Econ 522Economics of Law

Dan Quint

Fall 2012

Lecture 1

Questions about enrollment or prerequisites? Please talk to me after lecture.

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If you’re trying to get into the class but not yet registered, put your name and info on the yellow pad going around

If you haven’t taken Econ 301 (or the equivalent elsewhere), talk to me after class

I’m Dan Quint, this is Econ 522,Economics of Law

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Logistics, schedule, textbooks, etc.

Overview: what is the semester going to be about?

Some history Common law and civil law traditions Example: dead whales and baseballs

Plan for today

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Logistics/Syllabus

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Course website:

http://www.ssc.wisc.edu/~dquint/econ522 (Or UW Econ “Undergraduate” “Course Information” “522”) (Or Google “Econ 522” or “Dan Quint” or…)

Website has… Syllabus (incl. links to supplemental readings) My slides and lecture notes (after, hopefully before each lecture) Homeworks Sample exam problems from past years

Website

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Teaching Assistant: Nathan Yoder Contact info on syllabus/website Sections on Fridays, beginning next week (Sept 14) Questions about section – talk to Nathan

Office hours Nathan: Mondays 1-2, Wednesdays 4-5 Me: Tuesdays 2-4 (other times by appointment)

Attending section

Attending lecture

Logistics

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Grades are based on occasional homeworks (probably 4) – 20% two midterms – 20% each final exam – 40%

Homework you’re welcome to work together on homework I’m happy for you to discuss questions, ideas, answers together but everyone should write up their own answers – copying someone

else’s answers word-for-word is not OK if you do work with others, please note who you worked with on your

homework

Grading

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No class on Sept 17 or 26

Midterms tentatively scheduled for Oct 17 and Nov 19 November 19 is Monday of Thanksgiving week – we won’t meet

Wednesday

Final is Wednesday December 19

Please let me know EARLY if… you have an exam conflict, or you’re a McBurney student and need accommodations for exams

Schedule

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Textbook: R. Cooter and T. Ulen, Law and Economics I’m using 5th edition (not 6th) other versions are fine copies on reserve at Memorial Library and Social

Science Library (8th floor of Social Sciences)

Another book I like: D. Friedman, Law’s Order available free online (link on syllabus) (or it’s a $24 paperback)

Additional readings available online (via Learn@UW)

Readings

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What is thisclass about?

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This class is not about the law Well, OK, it’s sort of about the law, but… You’re not in law school I’m not a lawyer, I’m an economist It’s not my job to make you a better lawyer It is my job to make you a better economist

Economics is not a bunch of facts, it’s a set of tools We can point these tools at just about anything In this class, we’ll point them at laws and legal institutions But we’re more interested in the tools than in the answers

What is this class going to be about?

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To do well, you’ll have to learn to think like an economist This way of thinking comes naturally to some people… …but not to others If you “don’t get it”, you can’t get by memorizing a bunch of facts Someone in this class will get a C who’s never gotten a C before

Not trying to scare everyone off – I’d just rather say this now than after the first midterm

Relatedly, a warning:I THINK THIS IS A HARD CLASS

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unsatisfying answer:

“thinking about the law like an economist”

microeconomics is about how people respond to incentives

we’ll be using microeconomics (including a little bit of game theory) to analyze laws and legal systems the incentives they create and the actions and outcomes they lead to

What is Law and Economics?

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suppose something has happened

when a lawyer sees the case, the “damage is already done”

what’s left? assign blame maybe punish someone maybe move money around this is interesting to the people involved… …but it’s not interesting to economists!

“thinking about the law like an economist”: different from thinking about the law like a lawyer

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before the incident happened, lots of decisions were made

expectations/beliefs about what will happen after the fact influence these decisions

these decisions have an impact on outcomes

and these decisions therefore affect how much value is created (or destroyed) by society which is very interesting to economists

So what about the law is interesting to economists?

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So what about the law is interesting to economists?

LAWYERSECONOMISTS(you and me)

LAWYERS

Somethinghappens

LitigationCompensation

THE LAW

Decisions/Actions

CompensationLitigation

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You live in a state where the most severe criminal punishment is life imprisonment. Someone proposes that since armed robbery is a very serious crime, armed robbers should get a life sentence.

A constitutional lawyer asks whether that is consistent with the prohibition on cruel and unusual punishment.

A legal philosopher asks whether it is just.

An economist points out that if the punishments for armed robbery and for armed robbery plus murder are the same, the additional punishment for the murder is zero –

and asks whether you really want to make it in the interest of robbers to murder their victims.

