Category: Economic Analysis of Law


I reviewed Mark Weiner’s Rule of the Clan from a libertarian perspective.

Libertarians are impressed by order that emerges in an unplanned, decentralized way.  No one knows how to make a pencil, and yet through the decentralized process of market trading, pencils are made readily available.  If making a pencil does not require a central planner, then why do we need a strong central government?

The Hobbesian answer is that without a strong central government, we would have the “war of all against all.”    The libertarian response echoes Karl Kraus.  Kraus famously said something to the effect that “psychoanalysis is the disease which it purports to cure.” Libertarians point out that the state, which purports to be the cure for the war of all against all, is the leading cause of violent death and incarceration.

Weiner’s book contains a message for libertarians that is decidedly mixed.  He argues, on the one hand, that there is a decentralized order that is an alternative to a strong central government.  On the other hand, this order is not at all libertarian.

The decentralized order that Weiner describes is the rule of the clan.  It is a cultural system in which individuals lack what we think of as liberty.  Instead, the individual is subordinate to the extended family.

Libertarians have been known to use medieval Iceland as an example proving that a strong central government is not needed to maintain order.  Weiner describes medieval Iceland as an example of the clan-based system of order, but from his depiction it is clearly not a model of a libertarian society.

Weiner uses legal historian Henry Maine’s distinction between a Society of Status and a Society of Contract.  Rule of the clan embodies a society of status.  Libertarians want to see a society of contract.

Libertarians see the “contract theory” of existing states as a fiction.  I never signed an agreement giving authority to the people and institutions of my federal, state, and local government.  Instead, those people and institutions have decided unilaterally what authority they can exercise over me.

Is it possible to extend the society of contract, giving less asymmetric power to the people and institutions that constitute the government?   Libertarians believes that the answer is “yes.”  However, Weiner claims that wherever the people and institutions of government lack strong asymmetric power, what we observe is the rule of the clan.  Libertarians are faced with the burden of showing that while he may be correct in describing the decentralized orders that we have observed, there may yet emerge a more decentralized order that does not degenerate into the rule of the clan.

The River of Purchasing Power Dries Up at Detroit

RiveraIf only Detroit were a big bank, Treasury officials would be working round the clock this weekend to save it. Alas, this city is no Citi. It lacks a “winning business model” (like lobbying and bonuses for key federal officials). So municipal bankruptcy is on the horizon.

Detroit was chronically mismanaged, and the victim of unforgiving political geography. But the decline of jobs there is also a bellwether for the rest of the country. As Juan Cole observes,

This rise of [robotized manufacturing] violates the deal that the capitalists made with American consumers after the great Depression, which is that they would provide people with well-paying jobs and the workers in turn would buy the commodities the factories produced, in a cycle of consumerism. If the goods can be produced without many workers, and if the workers then end up suffering long-term unemployment (as Detroit does), then who will buy the consumer goods? Capitalism can survive one Detroit, but what if we are heading toward having quite a few of them?

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Nonrespondent law graduates and other sampling questions

The Washington Post reports one possible concern with estimates of the Economic Value of a Law Degree:

“[Paul] Campos argues that low-earning lawyers may be less likely to participate in SIPP in the first place because of the stigma involved in admitting that, even anonymously.”

By email, Jerry Organ asks related questions about the representativeness of our sample.

“SIPP” is the United States Census Bureau’s Survey of Income and Program Participation, and is one of the primary data sources used in The Economic Value of a Law Degree.  Campos worries about stigma and non-response.  Thankfully SIPP is specifically designed to deal with these problems and to include impoverished and stigmatized members of the population, including those who receive government aid.

The Census Bureau explains SIPP’s purpose as follows:

 “To collect source and amount of income, labor force information, program participation and eligibility data, and general demographic characteristics to measure the effectiveness of existing federal, state, and local programs; to estimate future costs and coverage for government programs, such as food stamps; and to provide improved statistics on the distribution of income and measures of economic well-being in the country.”

The Census Bureau elaborates on the use of SIPP to analyze participation in Food Stamps and other anti-poverty programs here.

