Class 2 – Law & Social Norms SOCIAL NETWORKS, SOCIAL NORMS, AND BEHAVIORAL ANALYSIS LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL

COURSE OVERVIEW Yesterday’s lecture: The Rational Actor Model and Its Complications – How does classical economics assume people will behave and how consistent are these assumptions with laboratory and real-world observations? Today’s lecture: Law & Social Norms – What role do informal social norms play in supplementing formal law? Are such norms efficient? How are they enforced? When should we expect to see more / less formality? Wednesday’s lecture: Social Psychology & Personality Heterogeneity – Do people have similar or dissimilar personalities and dispositions? Can variation be understood in a systematic way? How might law be tailored in light of personality heterogeneity? Thursday’s lecture: Social Network Theory – How does information flow among people and within organizations? Is information transmission predictable? What are the economic consequences of particular pathways for information to flow? Friday lecture: Legal applications – How might behavioral law & economics influence regulatory policy? How do social norms incentivize the creation of intellectual property? Can personality explain variation in the way judges think about criminal procedure? Can social network theory explain and rationalize information privacy law? PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

STEWART MACAULAY & THE BIRTH OF THE LAW & SOCIETY MOVEMENT Non-Contractual Relations in Business: A Preliminary Study, 28 American Sociological Review 55 (1963). Key findings: Businessmen in Wisconsin pay little attention to contract law and often don’t confront key details unless forced to do so by a lawyer. They try to keep things simple and rely on handshakes and reputation, even in the face of serious risk Very common for businesses to proceed despite absence of binding contracts. No agreements on terms & conditions in the majority of cases studied State law requires definite quantities to be specified. Contracts for all the quantity a firm requires are unenforceable but widely employed. Unenforceability not a concern for transacting parties. Pricing clause of standard contract used by paper manufacturers is too vague to be enforced under state law. PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

STEWART MACAULAY & THE BIRTH OF THE LAW & SOCIETY MOVEMENT Non-Contractual Relations in Business: A Preliminary Study, 28 American Sociological Review 55 (1963). Key findings (continued): Businesses regularly elect not to pursue winning claims to preserve relationships with existing partners; litigation very rare, even when stakes are high; businessmen try to settle claims without lawyers’ involvement Lawyers regularly agree to contracts they know to be unenforceable Contracts routinely drafted for internal purposes (coordinate different departments within vertically integrated firm), not for bilateral purposes; Financial control department (auditor, general counsel, treasurer) wants contracts, but sales department does not – “just one more hurdle in the way of a sale.” Contracts most likely when a) long duration of dealings anticipated, b) great injury from default, c) informal remedies won’t work, d) large organizations with treasurers and comptrollers who seek to advance own prestige / position PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

STEWART MACAULAY & THE BIRTH OF THE LAW & SOCIETY MOVEMENT Non-Contractual Relations in Business: A Preliminary Study, 28 American Sociological Review 55 (1963). Why are non-contractual business relationships so widespread? Local knowledge about norms and customs fill contractual gaps Insurance and other mechanisms for risk spreading Informal sanctions very effective because of repeat play, reputation Social ties among CEOs, stock ownership of business partners Firms are both buyers & sellers, no systematic power imbalance Formal contracts cause delay and reduces flexibility Insistence on formal contracts may signal lack of trustworthiness (cf. pre-nups) Lawsuits are the “nuclear option.” They permanently terminate future relationship. PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

SUBSEQUENT KEY WORKS IN LAW & SOCIETY Law and Society: Readings on the Social Study of Law (Macaulay, Friedman & Stookey eds. 1995) Lawrence Friedman, The Legal System: A Social Science Perspective (1975) Bernard Harcourt, Illusion of Order: The False Promise of Broken Windows Policing (2001) Malcolm Feeley, The Process is the Punishment: Handling Cases in a Lower Criminal Court (1992) Lisa Bernstein, Private Commercial Law in the Cotton Industry: Creating Cooperation Through Rules, Norms, and Institutions, 99 Michigan Law Review 1724 (2001) and Robert Mnookin & Lewis Kornhauser, Bargaining in the Shadow of Law, 88 Yale L.J. 950 (1979). PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

