Econ 522 Economics of Law Dan Quint Spring

Econ 522 Economics of Law Dan Quint Spring 2010 Lecture 1

I’m Dan Quint Welcome to Econ 522, Economics of Law w If you’re trying to get into the class but not yet registered, put your name and info on the yellow pad going around w If you haven’t taken Econ 301, talk to me after class 1

Logistics w Course website: http: //www. ssc. wisc. edu/~dquint/econ 522 w (Or google “Dan Quint” and click “Teaching”) w Teaching Assistant: Fran Flanagan Sections on Fridays, starting next week w Questions about section – talk to Fran w w Office hours Me: Tuesdays, 9: 30 -11: 30 (other times by appointment) w Fran: Thursdays, 12: 30 -2: 30 w 2

Grading w Grades are based on occasional homeworks (probably 3 or 4) – 20% total w two midterms – 20% each w final exam – 40% w w Midterms tentatively scheduled for Feb 24 and Mar 24 w Final is May 10 w Please let me know EARLY if… you have an exam conflict, or w you’re a Mc. Burney student and need special accommodations w w Attending lecture – I recommend it! 3

Readings w Textbook: R. Cooter and T. Ulen, Law and Economics w Another book I like: D. Friedman, Law’s Order w Additional readings (links on syllabus) 4

What’s this class about? w It’s not about the law w w 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 w Economics is not a bunch of facts, it’s a set of tools We can point these tools at just about anything w In this class, we’ll point them at laws and legal institutions w But we’re more interested in the tools than in the answers w 5

Relatedly, a warning: THIS IS A HARD CLASS w To do well, you’ll have to learn to think like an economist This way of thinking comes naturally to some people… w …but not to others w And if you “don’t get it”, you can’t get by just memorizing a bunch of facts w Someone in this class will get a C who’s never gotten a C before w w Not trying to scare everyone off – I’d just rather say this now than after the first midterm 6

What is “Law and Economics”? 7

What is Law and Economics? w unsatisfying answer: “thinking about the law like an economist” w microeconomics is about how people respond to incentives w we’ll be using microeconomics (including a little bit of game theory) to analyze laws and legal systems the incentives they create w and the actions and outcomes they lead to w 8

How do economists look at the law differently than lawyers? w suppose something has happened w when a lawyer sees the case, the “damage is already done” w what’s left? w w w assign blame maybe punish someone maybe have someone give money to someone else this is interesting to the people involved… …but it’s not interesting to economists! 9

So what about the law is interesting to economists? w before the incident happened, lots of decisions were made w expectations/beliefs about what will happen after the fact influence these decisions w these decisions have an impact on outcomes w and these decisions therefore affect how much value is created (or destroyed) by society w which is very interesting to economists 10

In pictures… Decisions/ Actions THE LAW Compensation Litigation Something happens ECONOMISTS (you and me) LAWYERS 11

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 12

So that will be our focus in this class 13

But of course, that’s not the whole story 14

But of course, that’s not the whole story 15

Outline of the class 16

Course outline… w Property law what things can be owned? w what can (and can’t) owners do with their private property? w w Contract law what can and can’t we contract on? w what constitutes a legal contract? w what happens if one of us doesn’t live up to our end of a contract? w what “default rules” stand in for terms we don’t specify? w 17

Course outline… w Tort law w who’s responsible for accidents? what do they owe? w The legal process itself w what is the goal of the legal system? how do we achieve it? w Criminal law w other topics if there’s time 18

A bit of history 19

A bit of history w Two great Western legal traditions of the last millennium w Common Law w Civil Law 20

The Common Law w originated in 12 th century England, under King Henry II w w w 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 w so common law originally rooted in common practices; can be changed by legislation; evolves with each new case w still basis for legal system in many English-speaking countries 21

The Civil Law w persists today in most of Western Europe, Central and South America, parts of Asia w originated following French Revolution judges, like king, were viewed as “corrupt and worthless” w Napoleon commissioned a group of legal scholars to draft a new set of laws – the Napoleonic Code w w less reliance on historical norms and precedents attempt to explicitly spell out the law, starting from blank slate w legal arguments appeal directly to written law, and commentary w 22

To sum up… Civil Law Common Law w orig. 18 th century France w orig. 12 th century England w persists in Western Europe and some other places w persists in U. S. , U. K. , other English-speaking countries w based on “ancient sources and pure reason” (group of scholars with blank slate) w based on existing practices and social norms w arguments focus on legal precedents, so law evolves as new precedents are set w legal arguments appeal to interpretation of the law itself, and to commentary which clarifies its meaning 23

Whaling 24

A nice example of how the common law responds to local norms and practices w Question: who owns a dead whale? w 1700 s-1800 s – whales hunted for oil, bone, other valuable products w a captured whale could be worth 3 -4 times a typical family’s yearly income w conflicts would sometimes arise over ownership 25

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 26

Robert Ellickson (1989), A Hypothesis of Wealth. Maximizing Norms: Evidence from the Whaling Industry w Examines 12 British and American court rulings where ownership of a dead whale was contested w In each case, the local whaling industry had established norms which were well-suited to that environment w And in each case, the common-law court ruled in accordance with the existing norms 27

One norm: “fast fish/loose fish” w Discussed in Moby Dick w Established by British whalers in Greenland fishery Prey were right whales – relatively slow and docile w Hunting was done by harpoon attached to whaling boat by rope w w A harpooned whale attached to a boat was a “fast fish” and belonged to the boat it was attached to w If the whale broke free, or had not yet been harpooned, it was a “loose fish” and other ships were free to pursue it 28

A different norm: “iron holds the whale” w The rule in fisheries where sperm whales were hunted sperm whales swim faster, dive deeper, fight harder w hunted with harpoons attached to “drogues” w sperm whales swim in schools w w The rule that developed: “iron holds the whale” if you harpoon a whale first, you own it… w …as long as you remain in “fresh pursuit” w 29

Clear tradeoff between the two rules w “Iron holds the whale” is more complicated What if a whale is found with multiple harpoons in it? w What constitutes “fresh pursuit”? w w “Fast fish/loose fish” is a simpler, “bright-line” rule Less ambiguity, should lead to fewer disputes w But wouldn’t work well with sperm whales w 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 w Tradeoff between simpler rule versus better incentives 30

A third norm developed where finback whales were hunted w Finbacks are extremely fast swimmers w 19 th-century whalers hunted them with bomb lances w Dead finbacks would sink, wash up on shore days later w Norm developed that original killer and the finder of the whale would split it w Ghen v Rich (1881) 31

Conclusions from Ellickson w Ellickson’s emphasis: in each location, norms developed which were well-suited to that particular environment w My point: in every case, the judge ruled in accordance with the local custom 32

So that’s whaling law w To connect it to more modern concerns… w I found a legal brief using same principles to determine ownership of a souvenir baseball Ownership of Barry Bonds’ 73 rd home run ball was disputed w Alex Popov had the ball in his glove first, but lost it in the scrum w Patrick Hayashi ended up with the ball, both wanted it w 33

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) 34

So that’s a bit of law w Next week, we’ll do some economics w If you’re not registered, make sure your name’s on the yellow pad w If you haven’t taken Econ 301 (or equivalent), please come talk to me w See you next Monday 35