Category: Economic Analysis of Law

Deep Blue, Metropolis, Big Sky, Greater Dixie

election.jpgThere are a lot of old faces leaving Congress, and we can expect many efforts to figure out what the Democratic wave meant. On one level, it may be all about “corruption [and] the Iraq war.” But a recent analysis by Stan Cox suggests some interesting possibilities.

Cox “compiled rankings of the 50 states for a range of characteristics, including wages, taxes, and energy costs from a recent Forbes Magazine’s survey entitled “The Best States for Business,” an environmental policy (“green-capacity”) rating by the Resource Renewal Institute, and government data on median income, income inequality, population size, and the number of Wal-Mart Supercenters relative to population.” He then divided “divergent states” into four categories based on their status: Deep Blue, Metropolis, Big Sky, Greater Dixie. He found that the more Democratic of these (Deep Blue and Metropolis) had median incomes “25% higher than in Big Sky and Greater Dixie.” Big Sky and Greater Dixie states also had far higher “Iraq war deaths per million residents,” lower minimum wages, and worse environmental policies (though they had cleaner environments, largely due to less population density).

I don’t agree with all the ways Cox interprets the data, but his organization of it is interesting. It’s a nice reminder to the MSM that rather than incessant coverage of the “horse race,” it might help to point out the huge disparities “in wages, business and environmental policies, income inequality, population size, racial and ethnic makeup, poverty, and military impact” of different areas. These disparities might explain a lot more about what went on Tuesday than the Limbaugh/Fox, macaca/misogynist, and Kerry “stuck in Iraq” feuds they fixated on.

Photo Credit: Flickr/Poor Yorick (“The 2004 presidential election as represented by population, by Mark Newman, Department of Physics and Center for the Study of Complex Systems, University of Michigan”).

PS: I forgot to mention a certain counterintuitive paper that suggests some legal uses of these results. Anup Malani has suggested that “The value of a law should be judged by the extent to which it raises housing prices and lowers wages. . . . Housing prices go up because more people want to live there. Wages go down because more people want to work there.” This type of data helps correlate things like wages and environmental laws.

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The Law & Economics of Quaker Litigation

quakers.bmpI feel duty bound to write a post defending the honor of 17th century Quaker grandees. Their reputation has suffered enough. The Quakers had (still have?) a tradition of discouraging intra-Quaker litigation in the secular courts. In England, Quaker eschewal of litigation was founded in part on the religious inaccessibility of the courts. Courts required oaths, and Quakers, taking Christ’s admonition in the New Testament to “swear not” literally, refused to take oaths. Once the Quakers started founding settlements in America, however, this problem went away, as Pennsylvania law allowed for “affirmations” in place of oaths, an explicit religious accommodation that eventually found its way into the Constitution. Nevertheless, Quaker sermons and pamphlets continued to insist that Friends should resolve their disputes amicably before the Monthly Meetings of the Society rather than sue in the secular courts.

In his book Of “Good Laws” and “Good Men”: Law and Society in the Delaware Valley, 1680-1710, William Offutt compared the records of the Monthly Meetings with the local court records to determine the extent to which Quakers actually lived up to their own sermons. What he found was that despite the nominal threat of excommunication for filing suit against another Friend, Quakers were quite enthusiastic about suing one another. Looking at the records of the Monthly Meetings, in turn, he found that congregational leaders were more likely to “sue” other congregational leaders before the Monthly Meetings but that Quaker leaders were perfectly happy to sue ordinary Quakers before the secular courts. Offutt rather archly suggests that the reasons for this had to do with the (hypocritical) desire of Quaker elites to maintain their images with other Quaker elites. Economics, however, suggests a more charitable reading of the actions of Quaker leaders.

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The Athenian Model

redrope.gifThe USA Today reports that shirking jury duty is an worsening problem. In response, local registrars are becoming punitive:

Tulare jury candidates who fail to show are warned that they could be found in contempt of court. If they do not respond, a second letter is sent, warning that a warrant will be issued for their arrest . . .

In Danville, Ill., a 19-year-old woman was found in contempt of court and sentenced to 14 days in jail for failing to appear for jury duty.

In Topeka, no-shows have been fined up to $100 a day.

In Grand Rapids, Mich., warrants were issued recently for the arrests of 56 people who failed to go to court and explain why they couldn’t serve.

It’s a trend. A foolish one. Why are folks always reaching for sticks, when there are carrots near to hand?

Seriously, jailing citizens for failing to be civic minded is, I think, a bad way of encouraging compliance. Why not try shaming, as the Athenians did with their famous red rope?

But, backwards.

