes, yes it is. But law schools, like HLS, already require onerous mandatory pro bono commitments during school. The problem with such programs is that the incentives are all wrong – toward clock management instead of results. But if you made pro bono service an important part of the admissions decision, and suggested that particularly effective public service would be highly weighted, then you’d set folks incentives well to achieve good. Elite schools might collude to create a list of potential law-related public work that candidates would be “well-advised” to perform in order to increase their chances of admission: volunteering for a public interest firm or tax law clinic; working for the PD or DA as a part-time investigator; assisting social security ALJs as a paralegal, etc.

To be clear, I don’t mean to say that admissions committees aren’t already considering public service. Surely, they are. But they aren’t communicating the idea that public service counts in a meaningful way. Check out HLS’ admissions FAQ, and note the silence on this point. The silence is shared by other top schools. The point is that law faculties (at least those I’ve seen) have traditionally seen the admissions committee as wearing a judicial, rather than legislative, hat. As a result, faculty might tend to think of admissions as a necessary chore accomplished by the folks who run the operations side of the school, instead of an extension of the pedagogical mission. [Update: Even the affirmative action debate, which is a policy choice effectuated through admissions, isn’t intended to shape the conduct of pre-law students.] Perhaps its time to rethink that model.

6

Post-Nuclear Holocaust Movies and the Academic Job Market

thunderdom.jpgGordon Smith has a post about interview questions for prospective law professors. Having recently run the gauntlet of the meat market, this is a topic where memories are still fresh in my mind. I remember one question in particular. It was during an on-campus call back interview. I gave my job talk — a piece on the relationship between autonomy theories of contract and corporations — and then waited for the faculty questioning. By this time I had given the paper about a half dozen times, and I thought that I pretty well knew what points were going to get raised. Not so. A faculty member raised his hand and asked the following question: “Can you please explain to me how autonomy theories of contract would deal with the remedy provided for breach in Mad Max Beyond Thunderdome where the rule is ‘break a deal, face the wheel’?”

Mad Max Beyond Thunderdome, of course, is the classic Mel Gibson-Tina Turner movie about life in Australia after a nuclear holocaust has destroyed civilization as we know it. Those who breach their contracts in the post-apoclyptic world must spin a wheel — rather like the Wheel of Fortune — on which are written various punishments. Whatever punishment the wheel lands on is meted out to the breaching party.

I replied by pointing out that a commitment to an autonomy theory of contract requires a rather more expensive enforcement mechanism, because it is necessary for adjudicators to invest resources in discerning the actual intent of the parties in so far as they are able, rather than relying on cheaper, more formalistic modes of interpretation. Presumably in the post-apoclyptic world, the resources that society has available for the resolution of contractual disputes are reduced, and therefore they adopt remedies rules that require less fact finding. Spinning the wheel, for example, doesn’t require that the court invest any additional resources in calculating the value of the disappointed promisee’s expectation measure. In a world, however, that has not been devastated by nuclear war, society has the resources to devote to a more nuanced approach to contractual disputes, although if we take efficiency as the sole goal of contract law, then a process of largely randomized remedies like the wheel may be superior.

I thought it was a pretty good answer. On the other hand, I didn’t get an offer from that school…

8

If It Can’t Be Sold, It’s Worthless

tiger.jpgThom Lambert offers this post on a “property rights” theory of endangered species protection (in essence, creating a market to increase supply). The arguments (also found in this Times’ opinion piece) are standard neo-classical economics. Trading, not regulation, increases supply of “goods,” therefore permitting endangered species to be “farmed” by hunters and others will ultimately “manage” them toward a sustainable population. “Some objections might be raised to this scheme,” to quote Daniel Farber’s An Economic Analysis of Abortion, “but rigorous analysis shows them to be unfounded.”*

Even though the arguments are hoary, I still feel torn about this issue.

On the one hand, as Lambert observes, some empirical evidence suggests that prohibitions don’t work well to preserve populations against development pressure. On the other hand, (1) the approach is useless for species that are commercially worthless (the owl, for example); and therefore (2) it has all of the problems of ordinary market valuations, and produces irreversible results (extinction) among the losers. (For a really good discussion of this problem, I recommend Matthew Scully’s Dominion: The Power of Man, the Suffering of Animals, and the Call to Mercy. The chapter on hunting, economics, and commodification is amazing.)

*The fun goes on in Farber’s footnote: “One commentator has said that this approach ‘seems almost pathological in its disregard of the moral values on both sides.’ . . . That commentator’s work evidences all too clearly a lack of rigorous economic training.” 3 Const. Comment. 2 (1986)

10

Judge Posner and Limits of Smartness

brain.jpgRichard Posner, while explaining why he dislikes affirmative action, argues:

As discrimination declines, replaced by affirmative action, explanations for lagging achievement that are based on discrimination lose their plausibility. They were never entirely plausible, given Jewish achievement in the face of fierce discrimination, though it is argued by Stephen Pinker in a recent issue of the New Republic that discrimination against Jews in the Middle Ages, by forcing them into middleman occupations where intelligence is a more valued asset than in farming or soldiering, resulted in the more intelligent Jews having a higher birth rate (because they were better off) than the less intelligent Jews and so, through the operation of natural selection, discrimination can be “credited” with some of the responsibility for the high average IQ of Jews today–even its genetic component. (Hitler may have had something to do with this as well, as it is plausible that the most intelligent European Jews saw the handwriting on the wall earliest and left Europe in the 1930s before it was too late.)

Although I admire Judge Posner and have learned a great deal from his writing, I think it is fair to say that I disagree with much of this analysis. It isn’t just that the evolutionary science of intelligence is extremely complicated, which should lead us to doubt claims about the effect of time-limited selection pressures on economic outcomes. Nor is it just that Posner has violated Godwin’s Law.

