These notes are reading notes from week 1 until week 7 of the course Empirical Legal Studies, the second course of the minor Law&Economics. The notes are made in goodnotes and include quotes, graphs and all of the other important information from the readings.
goal of the essay:
determine how and to what extent law and economics can be normative, EAL= economic
namely inform policymakers about which legal rules are desirable for society. analysis of law
three challenges in law and economics:
1. efficiency vs equity problem - efficiency is not always sufficient to choose among legal rules
2. policy problem - knowledge of effects of legal rules may be too limited to achieve efficiency
3. political economy problem - incentives underlying lawmaking may undermine efficiency quest
Important limitations of normative law and the coase theorem:
I
economics: when the property rights are clearly specified, the
- efficiency is not always enough to identify the best market mechanism will reach economic efficiency
legal rule. (calabresi) unless the costs of using that mechanism
- law and economics has always been concerned (transaction costs) are too high. In order to
with the flaws in the production of law understand the functioning of markets, we should
- judges aren't trained in economics and may have study transaction costs and their determinants
interests other than the pursuit of efficiency in (including the law).
society
positive analysis: skeptical about motivation of policy
efficiency depends on how we measure the value of makers to maximize social welfare
resources:
1. utility normative analysis: seek to design legal institutions
> problem: utility can’t be measured accurately that will produce rules aiming to maximize social
2. wealth welfare
> problem: doesn’t matter who ends up rich and
poor, no distributive concerns Posner: EAL should focus exclusively on wealth
3. growth of wealth maximisation. Wealth is an objective goal and it is
> problem: can only happen ex-post measurable. The goal of wealth maximization
reflects a work ethic in which individuals are entitled
Uncertainty makes economic growth more to keep what they produce thus having incentives to
acceptable than static efficiency as a normative produce as much as possible. Law should therefore
goal because the identity of winners from innovation not redistribute, but only maximise wealth by
cannot be known ex-ante. Uncertainty also has correcting the market’s failure to do so. Criticism to
adverse consequences on financial stability this: individuals are not randomly affected by wealth-
because it implies that risk cannot be precisely increasing reallocations of entitlements
measured ex-ante, which is the reason why financial
ex-post: afterwards (lawyers)
crises happen and need to be resolved ex-post.
ex-ante: before (economists)
conclusions:
> economic analysis of law can be normative, by informing lawmaking about which laws are desirable for
society
> the effective normativity of EAL depends on asking questions that can be answered based on efficiency
> Law and economics should maintain its focus on the measurability of outcomes
> Efficient legal rules vary with context and over time
,topic: failure to develop a theory adequate to handle problem of harmful effects
4 cases:
1. Sturges v Bridgman
Current question: how should we restrain A to stop it from damaging B?
2. Cooke v Forbes
Real question: should A be allowed to harm B or should B be allowed to harm A?
3. Bryant v Lefever
In order to carry out a market transaction, it is necessary to: 4. Bass v Gregory
> Discover who it is that one wishes to deal with is the gain from preventing the harm
> inform people that one wishes to deal and on what terms greater than the loss which would be
> conduct negotiations leading up to a bargain suffered elsewhere as a result of
> draw up the contract stopping the action which produces the
> undertake inspection to make sure the contract is observed harm?
The assumption that there are no costs involved in Pigou: discover whether any improvements can
carrying out market transactions is very unrealistic. be made in the existing arrangements which
Taking into account the costs of carrying out market determine the use of resources. If self-interest
transactions, it is clear that such a rearrangement of promotes economic welfare, it is because human
rights will only be undertaken when the increase in the institutions have been devised to make it so.
value of production consequent upon the rearrangement
is greater than the costs which would be involved in This article is critical of Pigou’s economic
bringing it about. When it is less, the granting of an analysis. Pigou asked the wrong questions in his
injunction or the liability to pay damages may result in analysis. Pigouvian analysis shows us that it is
an activity being discontinued, which would be possible to conceive of better worlds than the
undertaken if market transactions were costless. one we live in, but the problem is to devise
Economists and policy-makers generally have tended to practical arrangements which will correct
over-estimate the advantages which come from defects in one part of the system without causing
governmental regulation. However, this does not do more serious harm in other parts.
more than suggest that government regulation should
Private product: value of the additional product
be curtailed. It does not indicate where the boundary
resulting from a particular activity of a business
line should be drawn.
