Category: Behavioral Law and Economics

The Limits of Law & Econ in IP: The Case of Digital Music

Once again, the folks at Truth on the Market have celebrated the recording industry’s efforts to assure perfect control over copyrighted content via Digital Rights Management. Free marketeers like Tyler Cowen are beginning to question DRM as a tax on consumers, and even one of the big four record companies is considering abandoning it. Untroubled by such doubts, Josh Wright and Geoff Manne push for ever more latitude for the dominant platform (iTunes) and dominant content providers (the big four recording companies).

Their posts provide classic examples of what Reza Dibadj has called the key shortcomings of conventional law & economics (L&E) reasoning. As Dibadj summarizes,

[T]hree of the most basic assumptions to the popular L&E enterprise–that people are rational, that ability to pay determines value, and that the common law is efficient–while couched in the metaphors of science, remain unsubstantiated.

Let’s take a look at how each of these assumptions drives the TOTM approach to digital music markets.

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Why Don’t Sick Ships Sink?

royalcarribiean.jpgI see stories like this with distressing frequency:

Holland America’s Volendam returned to Port Everglades at about 6:30 a.m. Thursday with 74 sick people on board.

According to the Centers for Disease Control and Prevention, 68 passengers and six crewmembers became violently ill with flu-like symptoms. But shortly before noon Thursday, the cruise line issued a statement that said that the total number had escalated to 112.

So, are cruise ships death traps, or merely availability cascades gone amok? The question touches, I think, on behavioral l&e and the problem of deterrence without law. The law governing accidents on ships is complicated, and cruise lines are notorious for attempting, through forum selection and arbitration clauses, to reduce the scope and intensity of tort damages that might deter unsafe living conditions.

Thus, the industry provides a good natural experiment to see whether warnings, together with market forces, work to constrain bad behavior where tort law is relatively under enforced. Quality signals here are provided by the CDC, accessed through their query system or a monthly compilation. Despite lawyers’ best efforts, it is unclear if these signals are getting through to consumers. For example, the Volendam’s recent report score of a 93 seems pretty low for the industry, and contained specific warnings about food handling practices onboard. (Basically, they didn’t keep cream cool, and left it out too long). So why was the ship so fully booked? To the extent that market forces are to correct negligent sanitation practices, consumers have to actually care about getting sick. Is the problem an underappreciation of the risk? Or, a sense that the relevant costs of getting sick are less pressing because folks on vacation don’t miss work? (I looked for pricing differences between high and low quality ships, but couldn’t find good data in the time available.)

For what it is worth, the worse violator on the list that I saw was the Stad Amsterdam Clipper, with a 62. But it sure is a pretty sight to see.

Photo: Royal Caribbean Adventure (Score: 98 on November 5, 2006)


Total Persuasion Awareness

total-information-awareness.bmpThis story from the Times, on the increasing prevalence of advertising, is disturbing.

Marketers used to try their hardest to reach people at home, when they were watching TV or reading newspapers or magazines. But consumers’ viewing and reading habits are so scattershot now that many advertisers say the best way to reach time-pressed consumers is to try to catch their eye at literally every turn.

“We never know where the consumer is going to be at any point in time, so we have to find a way to be everywhere,” said Linda Kaplan Thaler, chief executive

at the Kaplan Thaler Group, a New York ad agency. ‘Ubiquity is the new exclusivity.

Gosh, I wish I were smart enough to know for sure what Ms. Thaler means there. But it puts me in mind of the TIA program out of DARPA.

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Dream Makers, Dream Breakers

stars.jpgI recently saw Dreamgirls, a well-marketed movie that’s largely about Barry Gordy-style marketing of music from the 50s to the 80s. Although there’s a lot to viscerally enjoy in the film, I kept analyzing the action from a lawyerly angle. Compulsory licenses, payola laws, restrictive entertainment industry contracts–all play pivotal roles in the movie. Each becomes a tool in the hands of a mogul and his enemies, as they struggle for fans and creative control.

Later in the weekend, I heard an interview with hip-hop impresario Ryan Leslie, who aims to be a 21st century starmaker. After scoring a perfect 1600 on the SAT, Leslie went to Harvard at 15, and is now precociously producing videos with Hollywood icons. Leslie’s career promises to be a lot less destructive than that of prior industry powerbrokers (for some spoiler-revealing reasons I’ll disclose after the jump). But what few fully realize is how important the law is to such a development.

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The BLE of Sports Betting

I know that we’re engaged in talking about serious subjects, but this Bill Simmon’s column really is a great read. Bill makes the following claim, which I pass along without evaluating whether it is, well, true. This year, against the Las Vegas NFL line, underdogs have gone 137-97-6 for the season. Bill continues:

“Out of those 136 underdogs that covered, an astonishing 100 won their games outright (including 11 of 13 last week). I can’t even rationally discuss this anymore.”