Jurors ought to be given a public reward that will encourage norms of civic engagement. Like, say, a bumper sticker (“I love my state so I served on a jury.”), a t-shirt (“I’m not too sexy for jury service”), a newspaper advertisement (“Pennsylvania salutes its jurors . . . “), or a red ribbon. Such small rewards will have the incidental positive effect of making people happier with the experience itself. Jail time, by contrast, will only reduce civic support for the jury system, and will be unlikely to be enforced at levels sufficient to really deter shirking. And, tangible rewards are better than the empty rhetoric that currently marks the legal system’s approach to the reward-punishment problem:

“Conscientious service brings its own reward in the personal satisfaction that an important task has been well done. The effectiveness of our system of justice is measured by the integrity and dedication of the jurors who serve in our courts.”

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Pay the Poor to Be Citizens

money.jpgA colleague suggests that there might be a relationship between a series of seemingly random observations:

  • A sudanese cell-phone billionaire announced a prize for good governance, to be awarded to current African leaders when they step down from office. According to news reports, “each leader awarded the prize will receive $5 million spread over 10 years after leaving office. If still alive when the initial prize is exhausted, prize-winners will receive another $200,000 annually until they die.”
  • The Arizona Voter Reward Act, which would establish a $1,000,000 prize whose proceeds would go to a randomly-selected voter, is on November 7th’s ballot. The state’s Chamber of Commerce is opposed: Harvard’s Info/Law project is more open minded. Most think the law would be plainly illegal preempted by federal law even if passed.
  • Jury pay rates are embarassingly low, if meant to be compensatory. Some jurisdictions are funding pilot projects to study if pay raises will increase compliance with jury service.

Here is the question for debate: is there any meaningful way to distinguish the African prize (which many legal commentators no doubt would celebrate) from the voting and jury service problems? Or, more provocatively, are the powerful the only people who we will allow to make money from being good citizens?

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2

The Economics of Things that Flow

water.jpgThis week’s New Yorker has an article about water, and, specifically, a claim that it isn’t well suited to traditional economic analysis. For a taste, check out the interview with author Michael Specter here.

Specter provides many examples (from different cultures) of the difficulty societies have in creating residential water markets. Folks resist thinking of water as a commodity. In other countries (particularly, those without a strong riparian law tradition) misuse is rampant. Urban dwellers demand water for free (or force industry to subsidize home use). The result: waste, extreme shortages of potable water, and disease. Specter is particularly strong when he discusses how the competition for water in India and China (in particular) has resulted in a classic tragedy of the commons: farmers competing to dig wells deeper than their neighbors, leading to a falling water table, and, ultimately contamination by salt and poisons. He also provides the somewhat astonishing factoid that water use in the United States has fallen in absolute and per capita terms in the last thirty years, largely due to demand-side reductions caused by technological development. The article claims that the technological change was in turn spurred by the Clean Water Act’s pressure on industry.

The article reminded me of Frank’s nice post of last week on Net Neutrality: Law, Money, and Culture. As you may recall, Frank argued against treating network access as a normal economic good, largely to avoid “another avenue for the large corporations that dominate the culture industry to fast-track their wares to consumers? In the end, network bias-toward-wealthy-entities portends ever more pervasive commercialization of cultural life.” While Frank doesn’t exactly come out and say so, you get the sense (reading other net neutrality folks) that the nondiscrimination principle arises from an intuition that access to a certain quantum of information is a new part of Americans’ birthright endowment.

Perhaps the analogy is facile, but is there a meaningful connection between the economics of water and information? The reason that the analogy occurs to me is that both goods the real cost is access, not consumption. Obviously, there are some important differences too (information isn’t life, whatever Neal Stephenson thinks, etc.) But it might be that the lessons from the partial commodification of water in the last thirty years, and the positive consequences of regulation, could inform our experiences with informational regulation as well. Or, as the title says, is it time for an economics of things that flow?

[Will Baude points out that the idea of fugitive resources isn’t new. Can anyone recommend a good primer comparing water and information economics? I obviously need to catch up!]

Net Neutrality: Law, Money, and Culture

dailyshow01.jpg

Bill Moyers enters the fray in the raging legal debate over net neutrality tonight, with a documentary on PBS. The Wu/Yoo debate on the topic gets the central issues on the table: should we permit dominant ISP’s (like Verizon and Comcast) to discriminate among the “bits” on their networks, giving more rapid service to preferred sites? I’ve offered some tentative thoughts on the matter, and these continue in that vein.