Friedman, Law’s Order, p. 8

How economists think – an example

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So that will be our focus in this class

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But of course, that’s not the whole story

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But of course, that’s not the whole story

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Property law

Contract law

Tort law

Legal process

Criminal law

Other topics

Areas of the law we’ll cover

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A bit of history – the Common Law and Civil Law traditions

An example – dead whales (and baseballs)

Plan for the rest of today…

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A bit of history

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Two great Western legal traditions of the last millennium

(English) Common Law

Civil (Napoleonic) Law

A little confusing, because “civil law” also refers to a branch of the law within U.S. system

Criminal law – deliberate illegal acts punished by government

Civil law – lawsuits brought by one private party against another

We’ll touch on both, but most of class will focus on civil law issues, within both the Common Law and Civil Law traditions

A bit of history

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originated in 12th century England, underKing Henry II judges ruled according to local norms/customs “go out and find the law as it’s being practiced” now: new laws enacted by legislature judges interpret law, rely heavily on precedents each decision is a precedent for future cases

so common law originally rooted in common practices; can be changed by legislation; evolves with each new case

still basis for legal system in many English-speaking countries

The Common Law

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persists today in most of Western Europe, Central and South America, parts of Asia

originated following French Revolution judges, like king, were viewed as “corrupt and worthless” Napoleon commissioned a group of legal scholars to draft a new set

of laws – the Napoleonic Code

less reliance on historical norms and precedents attempt to explicitly spell out the law, starting from blank slate legal arguments appeal directly to written law, and commentary

The Civil Law

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Civil Law

orig. 18th century France

persists in Western Europe and some other places

based on “ancient sources and pure reason” (group of scholars with blank slate)

legal arguments appeal to interpretation of the law itself, and to commentary which clarifies its meaning

Comparing the Common Law and Civil Law traditions

Common Law

orig. 12th century England

persists in U.S., U.K., other English-speaking countries

based on existing practices and social norms

arguments focus on legal precedents, so law evolves as new precedents are set

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“Spontaneous order versus planned order”

“The common law is not shaped by a single mind, but a bottom-up aggregate of many individual plans”

Civil law was laid down at a particular time, meant to be more static

For an example of how the common law develops and responds to local practices…

Comparing the Common Law and Civil Law traditions

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Whaling

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Question: who owns a dead whale?

1700s-1800s – whales hunted for oil, bone, other valuable products

a captured whale could be worth 3-4 times a typical family’s yearly income

conflicts would sometimes arise over ownership

A nice example of how the common law responds to local norms and practices

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It frequently happens that when several ships are cruising in company, a whale may be struck by one vessel, then escape, and be finally killed and captured by another vessel….

[Or] after a weary and perilous chase and capture of a whale, the body may get loose from the ship by reason of a violent storm;

and drifting far away to leeward, be retaken by a second whaler, who, in a calm, snugly tows it alongside, without risk of life or line.

Thus the most vexatious and violent disputes would often arise between the fishermen…

- Melville, Moby Dick

What’s the problem?

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Examines 12 British and American court cases where ownership of a dead whale was contested

In each case, the local whaling industry had established norm for determining ownership Norms differed from place to place… …but were well-suited to that environment

And in each case, the common-law court ruled in accordance with the existing norms

R. Ellickson, A Hypothesis of Wealth-Maximizing Norms: Evidence from the Whaling Industry

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Established by British whalersin Greenland fishery Prey were right whales Hunting was done by harpoon

attached to whaling boat by rope

A harpooned whale attached to a boat was a “fast fish” and belonged to the boat it was attached to

If the whale broke free, or had not yet been harpooned, it was a “loose fish” and other ships were free to pursue it

One norm: “fast fish/loose fish”

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Used in fisheries where sperm whaleswere hunted sperm whales swim faster, dive deeper,

fight harder hunted with harpoons attached to “drogues” sperm whales swim in schools

The rule that developed: “iron holds the whale” if you harpoon a whale first, you own it… …as long as you remain in “fresh pursuit”

A different norm: “iron holds the whale”

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“Iron holds the whale” is more complicated

“Fast fish/loose fish” is a simpler, “bright-line” rule But wouldn’t work well with sperm whales

Tradeoff between simpler rule versus better incentives Simpler rule is easier to implement, fewer disputes But more complicated rule might be able to provide better

incentives

Clear tradeoff between the two rules

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Finbacks are extremely fast swimmers 19th-century whalers hunted them with bomb lances

Dead finbacks would sink, wash up on shore days later Norm developed that original killer and the finder of the whale

would split it Ghen v Rich (1881)

A third norm developed where finback whales were hunted

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Ellickson’s emphasis: in each location, norms developed which were well-suited to that particular environment

My point: in every case, the judge ruled in accordance with the local custom

Conclusions from Ellickson

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To connect it to more modern concerns…

I found a legal brief using same principles to determine ownership of a souvenir baseball Ownership of Barry Bonds’ 73rd home run ball was disputed Alex Popov had the ball in his glove first, but lost it in the scrum Patrick Hayashi ended up with the ball, both wanted it

So that’s whaling law

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“Simply put, the Court should adopt a rule of first possession for baseballs that recognizes the longstanding customs and practices of baseball fans who for more than seventy years have competed to catch and gain title to baseballs that leave the field of play…

With these principles in mind, the Court should define the law of first possession of baseballs… by answering two questions:

First, what is the custom, practice, and understanding of baseball fans about first possession and title to baseballs that enter the stands?

Second, should the rules as practiced in the stands be modified to minimize the risk of violence, misconduct, and tortious behavior?”

- Brian Gray, “Report and Recommendations on the Law of Capture and First Possession”

(in the end, ball was sold for $450,000, proceeds were split 50/50)

The brief perfectly captures the essence of the common law system:

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Next week, we’ll do some economics

If you’re not registered, make sure your name’s on the yellow pad

If you haven’t taken Econ 301 (or equivalent), please come talk to me

See you next Monday

So that’s a bit of law