1. Econ 522 Economics of Law
Dan Quint
Fall 2010
Lecture 1

2. This is Econ 522, Economics of Law I’m Dan Quint
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

3. Plan for today Logistics/syllabus
Overview: what is the semester going to be about?
Some history
Common law and civil law traditions
Example: dead whales and baseballs

4. Website Course website: http://www.ssc.wisc.edu/~dquint/econ522
(Or UW Econ  “Undergraduate”  “Course Information”  “522”)
(Or Google “Econ 522”)
Website has…
Syllabus
My slides and lecture notes (after, hopefully before each lecture)
Homeworks
Sample exam problems from past years

5. Logistics Teaching Assistants: Fran Flanagan and Joanna Syrda
Sections on Fridays, beginning next week (Sept 17)
Questions about section – talk to TAs
Office hours
Me: Tuesdays, 1:30 – 3:30 p.m. (other times by appointment)
Fran: TBA
Joanna: TBA

6. Grading Grades are based on Homework
occasional homeworks (probably 4 or 5) – 20%
two midterms – 20% each
final exam – 40%
Homework
generally due on Fridays – turn in during section, or leave in TA’s mailbox, or to TA
you’re welcome to work together on homeworks
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

7. Exams Midterms tentatively scheduled for Oct 13 and Nov 10
Final is December 20
Please let me know EARLY if…
you have an exam conflict, or
you’re a McBurney student and need special accommodations
Attending section
Attending lecture

8. Readings Textbook: R. Cooter and T. Ulen, Law and Economics
older versions are fine (but…)
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 (links on syllabus)
Textbook: Robert Cooter and Thomas Ulen, Law and Economics
heavy, green, expensive
current version is 5th Edition
I don’t mind if you use an earlier version (but…)
Another book I like: David Friedman, Law’s Order
I use stuff from here in lecture sometimes
book is available free online (link on syllabus) – think of it as an “optional second textbook” (shorter/lighter)
much less comprehensive than Cooter and Ulen, but very thoughful/insightful on the things he covers
Additional readings
available online (links on syllabus), stars next to most important
most of the links are through JSTOR, which may only work through on-campus computers – let me know if you have trouble accessing the papers
Other books related to law and economics on the syllabus

9. Before we get to what this class is about…
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
That’s about it for logistics – everything’s on the syllabus, which is on the website – so let’s turn to the question of, what is this class going to be about?
First of all, it’s not going to be about the law
Well, OK, fine, obviously, that’s not true, it’s sort of going to be about the law
But you all are not in law school, you’re in an undergrad economics class
And more to the point, I’m not a lawyer
I’m not licensed to practice law in the state of Wisconsin or anywhere else, I’ve never been to law school, I honestly didn’t know that much about the law when I arrived at UW three years ago
What I am is an economist, and a professor in the economics department here
So even though this class has “law” in the title, it’s not my job to make you a better lawyer; it’s my job to make you a better economist
What does that mean?
Well, as I see it, economics is not a bunch of facts – being a better economist does not mean knowing the GDP of Chile, or which way interest rates move if there’s a trade imbalance
Economics is a way to look at the world, a way to analyze situations – a set of tools
And we can point these tools at just about anything
In this class, we’ll be pointing these tools and laws and legal institutions
But I want to be clear that the point of this class is more about the tools than about the answers
On the final exam, I won’t be impressed if you can regurgitate random facts from this semester, like the difference between strict liability and negligence, or even which one will lead to more accidents in a particular situations
What I want is for you to know how to find that answer for yourself – to be able to use the tools of microeconomics to answer questions about how the world will work

10. Relatedly, a warning: THIS IS A HARD CLASS
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
To do well in this class, you’ll have to learn to think about problems in a certain way
This type of thinking comes easily to some people, not to others
If you can’t learn to think in this way, there’s nothing you can memorize to do well in this class
Someone in this class will get a C who’s never gotten a C before
If you took intermediate micro and everything clicked – things naturally made sense – there’s a good chance you’ll do well in this class
If you struggled in 301, or are afraid of derivatives, you may have a very hard time in this class
I’m not trying to scare people off, I just want to be up-front that this is a hard class

