Economic Analysis of Law

F.H. Buckleyfbuckley@gmu.edu

Sciences Po Salle 40156, rue des Saints PèresOctober-November 2006

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A bit of economics… Micro-economics examines the

implications of the assumption that man is a rational maximizer of his ends or self-interest

Don’t confuse this with selfishness—my self-interest may include the concern I have for others generally, or for those close to me

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Now a bit of economics…

Man as a rational maximizer of his ends or self-interest

Nor is this a theory of consciousness. We want to see whether human choice conforms to our model whatever one’s state of mind.

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The hot new thing: Behavioral Law & Economics

What happens to the model when one adjusts for computation costs

Mental work is the costliest of human activities

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The hot new thing: Behavioral Law & Economics What happens to the model when one

adjusts for computation costs To economize on calculation, we

employ judgment heuristics as mental short-cuts

These are not infallible, when compared to choices we might make on the assumption of costless calculation

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A fundamental principle:the Law of Demand

P2

$

P1

Q2 Q1Quantity

The Law of Demand: There is an inverse relationship between price and quantity

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A fundamental principle:the Law of Demand

P2

$

P1

Q2 Q1Quantity

The Law of Demand: When the cost of an item increases, less is demanded

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A fundamental principle:the Law of Demand

P2

$

P1

Q2 Q1Quantity

The Law of Demand: When the cost of an item increases, consumer will substitute other goods

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A fundamental principle:the Law of Demand So what counts as a cost?

More physical or mental effort required

An increase in a criminal sanction

Social sanctions, e.g. shame or ridicule

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Downward-sloping demand curves may take a variety of shapes

$

Quantity

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An elastic demand curve $

Quantity

Luxury goods

A small change in priceresults in a large change in quantity demanded

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An inelastic demand curve $

QuantityHard drugs?

A large change in priceresults in a small change in quantity demanded

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A fundamental principle:Opportunity Cost For economists, the cost of something

is the value of the best alternative Your opportunity cost as students is what

you would earn were you working (in total lifetime earnings)

For a business, an investment opportunity has an opportunity cost of the next best alternative opportunity

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A fundamental principle:Opportunity Cost A price below opportunity cost

represents waste: “the game is not worth the candle.”

A price above opportunity cost will attract competitors in competitive markets

Competition tends to make opportunity cost both the minimum and the maximum price

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The economist’s use of assumptions The economist abstracts from the

mass of detail through simplifying assumptions, such as perfect rationality or costless bargaining

A model is evaluated on the basis of its predictive power, not on whether its assumptions seem realistic

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Does law-and-economics have an ideological bias? Economics as a positive discipline

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Does law-and-economics have an ideological bias? Economics as a positive discipline Normative law-and-economics

purports to say little about distributional or endowment issues

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Does law-and-economics have an ideological bias? Economics as a positive discipline Normative law-and-economics

purports to say little about distributional or endowment issues

Normative economics takes intangibles into account (e.g., moral externalities)

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A few basic legal concepts Private Law: The law of obligations

Contract

Quasi-contract

Delict (tort)

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Contract Contract Law as content-independent.

Sed qu. contracts contra bones mores

The idea of a hypothetical contract as explaining the content of quasi-contract and delict

“Contractarianism”

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A few basic legal concepts

Remedies in contract law

Damages as a compensatory award of money

Specific Performance as the exceptional remedy

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A few basic legal concepts Damages as a compensatory award of

money A man undergoes an operation to repair an

injured hand, after the doctor promises him that “it’ll be as good as new.” The operation is a failure. The hand is now much worse than it was before the operation. The doctor is at fault

What measure of damages is the man is entitled to? How would you compensate him?

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A few basic legal concepts Damages as a compensatory award of

money A man undergoes an operation to repair an

injured hand, after the doctor promises him that “it’ll be as good as new.” The operation is a failure. The hand is now much worse than it was before the operation. The doctor is at fault

Compensatory awards repair the wrong by putting the man in the same position he would have been in had the contract been performed.

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A few basic legal concepts Damages as a compensatory award of

money A enters into a contract to custom make a piece

of software for B. The contract price is $100,000, and A expects that he will incur costs of $50,000 in producing the product. After the contact is made, and after A has incurred costs of $10,000 in producing the software, B tells A he is canceling the contract. A has to junk what he has done thus far. What damages should be awarded to A?

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A few basic legal concepts Damages as a compensatory award of

money The expectation measure of damages as

basic in contract law (contract price of $100,000 less cost of $50,000 = profits of $50,000)

The reliance measure of $10,000 as delictual in nature

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Was the contract properly formed? Lack of capacity: Infants, minors, the

mentally incapable Lack of consent

Fraud Mistake Force or duress

Unconscionability or substantive unfairness

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Was the contract properly formed?Pateralism Lack of capacity: Infants, minors, the

mentally incapable Might the law of capacity extend

beyond this to mentally capable adults?

Of slaves and married women The revival of paternalism: Of

smokers, seatbelts and pension law

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Was the contract properly formed?Misrepresentation Misrepresentation: a false

representation which induces another to enter into a contract What is a representation When is it false? Simplex commendatio

non obligat Fraud and negligent misrepresentations

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Was the contract properly formed?Misrepresentation

Does a simple informational asymmetry constitute fraud?

Bargaining over antiques? Land assembly in Texas Gulf Sulfur? Insider trading in Texas Gulf Sulfur?

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Was the contract properly formed? What counts as unconscionability

The special concern for standard form contracts or contrats d’adhesion

Friedrich Kessler on a new form of fascism

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Was the contract properly formed? What counts as unconscionability

The special concern for standard form contracts or contrats d’adhesion

Friedrich Kessler on a new form of fascism

Can you offer some economic explanations for the use of standard form contracts other than oppression?

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Was the contract properly formed? What counts as unconscionability

The special concern for inequality of bargaining power

Does this have anything to do with whether markets are competitive or monopolistic?