QUESTIONS ON MACAULAY ? PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

WHAT’S THE BASIS FOR BARGAINING IN THE SHADOW OF THE LAW? Mnookin & Kornhauser’s 1979 canonical work assumes formal legal entitlements are critical: “Individuals in a wide variety of contexts bargain in the shadow of the law. Few automobile accident claims are ever tried; most are settled out of court. Criminal prosecutions typically resolve by a plea bargain. Most administrative proceedings result in consent agreements rather than trials. In each of these contexts, the preferences of the parties, the entitlements created by law, transaction costs, attitudes toward risk, and strategic behavior will substantially affect the negotiated outcomes. Indeed, we hope this article will stimulate and encourage further work by others in a variety of contexts. Theoretical and empirical research concerning how people bargain in the shadow of law should provide us with a richer understanding of how the legal system affects behavior, and should allow a more realistic appraisal of the consequences of reform proposals.” Final paragraph (p. 997). But Macaulay’s analysis suggests a basis for skepticism about the highlighted claim Robert Ellickson seeks to test this “legal centralist” intuition, asks what the starting point is for bargaining PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

LEGAL POSITIVISM / LEGAL CENTRALISM Legal centralism holds that the state is the exclusive creator of all property rights But there is a puzzle about the origins of these property rights. It seems that the existence of property rights may be a precondition for the formation of an effective government. But if that’s the case, how can the state be the exclusive source of property rights? Both property rights and government are both public goods depending on mutual cooperation. But what begins the virtuous cycle of cooperation that gives right to both? Legal Centralism implies that these formal entitlements are the starting point for any subsequent bargaining that occurs. Coase makes the same assumption in the work that forms the foundation for the Coase Theorem. See Ronald Coase, The Problem of Social Cost, 3 J. Law & Economics 1 (1960). Is what’s true of relational contracting (see Macaulay) also true of property, such that the property rights recognized by the states play a relatively peripheral role in structuring everyday relations and bargaining among people? PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

ROBERT ELLICKSON’S ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES First serious look by a Law & Economics scholar at social norms; winds up integrating Law & Society insights into Law & Economics Ellickson sets out to test Coase’s Problem of Social Cost, which uses a rancher-farmer dispute as its key numerical example: “A good example of the problem under discussion is afforded by the case of straying cattle which destroy crops growing on neighboring land. Let us suppose that a farmer and a cattle-raiser are operating on neighbouring properties. Let us further suppose that, without any fencing between the properties, an increase in the size of the cattle-raiser’s herd increases the total damage to the farmer’s crops… [Assuming zero transaction costs, the] size of the herd will be the same whether the cattle- raiser is liable for damage caused to the crop or not.” R.H. Coase, The Firm, The Market, and the Law 97, 103 (1988). PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

HOW DO RANCHERS AND THEIR NEIGHBORS SETTLE CATTLE TRESPASS DISPUTES? ELLICKSON TRAVELS TO SHASTA COUNTY, CALIFORNIA TO FIND OUT PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

SHASTA COUNTY, CALIFORNIA Population was 177,223 people in 2010; more than half this population is concentrated in Redding (population 89,861) Size is approximately 10,000 square kilometers (approximately 1.5 times the size of Shanghai) Per capita income $23,691 in 2010 ($29,634 is per capita income in California as a whole) 5.4% of population born overseas versus 27.2% for California as a whole PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

ELLICKSON DOES EXTENSIVE INTERVIEW, IS SURPRISED BY WHAT HE ENCOUNTERS Legal entitlements (open range versus closed range) seem not to matter to ranchers. Social norm is that rancher is responsible for damage caused by trespass regardless of legal entitlement. Ranchers either do not know formal law or know the contents of the law but choose to ignore it. They all know the social norms (example of bounded rationality?) Open range = livestock owners generally not liable for damage to unfenced land Closed range = livestock owners generally liable for damage to unfenced land Social Norms of “neighborliness” prevail Ranchers tolerate minor losses, put up with imbalances in accounts, incur costs of boarding other ranchers’ livestock, sometimes for months at a time. Self-help is dominant mechanism for exercising social control and lawsuits are extremely rare. Lawsuits between ranchers are essentially unheard of, and even insurance claims brought against each other are rare to non-existent. PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