11. What is “Law and Economics”?

12. What is Law and Economics?
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
as I said, I’m an economist, not a lawyer
so I’ll start with a fairly unsatisfying answer:
“thinking about the law like an economist”
microeconomics is about how people respond to incentives
how a consumer responds to a price
how a firm responds to a competitor’s actions
how a politician responds to political pressures
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

13. How do economists look at the law differently than lawyers?
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!
suppose something has happened
a car hit a bicylist
my construction company ordered 16 tons of steel and a shipping company failed to deliver it
someone murdered his wife
when a lawyer sees the case, the “damage is already done”
the incident already occurred
the bicyclist’s leg is already broken, construction is delayed, the wife is dead
what’s left is to assign blame, and maybe punish someone or have someone give money to someone else
this is interesting to the people involved – if you’ve been hit by a car while riding your bike, you care a lot about whether you’re entitled to damages
and interesting to your lawyer
but it’s not interesting to economists
what happens after the incident is generally just resources being transferred from one person to another
no new value is being created at this stage

14. So what about the law is interesting to economists?
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
before the incident happened, lots of decisions were made
driver decided how fast to drive
bicyclist decided whether to wear a helmet
shipping company decided how far ahead to plan delivery
my construction company decided how much to depend on that steel shipment arriving on time
expectations/beliefs about what will happen after the fact influence these decisions
if the driver knows he’ll be punished severely for the accident, he might take a cab home from the bar, or drive slower
if the bicyclist knows he won’t be compensated if he’s in an accident, he might be more likely to wear a helmet, or reflective clothing
if my construction company knows shipper won’t be punished for failing us, we might not bid on a big project
these decisions have an impact on outcomes
how many accidents happen
how many construction projects are begun, and completed
and so on
and these decisions therefore affect how much value is created (or destroyed) by society
and this is very interesting to economists

15. So what about the law is interesting to economists?
Decisions/ Actions
THE LAW
Compensation
Compensation
Something happens – a car hits a bicycle, a steel shipment is delayed, someone kills his wife
This leads to litigation… which leads to some legal outcome
And the law, of course, affects what outcome is reached
All of this – everything that happens after the initial event – is the domain of lawyers
But we’re not lawyers
No new wealth is created or destroyed by me writing you a check
It might seem fair if I at least pay for the damage I did
But from an economic point of view, once the accident has happened, who bears the cost is uninteresting
So let’s put all that aside for now
Because the law affects what outcome will be reached after the fact,
it also changes the decisions people make and actions people take
That is, it impacts how we behaved leading up to the accident
If I know that drivers who hit bicyclists have to pay huge cash settlements, I might drive more slowly – or take a cab if I’m planning to drink – or I might have chosen not to drive at all that day
If you know that bicyclists who get hit by cars don’t owe anything, you might bicycle less, or only on bike paths, or you might be more likely to wear a helmet
And these choices affect whether or not the accident occurs, or how much damage is done
Or whether steel gets delivered, and whether a big construction project ever even gets planned
All of this is interesting to economists
I’m an economist
And for the purposes of this class, so are you
So this is the part we’ll be focusing on
(Another way to think about it:
Everything that happens after the accident, affects the distribution of wealth in the economy, but not the total amount of wealth
That’s what lawyers are fighting over
Everything that happens before the accident, affects the total amount of wealth in the economy
That’s what we, as economists, are interested in.)
Litigation
Litigation
Something happens
ECONOMISTS
LAWYERS
LAWYERS
(you and me)

16. How economists think about the law differently – an example
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

17. So that will be our focus in this class
So that’s our focus in this class
Looking at how the law, by setting expectations about what will happen, changes peoples’ behavior
And through that behavior, how it affects economic outcomes

18. But of course, that’s not the whole story
So that’s our focus in this class
Looking at how the law affects peoples’ behavior
And through that behavior, how it affects economic outcomes