Census explains in greater detail how SIPP handles issues related to response bias, non-response bias, and weighting here.  SIPP oversamples in poor neighborhoods, imputes when necessary, and adjust the sample weights to approach a nationally representative sample.

It is about a good a survey as one is likely to find conducted by people who care a great deal about nonresponse and accurate estimates.

Additionally, to the extent that any lingering nonresponse bias may cause those with low earnings to be less inclined to participate, this bias will affect both law graduates and bachelor’s degree holders.  What we measure in the Economic Value of a Law Degree is the earnings premium, or difference in earnings that is attributable to the law degree.  The biases should wash out, or more likely, bias down our estimates of the law degree earnings premium, because bachelors are far more likely than law graduates to live in poverty.

Indeed studies that have compared earnings reported in SIPP to earnings from administrative data (tax and social security administration data) find that SIPP data underestimates earnings premiums because more highly educated and higher income individuals tend to underreport earnings, while less educated and lower income individuals tend to over report.  We make no attempt to correct for this downward bias in our earnings premium estimates to offset any lingering selection on unobservables.

Individual response bias issues also won’t affect federal student loan default data, which is administrative data from the Department of Education.  As noted in the article and in previous blog posts, former law students default on their student loans much less frequently than former students of bachelor’s degree or other graduate degree programs.



Brian Tamanaha Says We Should Look at the Below Average Outcomes (And We Did)

Brian Tamanaha’s response to The Economic Value of a Law Degree, as reported by Inside Higher Education doesn’t capture the contents of the study.  According to IHE, Tamanaha said:

 “The study blends the winners and losers, to come up with its $1,000,000, earnings figure, but that misses the point of my book: which is that getting a law degree outside of top law school – and especially at bottom law schools –is a risky proposition . . . Nothing in the article refutes this point.”

Professor Tamanaha is correct that the $1 million figure is an average, but we didn’t write a 70 page article with only one number in it.

The Economic Value of a Law Degree not only reports the mean or average—it reports percentiles, or different points in the distribution.  At the 75th percentile, the pre-tax lifetime value is $1.1 million – $100,000 more than at the mean.  At the 50th percentile, the value is $600,000.  At the 25th percentile, the value is $350,000.  These points in the earnings distribution do better than breaking out returns by school—they allow that even some people at good schools have bad outcomes (and vice versa).  Thus we capture, and at length, exactly the concern Tamanaha expresses.

Lifetime earnings distribution slide


As we discuss in the article, for technical reasons related to regression of earnings to the median, our 75th and 25th percentile values are probably too extreme. The “75th percentile” value is likely closer to the 80th or 85th percentile for lifetime earnings, and the “25th percentile” is likely closer to the 20th or 15th percentile.

In other words, roughly the top 15 to 20 percent of law school graduates obtain a lifetime earnings premium worth more than $1.1 million as of the start of law school. Roughly the next 30 to 35 percent obtain an earnings premium between $1.1 million and $600,000. In the lower half of the distribution, roughly the first 30 to 35 percent obtain an earnings premium between $350,000 and $600,000. Roughly the bottom 15 to 20 percent obtain an earnings premium below $350,000. These numbers are pre-tax and pre-tuition.

Even toward the bottom of the distribution, even after taxes, and even after tuition, a law degree is a profitable investment.  And that is before income based repayment, which can substantially reduce the risk at the bottom of the distribution.

We also present student loan default rates for 25 standalone law schools, most of which are low ranked institutions, and all of which have student loan default rates that are below the average for bachelor’s and graduate degree programs.  The average law school default rate is approximately one third of the average default rate for bachelor’s and graduate programs.

Student Loan Defaults


People with law degrees are not immune from risk.  No one is.  But the law degree reduces the risk of financial hardship.  Law degree holders face significantly less risk of low earnings than those with bachelor’s degrees, and also face lower risk of unemployment.  Increased earnings and reduced risk appear to more than offset the cost of the law degree for the overwhelming majority of law students.