HIERARCHY OF COUNTERMEASURES TO DAMAGE FROM CATTLE TRESPASS Lawsuit Claim with Insurance Policy Requests for Non- Monetary Compensation Complaints to County Officials, who may threaten range closure Violence Against Livestock Threats to Livestock Negative Gossip PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

WHY IS GOSSIP SO EFFECTIVE? Repeat play Mutliplex relations (interactions in many different contexts) People care about their reputations But why? More on this later Gossip is effective – it gets results Gossip is inexpensive – it is free or nearly free to the complainant but still may have both deterrent and adjudicative effects False gossip is evidently quite rare But why? Sanctions for telling falsehoods must be great, though this isn’t discussed extensively. This is an important research question. Only a few idiosyncratic people (i.e., Frank Ellis) are indifferent to reputation and thus not effectively sanctioned by gossip, though even he offers in-kind compensation to Larry Brennan after Ellis’s cattle consume 6,000 kilograms of Brennan’s hay (p. 213). PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

WHY DO THREATS FROM SUPERVISORS AFFECT RANCHERS BEHAVIOR? Question: If the threat is closing the range, but the open versus closed range distinction is ignored, what generates deterrence? Answer: Ranchers do not sue each other. But ranchers get sued by non-ranchers. “Ranchette” owners Farmers Motorists PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

WHAT ARE THE SOCIAL WELFARE EFFECTS OF THESE SOCIAL NORMS? Ellickson asserts that they are welfare-maximizing Transaction costs minimized Ann Kershaw: “The only one that makes money when you litigate is the lawyer.” Litigation creates bad blood. Recall Macaulay’s idea that it terminates a relationship. Relationships can recover from negative gossip or even violent self help But note that not all observers are so optimistic about the social welfare effects of violent self help. See, e.g., Jon Elster, Norms of Revenge, 100 Ethics 862 (1990). Litigation is very slow Litigation is not usually satisfying for a plaintiff. Articulating a complaint via negative gossip may produce many of the same psychological effects as filing a lawsuit would for complainant. See generally Jones et al., 26 J. Hospitality & Tourism Research 105 (2002); Mattila & Writz, 18 J. Services Marketing 147 (2004); Nyer, 17 J. Consumer Marketing 9 (2000); Pennebaker, 19 Literature & Medicine 3 (2000). PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

NEXT: DISCUSSION OF WHALING ARTICLE NOW: QUESTIONS ON SHASTA COUNTY ? PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

SHOULD INFORMAL NORMS DETERMINE CONTENTS OF LAW IN ADJUDICATION? If law tracks social norms then the law can be enforced at a low cost Population already knows content of norms; there is no marginal expense for educating them about the content of the law. Most people already adhere to the norms. Laws that track norms may have greater legitimacy, both among law enforcers and regulated population Recall example from Ellickson (p. 216) of rancher who castrated a trespassing bull with tacit approval from key law enforcement official But it’s possible that the norms work well precisely because the formal law is a cumbersome mechanism for resolving disputes. Importing the content of norms into formal law may make people too likely to use formal law, with its attendant transaction costs. Cumbersome formal law could function in a manner similar to a penalty default rule. See Ayres & Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Penalty Default Rules, 99 Yale L.J. 87 (1989). PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

A RELATED WORK BY ELLICKSON ADDRESSES THIS QUESTION AND OTHER IMPORTANT ONES Robert C. Ellickson, A Hypothesis of Wealth-Maximizing Norms: Evidence from the Whaling Industry, 5 Journal of Law, Economics & Organization 83 (1989). Looks at the evolution of property rules in the whaling industry (5 th biggest American industry in 1850; most houses lit by whale-oil lamps) Examines the feedback effects between formal law and informal norms among whalers Articulates a formal hypothesis about the welfare effects of particular social norms PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