Honestly, I don’t get it either. Are the folks in Vegas taking their eyes off of the ball, perhaps due to personal problems? Or has the NFL’s crazy economic scheme, resulting in parity of a sort, made betting on games really a matter of chance? (Simmons blames an unexpected triumph of common sense, but, really, would common sense have predicted the Eagles’ win over the Cowboys last week?)

And now, back to real legal topics. And grading.

Philanthropic Arms Races vs. Charity

There have been a number of interesting pieces on charitable giving this holiday season. Peter Singer estimates how much individuals ought to feel morally obliged to give. Arthur Brooks argues that conservatives and the working poor are more inclined to charitable giving than society at large.

All of these news stories, as well as the supernova of Buffett-benevolence, tend to focus attention on charitable giving to the poor. However, some estimate that only 10% of all charitable giving in the U.S. helps the underprivileged. This has led to Congressional hearings on the topic, with some Republicans complaining about the nonprofit status of hospitals with low rates of charity care, and some Dems questioning donations to elite universities:

Representative Thomas and others are particularly vexed by nonprofit hospitals, often noting that data from the American Hospital Association calculated that their average spending on uncompensated care was 4.4

percent of their costs in 2002, compared with 4.5 percent for their commercial cousins. Representative Charles Rangel of New York, the senior Democrat on the Ways and Means Committee, has asked whether a better target may be universities, which sit on tens of billions of dollars in assets while tuition increases are outpacing inflation.

A big question here is: what’s behind these dynamics? As I suggest below the jump, a lot has to do with a pernicious interplay between increasing inequality and pervasive use of ranking systems as measures of quality for credence goods. In fields like education and health, where the quality of one’s experience is very difficult to evaluate objectively, ranking systems are forcing leaders into an arms race to acquire ever more resources.

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Xoxohth 1.2: The Whys and Wherefores

[This is Part I, Section 2, of the project I announced here. (Part 1.1 is here.) The goal of today’s installment is to present a diversity of views on why people spend time on Xoxohth, drawing largely on the voices of posters themselves.]

inkblot.cgiI’ll start by acknowledging an uncomfortable fact. This project suggests, and perhaps even reinforces, that critique of academic life often bandied about by the popular press: I’m asking a minor question, focusing on the uninteresting choices of marginal members of society, and using a methodology of debatable validity.

I felt bad about this for a while. And then I realized that the next best use of my time is grading: a similar process, but with higher perceived stakes.

Forward. The issue for today is why people continue to spend substantial amounts of time on XO. The question arises from the obvious point that students and lawyers have many ways to spend their time. Most of those ways are unlikely to lead to professional embarrassment if publicized, and may even enable individuals to build reputations for probity and acuity. It is odd, then, that hundreds or thousands of students and lawyers devote significant chunks of their free time to talking anonymously on XO. What gives?

It seems to me that there are a few motivations in play: entertainment, a search for information, the need for community, and the pleasures of transgression. Before we begin, let’s get some reader input. What motivation do you think drives XO’s traffic?

Why Do People Spend Time on XO?
The Community
The Transgression!
Information (Giving and Getting)
Free polls from

Now that we’re done with the scientific polling, let’s look at the qualitative data.

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Trans-Fat Ban: Is there a Softer Paternalism Available?

It looks like the New York Board of Health has voted to ban trans-fats. For all our readers wary of such legal interventions, I offer the view of G.K. Chesterton on cognate controversies:

[Y]ou do not keep a little boy from throwing stones by preventing him from ever seeing stones. You do not do it by locking up all the stones in the Geological Museum, and only issuing tickets of admission to adults. You do not do it by trying to pick up all the pebbles on the beach, for fear he should practise throwing them into the sea. You do not even adopt so obvious and even pressing a social reform as forbidding roads to be made of anything but asphalt, or directing that all gardens shall be made on clay and none on gravel. You neglect all these great opportunities opening before you; you neglect all these inspiring vistas of social science and enlightenment. When you want to prevent a child from throwing stones, you fall back on the stalest and most sentimental and even most superstitious methods. You do it by trying to preserve some reasonable authority and influence over the child.

But if that all sounds a bit too Dobsonian to you, there’s always soft paternalism. According to Jim Holt,

[S]oft paternalism says, You know what’s best for you, and we’ll help you to do it. Here’s an example. In some states with casino gambling, like Missouri and Michigan, compulsive gamblers have the option of putting their names on a blacklist, or “self-exclusion” list, that bars them from casinos. Once on the list, they are banned for life.

Anyone want to propose a precommitment strategy for avoiding the sirens of fast food?