Frank McIntyre and I did not miss the point of Brian Tamanaha’s Failing Law Schools.   Rather, we disagree with his conclusions about the riskiness of a law degree because data on law degree holders does not support his conclusions.  We discuss Tamanaha’s analysis on pages 20 to 24 of The Economic Value of a Law Degree.

We believe that Professor Tamanaha’s views deserve more attention than we could give them in the Economic Value of a Law Degree. Because of this, last Spring, we also wrote a book review of Failing Law Schools, pointing out both the strengths and weaknesses of his analysis.  We will make the book review available on SSRN soon.

If Professor Tamanaha disagrees with our estimates of the value of a law degree at the low end, we’re happy to hear it.  But he should not say that we ignored the issue.  We look forward to a productive exchange with him, on the merits.

The Locust and the Bee

LocustBeeFables have been in the politico-economic air of late. The FT’s Martin Wolf considered the locust part of a master metaphor for the future of the global economy. He concluded that “the financial crisis was the product of an unstable interaction between ants (excess savers), grasshoppers (excess borrowers) and locusts (the financial sector that intermediated between the two).”

Now Geoff Mulgan has entered the fray with the excellent book The Locust and the Bee: Predators and Creators in Capitalism’s Future. As Mulgan observes,

If you want to make money, you can choose between two fundamentally different strategies. One is to create genuinely new value by bringing resources together in ways that serve people’s wants and needs. The other is to seize value through predation, taking resources, money, or time from others, whether they like it or not.

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Gently Nudging with Liability Rules?

No Smoking symbolWhy have sexual harassment and anti-smoking laws been so successful in changing entrenched social norms in the U.S. over the past few decades? In a 2000 U. Chicago Law Review article, Dan Kahan observed that combatting these ills took the approach of “gentle nudges,” imposing moderate remedies that were within the range of what decisionmakers (e.g. judges and juries) thought was reasonably proportional to the violation. Because these moderate remedies were enforced, norms shifted, and lawmakers could ratchet up the remedies. By contrast, Kahan observed that “hard shoves” imposing remedies substantially exceeding social norms fail to be enforced or to change norms. For example, France tackled sexual harassment by making it a criminal offense, which French society saw as vastly disproportionate. As a result, French sexual-harassment law went unenforced against conduct that would have easily incurred liability under U.S. law, and French norms barely shifted.

There is an underexplored connection between Kahan’s “gentle nudge” vs. “hard shove” dichotomy, and Calabresi & Melamed’s “property rule” vs. “liability rule” dichotomy. Calabresi & Melamed observed that remedies are either (1) liability rules, such as compensatory damages, or (2) property rules, such as injunctions or prison, which aim to deter. Liability rules generally overlap with “gentle nudges” in that they aim for proportional compensation. Property rules largely overlap with “hard shoves.”

The debate over the relative merits of property rules and liability rules has raged in academia and the courts. Bringing Kahan’s observations into the mix weighs in favor of liability rules, which are more likely to be enforced – and to shift norms.

I explore the relationship between these two dichotomies in sections II.C.3 and IV.C of a forthcoming article looking at IRS enforcement (or lack thereof). But their interrelationship is promising for anyone interested in either the property-rule/liability-rule debate or in altering social norms.


LSA Retro-Recap Days 2-3: Leisure, Law & Econ, and Liberalism

Day 2 of the conference saw a spirited panel (featuring Scott Shaprio, Ken Ehrenberg, Michael Guidice, and Brian Tamanaha) about the (ir)reconcilability of legal anthropology and sociolegal studies with analytic jurisprudence. Much of the discussion (not to mention the spirit) here concerned the appropriate definition of a “concept.” If that kind of question does not induce somnolence for you, then read on! Read More


The IRS Scandal, Property Rules, and Liability Rules

IRS LogoRegardless of your take on the IRS targeting conservative groups applying for 501(c)(4) status, the episode demonstrates once again that Congress, the Administration, and the media have multiple avenues to pressure the IRS to act or to reconsider earlier actions. This susceptibility to political pressure has broad, counterintuitive implications for how to best deter violations of requirements throughout tax law.