POSSIBLE RULES FOR WHALE OWNERSHIP Possession of the Whale is decisive proof of ownership Killer of the Whale gets the property right First pursuer of the Whale gets the property right First whaler to establish a “reasonable prospect of taking the whale” gets the property right Fast-Fish, Loose-Fish: First to harpoon the whale and maintain connection between harpoon and ship gets the property right, for as long as the whale and ship remain connected Iron Holds the Whale: First to harpoon the whale gets the property right, which is retained for as long as the harpooner remains in fresh pursuit of the wounded whale Split Ownership: Harpooner and Finder / Possessor split ownership of whale, with ratios ranging from 90/10 to 50/50 PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

WHALES DIFFER IN SIZE, BEHAVIOR, AND PROPERTIES PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

ELLICKSON’S CLAIM IS THAT THE RULE BEST ADAPTED TO A PARTICULAR KIND OF WHALE PREVAILS Fast-Fish, Loose-Fish: First to harpoon the whale and maintain connection between harpoon and ship gets the property right, for as long as the whale and ship remain connected Norm emerges in Greenland prior to 1800 among British whalers Well-adapted to right whale, a slow, docile whale that was commonly hunted there PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

ELLICKSON’S CLAIM IS THAT THE RULE BEST ADAPTED TO A PARTICULAR KIND OF WHALE PREVAILS Iron Holds the Whale: First to harpoon the whale gets the property right, which is retained for as long as the harpooner remains in fresh pursuit of the wounded whale Norm emerges in 1800s among American whalers Well adapted to sperm whales, which are stronger and more aggressive than right whales, and which swim in groups Lends itself to drogue fishing, whereby a float is attached to harpoon line, which increases drag and tires the whale so it can be killed PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

ELLICKSON’S CLAIM IS THAT THE RULE BEST ADAPTED TO A PARTICULAR KIND OF WHALE PREVAILS Split Ownership: Harpooner and Finder / Possessor split ownership of whale, with ratios ranging from 90/10 to 50/50 Norm emerges among whalers around Galapagos Islands (part of modern Ecuardor) Norm also emerges in United States in 1800s, especially in areas with plentiful finback whales, which are exceptionally fast, are hunted with bomb lances, and which sink to ocean floor after being killed, but rise to the surface several days later, perhaps carried a long distance by ocean currents PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

GHEN V. RICH, 8 FED. 159 (D. MASSACHUSETTS 1881) Rare litigated case in which American whalers litigate over ownership of a whale. Case involved a finback whale that was killed by Ghen (a Provincetown whaler), floated out to sea, and then was brought ashore by non-whaler (a Wellfleet resident named Ellis) who found it 27 kilometers from spot where it was killed, who sold it to Rich The court awards all the value to the whaler (no salvage to finder because finder breached the social norm), saying this about the prevailing social norm: The usage on Cape Cod, for many years, has been that the person who kills a whale in the manner and under the circumstances described, owns it, and this right has never been disputed until this case.... I see no reason why the usage proved in this case is not... reasonable... It has been recognized and acquiesced in for many years. It requires in the first taker the only act of appropriation that is possible in the nature of the case. Unless it is sustained, this branch of industry must necessarily cease, for no person would engage in it if the fruits of his labor could be appropriated by any chance finder. It gives reasonable salvage for securing or reporting the property. That the rule works well in practice is shown by the extent of the industry which has grown up under it, and the general acquiescence of a whole community interested to dispute it.... I hold the usage to be valid. PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

HOW ARE THESE NORMS ENFORCED INTERNATIONALLY? THIS ISN’T SHASTA COUNTY Whaling industry is international, but a small number of towns dominated the industry. In the early 1800’s Nantucket was home to half the North American fleet, and the same was true between roughly 1820 and 1860 of New Bedford Lots of social and economic links among American, British, French whalers – captains subject to gossip, whaling ships need to trade with each other and share news & mail PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