From the New Property to the New Responsibility

apple small.jpgJust as Charles Reich was a premier theorist of rights to government largesse, Peter Schuck and Richard Zeckhauser are leading exponents of the responsibilities it entails. In Targeting Social Programs, S&Z focus on the denial of benefits to “bad bets” and “bad apples:”

Bad bets are individuals who are likely to benefit little from social resources relative to other [beneficiaries]. . . . Bad apples are individuals whose irresponsible, immoral, or illegal behavior in the past—and predictably, in the future as well—marks them as unsuitable to receive the benefits of social programs.

This may sound a bit cold-hearted at first, but S&Z make a good case that, behind a veil of ignorance, we’d quite sensibly allocate resources to, say, the transplant recipient who is most likely to benefit, rather than the one who has been on the wait list the longest. They also show how often “bad apples'” worst effects are on the disadvantaged citizens near them. (For an example, see Kahan and Meares on anti-loitering ordinances.)

The West Virginia Medicaid program provides an interesting case study of “bad apple screening.” Consider the fate of one beneficiary who refuses to sign a “health responsibility contract:”

Mr. Johnson. . . goes to a clinic once a month for diabetes checkups. Taxpayers foot the bill through Medicaid . . . [b]ut when doctors urged him to mind his diet, “I told them I eat what I want to eat and the hell with them. . . . I’ve been smoking for 50 years — why should I stop now? . . . This is supposed to be a free world.”

Traditionally, there was little Medicaid could do to encourage compliance. But now, “[u]nder a reorganized schedule of aid, the state, hoping for savings over time, plans to reward “responsible” patients with significant extra benefits or — as critics describe it — punish those who do not join weight-loss or antismoking programs, or who miss too many appointments, by denying important services.” But as the article notes, “Somewhat incongruously, [Johnson] appears to be off the hook: as a disabled person he will be exempt under the rules.”

Critics claim the program is unduly intrusive: “What if everyone at a major corporation were told they would lose benefits if they didn’t lose weight or drink less?” asked one doctor. Certainly in some manifestations it could be; consider this 1997 proposal by Judge John Marshall Meisburg:

Congress should . . . consider legislation stipulating that no one can be granted disability by SSA if s/he continues to smoke against the advice of his physician, and smoking is a factor material to the disability, because such claimants are bringing illness and disability upon themselves. Such a law would reduce the burden of proof now needed to deny benefits to persons who fail to heed their doctors’ advice, and would dovetail with legislation just passed by Congress to abolish disability benefits for persons addicted to drug and alcohol. In many cases, smoking is akin to “contributory negligence” and the SSA law should recognize it as such. [From Federal Lawyer, 44-APR FEDRLAW 56 on Westlaw.]

I think S&Z frame the debate in a nuanced enough way to avoid this kind of draconian proposal. But I do have a few quibbles with the framing of their work, if not its substance.

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Rules? We Don’t Need Your Stinking Rules!

signs.jpgA very odd idea from Europe:

European traffic planners are dreaming of streets free of rules and directives. They want drivers and pedestrians to interact in a free and humane way, as brethren — by means of friendly gestures, nods of the head and eye contact, without the harassment of prohibitions, restrictions and warning signs.

Why? Because the law is so overgrown in the old country that it is (allegedly) ignored:

About 70 percent of traffic signs are ignored by drivers. What’s more, the glut of prohibitions is tantamount to treating the driver like a child and it also foments resentment. He may stop in front of the crosswalk, but that only makes him feel justified in preventing pedestrians from crossing the street on every other occasion. Every traffic light baits him with the promise of making it over the crossing while the light is still yellow . . . The new traffic model’s advocates believe the only way out of this vicious circle is to give drivers more liberty and encourage them to take responsibility for themselves. They demand streets like those during the Middle Ages, when horse-drawn chariots, handcarts and people scurried about in a completely unregulated fashion. The new model’s proponents envision today’s drivers and pedestrians blending into a colorful and peaceful traffic stream.

Ok, I get the concept, and I do think that the proliferation of law results in an enforcement loss on the margins. But there are two conditions to this experiment’s success.

First, it isn’t scalable. In absolute terms, big cities seem to me to be vastly harder to de-sign than small cities: the temptation to defect is higher; the benefits of cooperation diffuse; and the social sanctions easy to avoid. Similarly, homogenous and nondiverse populations like those that still dominate parts of Europe probably need less law than heterogeneous ones – a straightforward Shasta County idea.

Second, you still need private (tort) law. Even when the stop sign gets carted away, a reasonable duty of care remains. Further, that law has to be relatively well-appreciated to be effective. Therefore, the designers of the experiment must be sort of suggesting that we can remove law’s signs because the rules have been completely internalized.