In their path-breaking law & economics article, Calabresi & Melamed observed that every entitlement can be protected by either a property rule (e.g. injunctions, disgorgement of profits) or a liability rule (e.g. compensatory damages). The same is true in tax law. When a taxpayer violates a requirement for a favorable tax status, the tax code either imposes additional tax proportionate to the harm (a liability rule) or imposes the draconian penalty of taking away the tax status entirely (a property rule).

Which rule is most likely to deter a well-connected organization from violating a requirement imposed on it by tax law? At first glance, property rules (i.e. yanking the organization’s favorable tax status) appear to be the most effective deterrent. But the IRS routinely hesitates to take this draconian step, which would result in complaints to Congress, the Administration, the media, and other organizations. Even if the tax code, as written, imposes this property-rule remedy, the IRS can and often does decline to impose it in practice.

Examples of this problem abound throughout tax law. My favorite example is a real estate investment trust (or “REIT”) that had its IPO in 2007 and revealed in its SEC filing that it was in clear violation of one of the requirements (I.R.C. § 856(a)(2)) to qualify as a REIT for tax purposes. How brazen! But what was the IRS to do? The requirement is protected by a property rule: the only remedy available to the IRS was to take away the REIT’s favorable tax status entirely. This would have been draconian. All the REIT’s shareholders would have complained to their congresspersons, the financial press would have run stories, and the National Association of Real Estate Investment Trusts would have raised a ruckus. The IRS didn’t dare impose this property-rule remedy. The IRS did nothing, and the REIT suffered no consequences for the violation.

Would this REIT have been so brazen if the requirement had, instead, been protected by a liability rule, which would merely have imposed additional tax proportional to the violation? Almost certainly not. And that is the counterintuitive result: liability rules are often more effective in practice than draconian property rules in deterring taxpayers from violating tax-law requirements.

The relative merits of property rules and liability rules in tax law are explored in depth by this forthcoming Virginia Law Review article.



Corporate Political Speech, Rent-Seeking, and Political Extortion

Before I sign off, I’d like to thank Danielle et al. for their hospitality.  I’m very glad to have had this opportunity to share some of my thoughts, and to get some great feedback.  Let me finish up by offering an alternative rationale – grounded in public choice theory – for limited shareholder authority over corporate political spending.

Shareholder regulation of corporate political activity may not only decrease agency costs within the firm, it may improve overall societal welfare.  First, diversified shareholders might be able to constrain the costs of rent-seeking behavior that merely redistributes wealth between portfolio firms. Second, all shareholders may want to reduce the possibility of political extortion by removing from management the final say on certain kinds of political expenditures.  Allowing shareholders to regulate corporate political activity could limit these social welfare-decreasing activities, and channel corporate resources to more productive uses.  I sketch these arguments in more detail below. Read More


The Efficiency of Corporate Political Speech Bylaws

Nearly half a century ago, Albert Hirschman formalized two ways in which members of organizations could express their displeasure: exit and voice.  Exit is market-based expression, and is typically quiet, impersonal and cheap.  Voice, by contrast, is political expression — it is usually loud, messy, and expensive.  From an efficiency perspective, exit is thus generally favored as a matter of institutional design.

Corporate law largely track Hirschman’s theory.  Shareholders’ voice rights are, by default, quite constricted, and the business judgment rule imposes an important limitation on seeking judicial remedies.  In most cases, unhappy shareholders’ only practical method of expressing their discontent is to exit the firm by selling their shares.

But Hirschman warns that in certain circumstances, such as where the barriers to exit are sufficiently high, it is preferable to adjust institutional design to facilitate or strengthen members’ voice rights.  Corporate political activity presents exactly such a case, because the standard shareholder remedies – suing, voting for the board of directors, and selling their shares – are either unavailing or exceptionally costly.  I treat this range of options in more detail elsewhere, but below I will briefly describe these problems with a focus one key area in which corporate political activity differs markedly from other types of corporate action, and then turn to an important objection. Read More