WERE THE NORMS WELFARE-MAXIMIZING FOR WHALERS? Ellickson says yes Norms were adaptable to different attributes of different species of whales Norms varied by location, not by species being hunted Plausibly efficient anyway, since whalers don’t always know what sort of whale they are approaching, and whale-specific rules would have generated complexity and greater likelihood of misunderstanding. But this response is not fully satisfying. Very little litigation – the rules were well-understood by industry participants Rules plausibly not welfare maximizing for society as a whole. They seemed to have resulted in overfishing. Command and control regulation, trade industry regulation, or tradable catch rights with strong enforcement probably necessary to enforce optimal catch limits & promote sustainability. But the rules probably did maximize the welfare of incumbent whalers. PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

ELLICKSON’S WEALTH-MAXIMIZING HYPOTHESIS “Members of a close-knit group develop and maintain norms whose content serves to maximize the aggregate welfare that members obtain in their workaday affairs with one another.” (Ellickson, Order without Law at 167). A group is close-knit “when informal power is broadly distributed among group members and the information pertinent to informal social control circulates easily among them (Id. at ). Workaday affairs excludes foundational rules (ground rules that enable group members to engage in exchange) and purely distributive rules (e.g., norms of charity). (Id. at ). “Wealth maximizing norms minimize the members’ objective sum of (1) transaction costs, and (2) deadweight losses arising from failures to exploit potential gains from trade.” (Ellickson, Whaling at 84). PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

DOES THE EVIDENCE SUPPORT THIS HYPOTHESIS? Shasta County? We already know Ellickson says yes Whaling? We already know Ellickson says yes Macaulay’s Businessmen Ellickson says yes. See Order without Law at (discussing norms of “commitments to be honored,” “one ought to produce a good product and stand behind it,” and “do not lie about what you are trading” as plausibly welfare maximizing) PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

NEXT: HOW AND WHY DO NORMS ARISE? NOW: QUESTIONS ON WHALING AND WELFARE ? PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

HOW DO SOCIAL NORMS GET ENFORCED? RICHARD MCADAMS VERSUS ERIC POSNER Richard H. McAdams, The Origin, Development, and Regulation of Norms, 96 Michigan Law Review 338 (1997). People seek the esteem of others for its own sake; it’s an important part of human well-being Adhering to and enforcing social norms both heighten the esteem with which others regard the adherent / enforcer Norms change thanks to norm entrepreneurs who show that existing norm is either not beneficial or not adhered to; successful norm entrepreneurs get large esteem rewards PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

HOW DO SOCIAL NORMS GET ENFORCED? RICHARD MCADAMS VERSUS ERIC POSNER Eric Posner, Law and Social Norms (Harvard University Press 2000). People adhere and enforce social norms as a strategy to signal their worthiness for future advantageous cooperation (people with low discount rates likely to cooperate). Social cooperation arises when a) people have a sufficiently low discount rate, b) people have sufficient information about everyone else, and c) people adopt cooperative strategies (especially when gains from cooperation are great) Many social norms signal the low discount rate of the person who is adhering to them (e.g., volunteering for military service in wartime). Others signal investment in a relationship (e.g., personalized gifts or involvement in a trade association). PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

OTHER IMPORTANT ASPECTS OF ERIC POSNER’S THEORY OF SOCIAL NORMS He is trying to make existing practices concerning social norms consistent with a rational actor model. At times his account is ingenious, at other times it is not plausible. The fundamental theoretical framework is a prisoner’s dilemma In a single-shot game, cooperation maximizes the joint welfare of the parties, but each party assumes the other will defect, and the result minimizes the joint welfare of the parties. Repeat play will induce high levels of cooperation in the prisoner’s dilemma, but if individuals care much more about this round than future rounds (high discount rate), then they are more likely to defect CooperateDefect Cooperate2, 20, 3 Defect3,01,1 PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

OTHER IMPORTANT ASPECTS OF ERIC POSNER’S THEORY OF SOCIAL NORMS Imagine a signaling model (Michael Spence, Job Market Signaling, 87 Quarterly J. of Economics 355 (1973)), with good types and bad types Good types benefit from likelihood that transaction-partners will cooperate with them in repeat-play transactions. People don’t enter into transactions or else defect in transactions with bad types (high discount rate people) because the assumption is these bad types will defect. Social norms arise when people signal that they are a good type by adhering to the norm. Norms often: Show self restraint / lack of imuplsiveness Are costly signals, not cheap talk (e.g., fancy office space) Are observable (sometimes concealing norm violations is itself a positive signal) Involve arbitrary behavior, with pure signaling value (e.g., gift giving practices) PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