Social product: private product minus the fall in
the value of production elsewhere for which no
compensation is paid by the business
conclusions:
> economists fail to reach correct conclusions about the treatment of harmful effects. This failure stems
from basic defects in the current approach to problems of welfare economics
> a change of approach towards problems of welfare economics is necessary
> analysis of divergencies between private and social products diverts attention from other changes in
the system which are inevitably associated with the corrective measure, changes which may well produce
more harm than the original deficiency.
> the analysis which proceeds in terms of a comparison between a state of laissez faire and some kind
of ideal world inevitably leads to a looseness of thought since the nature of the alternatives being
compared is never clear.
> there is a faulty concept of a factor of production. It is considered a physical entity which is used rather
than the right to perform certain actions. The right to do something which has harmful effects is also a
factor of production.
, self-evident axioms of
Topic: the applicability of the Coase theorem to the political market
normative political theory:
1. Range
Main finding: If all voters are allowed to enter into Coasian bargaining over
2. Universal domain
the policy outcome to be adopted by the majority coalition, uniqueness and
3. Unanimity
stability are obtained.
4. Non-dictatorship
Correlation between preference and choice is weaker for groups than for 5. Independence of
individuals. irrelevant alternatives
6. Rationality
Intransitivity: occurs in situations with no strong
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3 challenges to the politics-like-market analogy
political consensus on a given issue. A different 1. The value of a legislator’s vote often depends
order in the decision-making process may affect the upon how other legislators vote
outcome and that any winning coalition may be 2. Real life politics has too many political actors for
undermined by the reintroduction of an alternative it each to bargain with everyone else
previously defeated. 3. There is a diffuse hostility to a rationalization of
politics as a market for consensus
The democratic process is unable to capture the
intensity of the voters’ preferences. Individual voters 4 considerations:
do not face the opportunity cost of casting their vote. 1. Discrete policy choices and discontinuities
In a democracy it is not taken into account how Policy choices are often binary and there is no
strong or weak voters feel about an issue. The guarantee that discrete policy choices will allow
presence of exchange opportunities allows the voting gains from potential trade
system to capture the intensity of voters’ 2. Issue bundling
preferences. Political deals are characterized by bundling
different issues. This may generate suboptimal
More politically-sensitive voters can be viewed as outcomes.
having a greater bargaining power in the political 3. Free riding and bargaining failures
exchange process. Freeriding problem is exacerbated by an increase
in the ratio of number of voters over the number of
Proposition 1: if the conditions for the Coase theorem
dimensions of the policy space. Any policy change
are present for all voters, different initial majority
“purchased” by a voter is potentially a free good
coalitions will lead to the same final policy outcome.
Proposition 2: in a world of zero transaction costs, for another voter. There will be a suboptimal level
the choice of alternative decision rules has no effect of bargaining for the common interest.
on the policy outcome 4. Agency problems and the political dilemma
Proposition 3: if the Coase theorem holds, voters’ Political representation is often undermined by
preferences are strictly concave, and vote-exchange serious agency problems. If market mechanisms
agreements are enforceable, cycling in a multi- are allowed to operate in political contexts, the
dimensional policy space is excluded. collective decision-making mechanism is loosened.
Conclusions:
> if votes are alienable and vote-trading contracts are enforceable, bargaining will exploit gains from trade
> collective decision-making will have desirable social properties under these assumptions
> political bargaining yields unique policy outcomes under generally plausible conditions
> there is a gap between the frictionless world of the political Coase theorem and the real world of politics
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