The problem is rather that smart people are often anti-social geeks, who don’t make better life choices under conditions of uncertainty. It is true that there is evidence that intelligence and ability to perform statistical calculations under controlled conditions are related. But I haven’t seen any good real-world evidence that smarter folks are better able to discount those emotions/biases (such as patriotism, risk aversion, optimism) that would have led Jews in Europe to stay put. Indeed, the conventional wisdom is that smarter people have weaker “street-smarts”, which is another way of saying they are likely to be bad at reading others for social cues. So even if intelligence were hereditable in the way Posner evidently postulates, it seems unlikely to me that the smarter portion of European Jewry escaped the Holocaust.

4

Economists Say the Funniest Things

firefighter.jpgThese scorching days inspire writing about firefighters. In Montana, Senator Burns is under fire for having attacked a local brigade. And in Dallas, W. Michael Cox, chief economist for the Federal Reserve Bank of Dallas, is in a bit of hot water for commenting on a study that found that the middle-class is being priced out of urban life. Cox said (to the NYT):

Of course, cities need police officers, firefighters, teachers. But as long as they can get the labor they need from somewhere nearby, some economists say, middle-class shrinkage may not hurt. In Southern California, developers import construction workers from Las Vegas and put them up in hotels; costs go up but rich clients can pay. Firefighters who want to live in high-priced cities can work two jobs, said [Cox.] “I think it’s great,” he said. “It gives you portfolio diversification in your income.” Pay for essential workers like plumbers and cabdrivers will tend to go up, he said.

Cox has an optics issue here, but he’s also missing the point. Economically diverse neighborhoods, the argument goes, are a type of a public good. Believing that individuals will “pay” for that good through double-employment is foolish.

13

Must District Judges Give Reasons?

gavel.jpgJonathan Adler highlights this astonishing Ninth Circuit opinion on the alleged misconduct of now-embattled District Judge Manuel Real. Some interesting facets of the case (previously blogged about here, here, and elsewhere). First, dissents matter. It is more than tempting to attribute the current push to impeach Judge Real to Judge Kozinski’s harsh dissent from the panel’s order exonerating him on the misconduct charge. Second, the case raises a neat issue which relates to what I’ve been writing this summer. While the overall facts of the case are well worth reading in the original, if you’ve ten or twenty minutes, I want to focus briefly on part of Judge Kozinski’s charge against Real: that he failed to explain the reasoning for a controversial order.

The basic story is that Judge Real withdrew the petition in a pending bankruptcy case and stayed a state-court judgement evicting a woman who was appearing before his court in a criminal matter. Both orders were entered apparently sua sponte, or at least without hearing the evicting party’s arguments. According to Kozinski, Judge Real “gave no reasons, cited no authority, made no reference to a motion or other petition, imposed no bond, balanced no equities. The two orders [the withdraw and stay] were a raw exercise of judicial power…” In a subsequent hearing, Kozinski continued, “we find the following unilluminating exchange”:

The Court: Defendants’ motion to dismiss is denied, and the motion for lifting of the stay is denied . . .”

Attorney for Evicting Party: May I ask the reasons, your Honor?

The Court: Just because I said it, Counsel.

Kozinski wrote:

I could stop right here and have no trouble concluding that the judge committed misconduct. [Not only was there a failure of the adversary process . . . but also] a statement of reasons for the decision, reliance on legal authority. These niceties of orderly procedure are not designed merely to ensure fairness to the litigants and a correct application of the law . . . they lend legitimacy to the judicial process by ensuring that judicial action is-and is seen to be-based on law, not the judge’s caprice . . . [And later, Kozinski exclaims] Throughout these lengthy proceedings, the judge has offered nothing at all to justify his actions-not a case, not a statute, not a bankruptcy treatise, not a law review article, not a student note, not even a blawg. [DH: Check out the order of authority!]

So here’s the issue: in the ordinary case, to what extent are judges required to explain themselves?

Read More

2

The Judicial Salary Problem

Peter Lattman highlights some recent comments by Chief Justice Roberts. The Chief Justice talked, in part, about the campaign to raise the salary of federal judges:

At current salaries, “you no longer can draw the best trial lawyers, on a regular basis,” to the federal bench, Roberts said. While no one becomes a judge to get rich, he said, the government “ought to pay them enough so they can educate their children and have a reasonable lifestyle.””We don’t want to get to the point where we have the judiciary staffed solely by people of independent means, or by people for whom the judicial pay scale is a raise,” he said.

A few comments.

First, I wonder why the Chief Justice refers to “trial lawyers” as the appropriate pool. Even to the extent that he means “litigators” (because there are vanishingly few trials for judges to preside over), is there any reason, in theory, to think that litigation departments produce better jurists than corporate departments? I wonder. Considering that most of the job of the modern district judge is management of a process through to settlement, it would seem that corporate attorneys – at least ones who like to write – have a leg up.

Second, I (along with many others) question the claim’s empirics. The studies I have seen suggest that pay is not correlated with judicial decisions to retire (early). (The evidence is concededly mixed). It would be also quite surprising if it is correlated with agreeing to be nominated to the bench in all but the anecdotal case. The legal profession is acutely status conscious: lawyers who are in the position to be nominated have already demonstrated (through public service, or political connections, or effort) that they are particularly motivated by prestige as a substitute for cash. Moreover, it is a well-accepted fact that it is better to be a hammer than a nail. In our system, judges aren’t the nails. (Most of the time). In short, I think that even if you cut real federal judicial starting salaries (by keeping them constant despite inflation) the applicant pool would not significantly change.

But those are, essentially, market-clearing arguments, and don’t persuade me that the Chief Justice’s “real” point is wrong. Roberts has a better argument.

Read More