19. But of course, that’s not the whole story
Of course, this isn’t the whole story
The laws themselves have to come from somewhere
In our system, new laws are passed by the legislature, and interpreted by judges
Legislators and judges are people, who respond to incentives like anyone else
Legislators and judges also come from somewhere – legislators are elected, and judges are elected or appointed, and the voters themselves respond to incentives as well
All this is done within a system specified in a constitution of some sort…
Which is itself the outcome of some sort of process
This is all fascinating stuff for political economists, political scientists, constitutional scholars, legal philosophers, historians…
…but outside the scope of this class
In addition to this, things other than the law can influence peoples’ behavior
Robert Ellickson, in a book titled “Order Without Law: How Neighbors Settle Disputes,” argues that often peoples’ behavior depends not on the law itself, but on social norms like what it is believed to take to be a “good neighbor”
I might choose not to speed, even if I’m not liable for hitting people, because speeding is perceived as being thoughtless and rude; or because if I did hit someone, I might not be liable, but I would worry about being ostracized
Nonetheless, for this class, we will be focusing on this lower-left corner
we will be examining the effect that the law has on outcomes, assuming that people do indeed take the law into consideration when deciding how to act;
and we’ll mostly be looking at laws as if they “fell from the sky” – not worrying about where they came from, just taking them as given, and examining the incentives they create and the effects that they’ll have

20. Topics Property law Contract law what things can be owned?
what can (and can’t) owners do with their private property?
Contract law
what can and can’t we contract on?
what constitutes a legal contract?
what happens if one of us doesn’t live up to our end of a contract?
what “default rules” stand in for terms we don’t specify?
Property law
a couple of the key questions that a property law system has to answer:
what things can be owned?
what can (and can’t) owners do with their private property?
the answers sometimes seem obvious
this is my iPhone, you can’t take it from me
but lots of “edge cases” where things are less clear
do we own our bodies? (we can sell our blood, but we can’t sell our kidneys, can’t sell ourselves into slavery)
does my right to be undisturbed on my property trump your right to have people over and make noise?
if you own a house and the government wants to build a school, or a road, or a park, they can force you to sell
if I lose my wallet and you find it, is it yours, or do you have to give it back?
Contract law
what can and can’t we contract on?
can’t contract for sex
if I contract to buy drugs from you and you take my money and run, I can’t sue you
what constitutes a legal contract?
what happens if one of us doesn’t live up to our end of a contract?
what “default rules” stand in for terms we don’t specify?

21. Topics Tort law The legal process itself Criminal law
who’s responsible for accidents? what do they owe?
The legal process itself
what is the goal of the legal system? how do we achieve it?
Criminal law
other topics if there’s time
Tort law
a tort is when someone harms someone else, like in a car accident
so the question in tort law is, who’s responsible for accidents? what do they owe?
how do we design a system to get “good” outcomes?
what does this mean for industrial safety regulation?
The legal process itself
what is the goal of the legal system? how do we achieve it?
Criminal law
is there a “right” amount of crime to aim for? how do we achieve it?
other topics if there’s time

22. Plan for the rest of today…
A bit of history – the Common Law and Civil Law traditions
An example – dead whales (and baseballs)

23. A bit of history

24. A bit of history
Two great Western legal traditions of the last millennium
Common Law
Civil Law
Said before: we’ll mostly treat laws as if they “fell from the sky”
But it’s still good to know the origins of the legal systems we’re considering
Two great Western legal traditions of the last millennium
Common Law
Civil Law

25. The Common Law originated in 12th century England, under King 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 system originated in England in the 12th century
King Henry II would send judges from his central court to hear cases throughout the country
they would rule according to local norms and existing practices
one version: the judges were told to “go out and find the law” as it was already being practiced
if some area had developed a rule for how people should act, that rule would become the law
under the common law, new laws are enacted by legislature
the job of a judge is to interpret the laws, relying heavily on precedent
the way that similar cases were decided in the past
once one case is decided, it becomes a precedent for future cases
so common law rooted in common practices of the people, except where those practices have been explicitly superseded by legislation, and evolves over time as new precedents are added to the case law
the English Common Law system is still the basis for legal systems in many English-speaking countries
U.S. and Canada
Great Britain and Ireland
Australia and New Zealand
parts of Africa and Asia

