Presentation is loading. Please wait.

Presentation is loading. Please wait.

Games for Judges: An Approach to the Design of Legal Liability Rules Sergey Knysh, Paul M. Goldbart & Ian Ayres w3.physics.uiuc.edu/~goldbart.

Similar presentations


Presentation on theme: "Games for Judges: An Approach to the Design of Legal Liability Rules Sergey Knysh, Paul M. Goldbart & Ian Ayres w3.physics.uiuc.edu/~goldbart."— Presentation transcript:

1 Games for Judges: An Approach to the Design of Legal Liability Rules Sergey Knysh, Paul M. Goldbart & Ian Ayres w3.physics.uiuc.edu/~goldbart Department of Physics University of Illinois Yale Law School New Haven, CT Michigan Law Review,100 (Centenary Volume), 1-79 (2001) Preprints (2002): Design of Efficient Legal Liability Rules: I. Continuous Extension of Multistage Rules II. Comparison of Discrete Vanilla and Exotic Variants

2 Outline  Property rules & liability rules  Nuisance dispute settings  Options view of liability rules  Optimizing liability rules  Continuum liability rules  Game-theoretic viewpoint  Practical advice for courts

3 Property rules & liability rules  Property rules: protect by deterrence  Liability rules: protect by compensation

4 Property rules & liability rules  Example: Abbott breaks Costello’s arm  Intentionally?  focus on taker’s welfare (a criminal offence)  traditionally protect via a property rule  Through negligence?  focus on takee’s welfare (compensatory damages)  traditionally protect via a liability rule

5 Property rules & liability rules  But property rules are not very efficient  Example: Laurel steals Hardy’s hat?  Property rule: Hardy can sue to recover hat (replevin)  Liability rule: Can also sue for value of hat (trover)  Advantage? If hat is worth $10 to Laurel, $5 to Hardy?

6 Property rules & liability rules  Liability rules are more efficient  Example: Fred holds over in Barney’s apartment  Barney can sue for trespass  or to force Fred to rent for another year  Goal of liability rules:  Add efficiency — by compensating initial entitlement holder for transfer of entitlement (goes beyond mere deterrence)

7 Concerns of judges re liability rules  Traditional view:  identity of the initial entitlement holder  compensation as deterrence  Modern view:  identity of the more efficient chooser  decouple allocative and distributional concerns  liability rules: a means by which an imperfectly informed court can delegate choice to private litigants thus harnessing their superior information

8 Central aims  Focus on nuisance dispute settings  Provide courts with liability rules that are  economically efficient  cheap to implement

9  A/c noise reduced value of adjacent residence  Estancias Dallas Corp. v. Shultz (Tex. App. 1973)  Hotel addition obstructed view of adjacent hotel  Fontainbleu Hotel v. Twenty-Five Twenty-Five Inc. (Fl. 1959)  Dog-track lights interfered w/ drive-in movie theater  Amphitheaters, Inc. v. Portland Meadows (Or. 1948)  Pollution from Con Ed plant disrupted new car preparation business  Copart Indus. v. Con. Ed. Co. (N.Y. 1977) Examples of nuisance disputes

10 Property rules & liability rules  What might courts do in nuisance disputes?  E.g. Boomer v. Atlantic Cement (N.Y. 1970)  Resident/Plaintiff (Boomer): discomforted by pollution  Polluter/Defendant (Atl. Cem.): factory operator  After Calabresi & Melamed (’72):  Rule 1: nuisance  injunction on Polluter (stop!)  Property rule  Rule 2: nuisance  Polluter pays damages to continue  Liability rule  Rule 3: not a nuisance  Polluter continues  Property rule  Rule 4: nuisance?  Resident pays Polluter damages to stop  Liability rule

11 Options: Calls and Puts  Call option  choice of whether or not to pay a non- negotiated amount to purchase entitlement  choice of forcing seller to sell (be paid)  Put option  choice of whether or not to be paid a non- negotiated amount to sell entitlement  choice of forcing buyer to buy (pay)

12  Rule 2: Polluter can pay damages to continue  Liability rule: initial entitlement to Res; call option to Pol  Rule 4: Resident can pay damages to stop Polluter  Liability rule: initial entitlement to Pol; call option to Res  Rule 5: Polluter can require damages & stop  Liability rule: initial entitlement to Pol; put option to Pol  Rule 6: Resident can require dam’s & allow Polluter  Liability rule: initial entitlement to Res; put option to Res Liability rules as options (Morris ’93)  Put: buyer forced to buy  Call: seller forced to sell  Who pays? Who chooses who pays?

13  Rule 2: Entitlement to Resident; call to Polluter  Boomer v. Atlantic Cement (N.Y. 1970)  Rule 4: Entitlement to Polluter; call to Resident  Spur Indus., Inc. v. Del E. Webb Dev. Co. (Ariz. 1972)  Rule 6: Entitlement to Resident; put to Resident  Thelma builds an encroaching wall on Louise’s land; Louise can sue Thelma to remove the wall or to force Thelma to buy the encroached land permanently Realizations

14  Imperfectly informed court  Explore classes of rules  Which to use? Ex post efficiency as criterion  Vanilla rules  Exotic rules  dual-chooser rules (vetos, higher-order,…)  Emerging guidelines for courts Basic ingredients for analyzing liability rules

15 Imperfectly informed courts In any given instance  Plaintiff P  Defendant D  P alone knows her valuation,  D alone knows his,  P, D & court know j.p.d. i.e. joint probability distrib. of valuations (possibly correlated) value of asset to plaintiff value of asset to defendant D is higher valuer P is higher valuer j.p.d.

