Econ 522 Economics of Law

1. Questions about enrollment or prerequisites? Please talk to me after lecture. Econ 522Economics of Law Dan Quint Spring 2011 Lecture 1

2. I’m Dan Quint, this is Econ 522,Economics of Law • 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 Assistant: Fran Flanagan • Sections on Fridays, beginning next week (Jan 28) • Questions about section – talk to Fran • Office hours • Me: Tuesdays, 2 – 4 p.m. (other times by appointment) • Fran: TBA • Attending section • Attending lecture

6. Grading • Grades are based on • occasional homeworks (probably 4 or 5) – 20% • two midterms – 20% each • final exam – 40% • Homework • 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 Feb 28 and Mar 30 • Final is May 12 • Please let me know EARLY if… • you have an exam conflict, or • you’re a McBurney student and need special accommodations

8. Readings • Textbook: R. Cooter and T. Ulen, Law and Economics • older versions are fine (but…) • copies on reserve at Memorial Library and SocialScience 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)

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

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

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

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!

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 decisionshave an impact on outcomes • and these decisions therefore affect how much value is created (or destroyed) by society • which is very interesting to economists

15. So what about the law is interesting to economists? Decisions/Actions THE LAW Compensation Compensation Litigation Litigation Somethinghappens 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

18. But of course, that’s not the whole story

19. But of course, that’s not the whole story

20. Topics • Property 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?

21. Topics • Tort 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

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

25. The Common Law • originated in 12th century England, underKing 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

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

27. Comparing the Common Law and Civil Law traditions Civil Law • 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

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

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”

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

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)

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

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