Category: Jurisprudence

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Reward Characteristics and Transaction Costs

I want to continue my discussion of rewards as a regulatory tool by focusing on: (1) the traits that rewards can have; and (2) how transaction costs affect the decision to choose rewards rather than property rights or sanctions.

One significant decision for a reward is whether it should be what I’ll call “ex ante” or “ex post.”  In other words, the state could say “We will give you a specific sum if you do something.”  Or the reward could be structured as: “If you do something, then we will give you a reward.”  The former usually involves a more specific valuation (a bounty or a subsidy), while the latter tends to be more indefinite (salvage or a medal).  Another important issue is whether the reward will be a lump sum, a percentage, or some bundle of benefits.  Once again, valuation difficulties play a significant role in this decision, as the % reflects greater uncertainty about how valuable a particular action (such as a qui tam suit) should be.

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The Advantages and Disadvantages of Rewards

In my last post I explained that the state sometimes offers money or status (a reward) to regulate behavior instead of imposing sanctions or granting property rights.  Now let me explain the pros and cons of this approach.

On the positive side, a reward is almost always less intrusive than sanctions.  The best example is the difference between the draft (or any compulsory labor) and the volunteer military.  While in that case offering inducements is the more expensive option, in many instances rewards are also a cheaper form of regulation because their enforcement costs are insignificant compared to criminal law, tort law, or property rights.  When I discuss the lack of a “Good Samaritan” duty in common-law tort with my students, I point out that the high costs of imposing such a duty (both from a libertarian and a litigation standpoint) compare unfavorably to maritime salvage doctrine, which rewards rescuers rather than going after those who are indifferent.  Finally, a reward is more transparent than the regulatory alternatives, both because the cost of the policy can be measured easily (and often ex ante) and because enforcement costs are low.

What are the downsides of rewards?  First, they are susceptible to fraud.  Any time you offer a pot of money con artists will come out of the woodwork, in part because the value of success is so clearly defined and the costs of applying are pretty low (unlike, say, in litigation).  Second, the state must establish the value of the reward, and that is often very difficult.  For example, few people would suggest that the state should buy inventions or books in lieu of granting a property right for them, because there would be almost no way to know how much they are worth.  Finally, there are many situations in which people simply feel that a reward is inappropriate because citizens have a duty to do what the state wants them to do.  We could (as I’ll point out in a subsequent post) increase tax collection through a reward system, but many would object on the grounds that people should pay their taxes even if, in practice, many don’t — not be rewarded for doing so.

In the next post, I’ll talk about some factors that shape the scope of rewards and role that transaction costs play in the decision to use them.

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Defining Rewards

Last year I briefly discussed a project that I’m working on that treats “rewards” as a distinctive legal category.  Well, I’m still working on it, but I thought I would do a series of posts about this topic, as I’m getting close to writing up my work.

What do I mean by rewards?  I’m referring to money or status that is given by the state, acting in its regulatory capacity, to induce socially valuable behavior.  As a result, I am excluding rewards by private parties (“Find my lost cat and I’ll give you $50″), property rights (e.g., patents or copyrights), or state action as an employer (“Sally did a great job — give her a raise.”)  The distinction with property rights is conceptual, as rewards are closely related to liability rules because the state establishes the valuation.  The other exclusions are a matter of convenience, though I’m also unsure that there is anything distinctive about private rewards or how the state acts as an employer.

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Law and the Judge’s Cousin

There is an interesting exchange in the comments of my last post between Dan Cole,Jeff Lipshaw, and Michael Froomkin about institutions and the limits of substantive law. Dan Cole writes:

But substantive law is an intrinsic part of the institutional structure. If the quality of institutions matter, then by definition the quality of laws matter. That is a point made over and over again by Coase, North, Williamson and other economists.

Yes and no. I don’t deny that law plays a role in the quality of the institutions that resolve disputes. I also don’t deny that the overall quality of dispute resolving institutions is effected by the substantive law that the institutions apply. On the other hand, legal institutions are the result of much more than either the legal rules that define their workings or the legal rules that they apply. They are also the result of things like allocation of resources and informal social practices.

I was once at a panel that brought this point home forcefully. It was on comparativecommercial law and that perennial chestnut, which is better the common law or the civil law.  The partisans of the common law were laboring hard to establish the virtues of its flexibility and respect for freedom of contract.   (I’ve labored over these virtues myself on occasion.)  At this point, a long-time commercial practitioner on the panel interjected remarks to this effect:

At the margins, I suppose that the common law is slightly more friendly to commercial innovation than is the civil law. When I go to a civil law jurisdiction I often learn that there are certain transactions I simply can’t run or are more complicated to structure. On the other hand, when I am assessing the economic prospects in any particular country, my main question isn’t “Is this a civil law or a common law jurisdiction?” Rather, my main question is whether or not the fact that the lawyer on the other said is the judge’s cousin will effect the outcome of the case.

That is what I mean when I say that institutions matter more than substantive law.

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Counterfactual Legal History

About ten years ago a popular series of books called “What If?” — consisting of a series of essays by historians — came out that looked at key turning points in world or military history and tried to describe plausible counterfactuals.  I’ve often thought that asking that question about law would make for a fun conference.  Proposing the idea, though, points up a major difference between lawyers and historians.