AN APPLICATION TO PRICE-GOUGING Recall Jolls et al.’s explanation for resistance to price-gouging. Previous prices establish a reference point, which functions as an anchor for future transactions. Deviations from that anchor cause people to become upset. Posner (pg. 26) says that firms voluntarily elect not to price gouge in situations where they can do so (e.g., after natural disasters) because doing so signals to consumers that they are “good types” not opportunistic “bad types” whose reputation will be solid over the long term. Raising prices signals a high-discount rate, which signals that a firm is a poor cooperative partner But why is that signal sent? Maybe consumers want to do business with firms that will make the most of market opportunities, signaling aggressiveness or a propensity to out-compete other firms in the industry. Absent some Jolls-like explanation for consumer attitudes, it is hard to understand Posner’s theory. And Posner’s signaling account doesn’t explain why laws prohibit price gouging / ticket scalping amidst scarcity. (Of course, he is trying to explain social norms, not formal law.) PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

WHEN ARE NORMS VIOLATED? When people care more about the intrinsic benefits of the behavior at issue than they do about the signal sent by engaging in that behavior. When extremely powerful people are involved. They have so much power that people need to cooperate them regardless of what signals they are setting. Government leaders (especially unelected leaders) or leaders of other monopolies can be idiosyncratic and need not signal a low-discount rate to get people to cooperate with them. Norms change rapidly and people fail to notice. Norms differ from community to community, and an outsider is confronted with a confusing set of social norms. (e.g., different norms about gift-giving to academics in universities in the United States and China; different norms and ceremonies regarding the use of business cards). Sub-groups members signal propensity to cooperate with each other by adopting norms hostile to those of majority group (.e.g., teenagers’ counterculture). Rejecting a deeply embedded majoritarian norm is itself a costly signal. PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

CAN WELFARE-MAXIMIZING SOCIAL NORMS EMERGE IN LOOSE-KNIT GROUPS (SUCH AS CITIES)? Strahilevitz, Social Norms from Close-Knit Groups to Loose-Knit Groups, 70 University of Chicago Law Review 359 (2003). Strahilevitz, “How’s My Driving?” for Everyone (and Everything?), 81 New York University Law Review 1699 (2006). Strahilevitz, Information and Exclusion (Yale University Press 2011). McLaughlin & Vitak, Norm Evolution and Violation on Facebook, 14 New Media & Society 299 (2011). Abrams & Strahilevitz, Do More Eyes on the Road Mean Better Driving? A Field Experiment (presented at American Law & Economics Association Annual Meeting, 2013). PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

LAW & SOCIAL NORMS: OTHER KEY READINGS Robert Cooter, Expressive Law & Economics, 27 Journal of Legal Studies 585 (2000). Adrian Laanni, Social Norms in the Courts of Ancient Athens, 1 Journal of Legal Analysis 691 (2009). Lawrence Lessig, The Regulation of Social Meaning, 62 University of Chicago Law Review 943 (1995). Dan M. Kahan, Gentle Nudges vs. Hard Shoves: Solving the Sticky Norms Problem, 67 University of Chicago Law Review 607 (2000). Dotan Oliar & Christopher Sprigman, There’s No Free Laugh (Anymore): The Emergence of Intellectual Property Norms and the Transformation of Intellectual Property, 94 Virginia Law Review 1787 (2008). Jeffrey J. Rachlinski, The Limits of Social Norms, 74 Chicago-Kent Law Review 1537 (2000). Cass R. Sunstein, Social Norms and Social Roles, 96 Columbia Law Review 903 (1996). PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS

QUESTIONS: WHAT ELSE WOULD YOU LIKE TO DISCUSS? ? PROFESSOR LIOR STRAHILEVITZ, UNIVERSITY OF CHICAGO LAW SCHOOL 2013 SUMMER SCHOOL IN LAW & ECONOMICS