26. The Civil Law
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 other major legal tradition of the last millennium is the Civil Law
The Civil Law system persists in most of Western Europe, Central and South America, and parts of Asia not colonized by Britain (and, to a degree, the state of Louisiana)
originated following French Revolution
revolutionaries felt judges, like the king, were “corrupt and worthless”
chose to abandon common law system and start fresh
Napoleon commissioned a group of legal scholars to draft a new set of laws, which became known as the Napoleonic Code
these scholars modeled their work on The Body of the Civil Law, compiled for Roman emperor Justinian in 6th century A.D.
the Civil Law system relies less on historical norms and precedents
more laws are explicitly spelled out
legal arguments appeal directly to the meaning of the law itself, and to commentary meant to clarify that meaning

27. Comparing the Common Law and Civil Law traditions
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
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

28. Comparing the Common Law and Civil Law traditions
“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
One of my former students put it very nicely: he described the difference between the two as the difference between “spontaneous order and planned order,” since “common law is not shaped by a single mind, but a bottom-up aggregate of many individual plans,” while the civil law was laid down at a particular time and meant to be more static

29. Whaling

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

31. What’s the problem?
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

32. Robert Ellickson (1989), A Hypothesis of Wealth-Maximizing Norms: Evidence from the Whaling Industry
Examines 12 British and American court rulings 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

33. One norm: “fast fish/loose fish”
Discussed in Moby Dick
Established by British whalers in Greenland fishery
Prey were right whales – relatively slow and docile
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
So under this rule, you had no claim to a whale unless it was attached to your boat by a rope

34. A different norm: “iron holds the whale”
The rule in fisheries where sperm whales were 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”
“Iron holds the whale” tended to be the rule in fisheries where sperm whales were hunted
sperm whales swim faster, dive deeper, fight harder than right whales
hunting them in old way would risk sinking the boat
instead, harpoons were attached to “drogues” – pieces of wood that would float behind the whale and tire him out
the ship would follow the whale until it tired, then kill it
sperm whales also swim in schools - so when a ship stumbled into a school of sperm whales, most important to kill or wound as many as possible quickly, rather than stop to secure each one
The rule that developed: “iron holds the whale”
if you harpoon a whale first, you own it…
that is, your iron (harpoon) stakes a claim to that whale…
…as long as you remain in “fresh pursuit”

35. Clear tradeoff between the two rules
“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
“Iron holds the whale” is more complicated
What if a whale is found with multiple harpoons in it?
What constitutes “fresh pursuit”?
“Fast fish/loose fish” is a simpler, “bright-line” rule
Less ambiguity, should lead to fewer disputes
But wouldn’t work well with sperm whales
Too dangerous to hunt sperm whales with harpoons tied to boat
Wasteful to let rest of a school swim away while trying to secure first whale
When choosing between the two rules, we see a tradeoff between simpler rule versus better incentives
The simpler rule is easier to implement, and would likely lead to fewer disputes
But the more complicated rule might be useful in providing better incentives – as in the case of sperm whales
This tradeoff – between simpler, clearer rules, and more complicated rules that provide more precise incentives – will be one that we see several times in this class

36. A third norm developed where finback whales were hunted
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)
Finbacks are extremely fast swimmers
19th-century whalers hunted them with “bomb lances”
Dead finbacks would sink to the bottom immediately, then wash up on shore 2-3 days later
There needed to be an incentive to hunt finbacks, but also an incentive to retrieve/harvest the dead whales once they were found
The norm developed that the original killer and the finder of the whale would split the proceeds
In some places, there were predetermined shares
New England coastal norm was to split the whale according to the effort each side put in
Ghen v Rich – 1881 Massachusetts case – the finder of a dead finback sold it to the defendant, who didn’t want to return a share to the original killer of the whale
court pointed out that if the finder were entitled to keep the whole whale, there would be no reason to hunt whales, and the entire whaling industry would have to shut down

37. Conclusions from Ellickson
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
Ellickson emphasizes that in each location, norms developed which were well-suited to that environment
local rules provided sufficient incentives for what was seen as valuable work
(in fact, the incentives worked too well – whales were plentiful when these norms appeared, but in many cases were then hunted to near extinction)
But my point: in each case, the common-law judge deferred to the local custom
local rules were different in different places
in every case Ellickson examined, court’s ruling matched local custom

38. So that’s whaling law 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

39. The brief perfectly captures the essence of the common law system:
“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)

40. So that’s a bit of law 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