Historians (except for the folks who participated in those books) are generally not fans of counterfactuals. In part, that is based on a methodological preference in favor of describing reality rather than speculating. But another reason is that historians tend to be very sensitive about the complexity of events and thus very skeptical about causal arguments of any sort.

Lawyers, by contrast, use counterfactuals all the time.  After all, “but for” causation or “harmless error” is asking a jury or court to figure out alternative paths for litigation.  In part, this is justified because we view causation as a more probable than not question.  A looser standard for causation leads to a greater willingness to think about what might have occurred if the facts were changed.

Once again, this raises the question of what a legal historian should do.  My own work is chock full of counterfactual experiments, which may explain why some historians might not like my scholarship. Straightforward legal history is important and worthwhile, but it seems to me that law (especially constitutional law) is more contingent than we generally think, and thus we need more work exploring lost paths.  There are some terrific examples — Risa Goluboff’s book on “The Lost History of Civil Rights” comes to mind — but that’s not enough.

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A Legal Historian’s Dilemma

This weekend I attended the Annual Meeting of the American Society of Legal History, which is always a great event.  The best line came from Jack Rakove, who said that the search for original understanding in constitutional law is increasingly an inquiry into what “Joe the Ploughman” thought in 1787 or 1791.

A legal historian (a role I play on a semi-regular basis) faces a problem that is common to folks who straddle different disciplines.  Unlike real historians, there is an expectation that legal historians should make their work relevant for current issues.  When I present papers or try to make them more marketable for law reviews, there is always a temptation — that I don’t always resist — to have a final section that tries to draw lessons from the history and apply them to current doctrine.  If you don’t do that, then lawyers will often ask, “What’s the point of this?”  If you do take this on, though, then those with a history training will say that you are doing law office history.  I’ve never come up with a great solution to this problem,

I’ll talk about a related issue — the use of counterfactual history — in a post tomorrow.

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Shame on the Brits!

By temperament, I am not a particularly passionate person. Every so often, however, the world throws up an event of such mindless horror that even phlegmatic me is roused to ire. Chris Lund points out such a horror in this post over at Prawfs. All I can say is, “What the hell are their Lordships thinking over at the new Supreme Court of the United Kingdom?” Shame! Shame on you! Read More

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Exciting Addition for Public Choice Profs

My colleague, Max StearnsMstearns, and Todd Zywicki of the George Mason University School of Law have just published their new course book, Public Choice Concepts and Applications in Law (West Publishing Company).  This course book, the only one of its type, introduces law students to the concepts of public choice and the implications of those concepts for a host of substantive legal doctrines and for features of institutional design of various lawmaking bodies.  Covered concepts include an general economic reasoning (including an overview of price theory), interest group theory, social choice theory, and elementary game theory. The institutional applications unit includes chapters that consider the implications of covered concepts for legislatures, the judiciary, the executive branch (and bureaucracies), and constitutions as governing documents.  The book is designed for courses or seminars in public choice or for use as a supplement courses as legislation, administrative law, or jurisprudence.  Students will love this: the book is in paperback.  Max tells me that he and Todd will be submitting the Teachers’ Manual to West this week and that West will quickly make that available to potential adopters.  In addition, they are working toward posting supporting materials for part III on line.  That part which will include various chapters on discrete topics of law to be used in connection with the bound volume and that will be updated over time.  Max tells me that he is happy to respond to any questions or comments that you have by email.   Having sat in on Max’s public choice seminar and enjoyed, and learned from, his vast body of work in the area, I have no doubt that Public Choice Concepts and Applications in Law is a great contribution to the classroom and beyond.

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Using “Foreign” Law in Constitutional Interpretation

It is not breaking news to note that a significant debate is underway about whether foreign law should be used to read our Constitution.  Separating this jurisprudential issue from the substantive controversies that often accompany the debate (on capital punishment, for example) is difficult and often breaks down into a liberal/conservative smackdown.  So I’d like to suggest a possible line of neutral research.  This might be a good student note topic.

Pick a pair of U.S. states (or multiple pairs) that differ widely in their politics.  (Say Mississippi and Vermont, or Utah and Hawaii).  Then look at each State Supreme Court’s cases interpreting its own Constitution.  How often do those cases cite the “foreign law” from the ideologically opposed state?

This would be helpful information.  Nobody would argue that it is inappropriate for a state court to cite another state court in a constitutional context because we are one nation.  But it would be interesting to learn whether this practice is common.  Critics of citing foreign law in the U.S. Supreme Court argue that the practice is wrong in part because our citizens did not consent to the processes that produce those decisions and often have different values from a country like France.  The same argument, though, could be made if the Texas Supreme Court, for example, cites a decision from Maine.  (Note that this study would work best in states where amending the constitution is relatively hard.)  If states like Texas routinely cite states like Vermont in constitutional cases (not garden-variety common law cases), then the argument against doing so at the federal level would be undermined.  And vice versa.

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The Policy Arguments for and Against Driving on the Right Side of the Road

Generations of law professors have always insisted that there is some class of rules where the particular content of the law is less important than that we have some clear answer to a question. The paradigmatic example is a rule specifying which side of the road one ought to drive on. The decision, so the argument goes, is entirely arbitrary so long as we all pick a side.

Not so it would seem. Read More