16 Imperfectly informed courts: Property rule What might the court do?  compute means w.r.t. : &  allocate asset to higher mean valuer (here: D) value of asset to plaintiff value of asset to defendant D is higher valuer P is higher valuer mean values inefficient!  What can the court do to promote better efficiency?

17 Imperfectly informed courts: Liability rule One stage / Call flavour  The court could…  allocate asset to P  give call option to D  set damages  How would D respond?  by exercising option when worth it to him  How to set damages?  to elicit a response that maximizes the expected total value  So… where to arrange the bar? Resp. profits (to P, to D)? if D exercises if D doesn’t

18 Imperfectly informed courts: Liability rule One stage / Call flavour  Upshot…  optimally efficient (i.e. best mean total profit) if D “pivots” at nonchooser’s mean  (rational) D does this if damages are also at nonchooser’s mean if D exercises Resp. profits to P & D ? if D doesn’t

19 Imperfectly informed courts: Liability rule One stage / Put flavour  The court could…  allocate asset to P  give put option to P  set damages  How would P respond?  by exercising option when worth it to her  How to set damages?  to elicit a response that maximizes the expected total value  So… where to arrange the bar? Resp. profits (to P, to D)? if P does put if P doesn’t put

20 Imperfectly informed courts: Liability rule One stage / Put flavour Resp. profits (to P, to D)? if P does put if P doesn’t put  Upshot…  optimally efficient (i.e. best mean total profit) if P “pivots” at nonchooser’s mean  (rational) P does this if damages are also at nonchooser’s mean

21 Imperfectly informed courts: Veto rule  The court could…  allocate asset to P  give call option to D at damages  give call option to P at same damages  Transfer to D can be vetoed by D or P  So… where to arrange the bars? Resp. profits (to P, to D)? D takes but P doesn’t take back D doesn’t take D takes and P takes back

22 Imperfectly informed courts: Veto rule  Upshot…  efficient for D to pivot at damages  efficient for P, too  Optimal damages obey straightforward formula D takes but P doesn’t take back D doesn’t take D takes and P takes back

23 “Phase diagram” for rules  uniform rectangular j.p.d., 1/  is the golden ratio  P mean, range 2 ; D mean, range 2  rules: property (Pr), one-stage liability (Li), veto (Ve)  Simplest setting… …roughly SCR: select more vola- tile valuer as chooser DCR: select lower mean valuer as vetoee SCR v. DCR: select SCR if diff. in var’s exceeds diff. in means

24 Multi-stage liability rule: Call flavour  The court could give…  asset to P  call option to D at damages  call-back option to P at damages  call-back option to D at damages  call-back option to P at damages  …..  How to choose the damages?  So… where to arrange the bars? Resp. profits (to P, to D)?

25 Multi-stage liability rule: Call flavour  Find pivots that max. expected total value  Set damages to elicit these responses  Strategic over-bidding (pivots smaller than damages)  Note: shrinking areas of inefficiency

26 Infinite-stage liability rule: Call flavour  Discrete damages  damages functions  Reparametrization  can take  Discrete pivots  pivot functions  Optimal pivot functions  converge to diagonal  perfect efficiency

27 Infinite-stage liability rule: Call flavour  Rational D & P pivot optimally, provided damages functions obey  simple ODE’s  simple BC’s  Solvable (to quadratures) for any j.p.d. (including arbitrary correlations)

28 Infinite-stage liability rule: Call flavour  Illustrative example  uniform triangular (correlated)  readily solvable  General distributions…  what aspects of j.p.d feature?  simple geometry if j.p.d. uniform (even if shape gives corr’s)

29 Infinite-stage liability rule: Call flavour How to use the results  Court computes parametric damages curve  And requires D & P to “bid”  bids separate call-exercise from non-exercise ranges  Asset goes to higher bidder  for damages projected from lower bid (to higher bidder’s axis)  Asset ends up in hands of higher valuer

30 Infinite-stage liability rule: Call example  Use? Litigants issue bids  Asset goes to higher bidder  At damages set by lower bid  j.p.d. a uniform “2 x 1” rectangle (no correlations)

31 Game-theoretic aspects  Introduce generalized damages functions  And strategy functions  what P & D bid, given their private valuations  P’s expected profit  D’s expected profit efficient

32 Game-theoretic aspects  Seek Nash Equilibrium (my strategy is optimal for me if you fix yours, & vice versa)  Make simple choice for damages functions  Demand that the N-E strategies be “revealing”  Upshot: previous call-option damages conditions  Court has made it so that it pays not to lie!

33  Explore classes of liability rules  single-chooser, veto, continuous  decouple allocational & distributional concerns  Property rules  give entitlement to (estimated) higher valuer  suggested as a general practice, but…  Liability rules  do better — by harnessing private information  continuous versions can be fully efficient  go to end-stage, limit transaction costs Emerging guidelines

34


Download ppt "Games for Judges: An Approach to the Design of Legal Liability Rules Sergey Knysh, Paul M. Goldbart & Ian Ayres w3.physics.uiuc.edu/~goldbart."

Similar presentations


Ads by Google