The net neutrality battle may offer us a classic efficiency-equity tradeoff. Imagine a world where everything on the internet came to you four times faster, but dominant ISP’s could cut deals with certain sites that made their content come 10 times faster. On many classic economic accounts, that would be Pareto-optimal–everyone’s better off. As some very smart people (like Philip Weiser) have claimed, that differential pricing could finally lead to revenue levels that would remedy the US’s unacceptably slow pace of getting people connected to broadband (and faster) networks.

But on the other hand, what about the competitive disadvantage of those unable to cut the deals? Compare this article reprinted in the Boston Pilot (the Boston Roman Catholic Archdiocese’s official paper) touting net neutrality and this piece from Brookings-AEI disparaging it as a form of “price control.” The economists just tend to miss the cultural importance of media consolidation. That’s what convinced me that the stakes are ultimately a “battle for mindshare” (to use Hannibal Travis’s evocative metaphor), and can’t be cast in simple economic terms.

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Extraterritorial effects of non-enforcement of the antitrust laws

baseball.jpg

The League Championship Series are starting, whether the Mets have any starting pitchers or not. But today’s baseball news concerned the importation of a quality starter from Japan, Daisuke Matsuzaka. Matsuzaka was the MVP of the inaugural World Baseball Classic this year, a kind of World Cup for baseball.

What does this have to do with law? Matsuzaka, unlike say, Hideki “Godzilla” Matsui, does not have 10 years in Japanese baseball, and so he is subject to an agreement between Japanese baseball and American Major League Baseball (MLB), in which MLB teams will submit silent bids for his services to MLB’s league office, and then the highest bidder will get exclusive rights to negotiation with Matsuzaka. The amount of the winning team’s bid will go to Matsuzaka’s former team (the Seibu Lions) as a transfer fee. And then, since he will be unable to take bids from any other team, Matsuzaka will probably take less from his new American employers than a free agent would.

It seems to me that Matsuzaka might well be better off if, free from this system, he could negotiate a higher salary as a free agent by receiving bids from several American teams, and then just buy himself out of his contract with Seibu — an efficient breach. Indeed, the fact that MLB and the Japanese leagues agreed on this system after the high-profile move of Hideo Nomo seems to imply that it takes $/¥ out of Matsuzaka’s pocket, and puts it in theirs. But this appears to be a case where baseball’s antitrust exemption in the U.S. has been extended outside our borders by contract with the Japanese leagues. While no one cries for baseball millionaires, it may be worth noting that while other countries sometimes take offense at U.S. antitrust law sprawling into their economies, tolerance of anticompetitive practices can also have extraterritorial effect.

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Outsourcing and Agency Costs

The Times reports that the exploding outsourcing industry in India has run into two sorts of problems: (1) domestic political instability resulting from a federal system; and (2) duty of care problems resulting in data breaches. The two articles, fronted together, remind me that I’ve not yet had a chance to plug George Geis’ provocative article on Business Outsourcing and the Agency Cost Problem. From his abstract:

Why has business outsourcing increased so rapidly over the past decade? The question is important for corporate law scholars because it raises foundational issues underlying the theory of the firm. Indeed, the decision to pool resources under centralized control presents a fundamental tension between the benefits of scale and the dangers of unchecked managerial discretion. The location of a firm’s borders – and thus the extent of outsourcing – can be viewed as an equilibrium of these competing effects.

The conventional explanation for the rise in business outsourcing is that falling interaction costs have changed this balance by opening new markets where firms can source economic inputs for less. This Article offers a second account, however, for the outsourcing phenomenon – one that is rooted in agency theory. Like many other economic relationships, outsourcing projects generate agency risk because a vendor makes decisions that affect the wealth of the outsourcing firm.

This Article argues that business outsourcing has thrived in recent years not only because globalization has unlocked inexpensive production markets, but also because it is becoming easier for firms to monitor and prevent the agency costs of outsourcing. Drawing upon a detailed analysis of outsourcing contracts, it explores several strategies to minimize agency costs – shedding new light on the structure and terms of a typical outsourcing project. It then contends that the same forces that are opening new markets are also making it economical for firms to mitigate outsourcing agency risk. Taken together, this work adds another important, but previously neglected, context for understanding the essential tradeoffs that arise when economic ownership is divorced from control.

It is a terrific paper, I think, which might lead some folks to new applications of AC theory. One question I have concerns the role of consultants as norm entrepreneurs, and as developers of strategies to monitor outsourced agents. (If, indeed, outsourced firms ought to be thought of as agents). It is also interesting to think about agency costs and remedies in transnational contracts. If, as the Times reports, Bangalore will shut down today, which jurisdiction’s contract law on force majuere will shadow the resulting dispute?

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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.

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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.