Previous Section of the Notes

• VI. The marriage contract
  • A. Why it exists: Relationship specific sunk costs in marriage
    • 1. A marriage is a joint project carried out over a long period of time, and ...
    • 2. Once it is started, the parties are locked into a bilateral monopoly situation, since breaking up and starting over will impose large costs.
    • 3. Most obviously due to the couple's children, but also because each partner, especially the wife in a traditional marriage, has become a specialist in that particular relationship.
    • 4. One way of dealing with such situations is a long term contract, specifying each party's obligations.
    • 5. This is especially important if the timing of the two party's contribution to the joint project is out of synch,creating an opportunity for opportunistic breach.
      • a. Consider a traditional marriage, in which the wife works very hard bearing and rearing children in the early years.
      • b. And expects to get paid back in the later years, when the work associated with her part of the job is much less--and her husband's income much more.
      • c. Giving him an opportunity to dump her at forty and marry a younger woman.
      • d. One way of describing this situation is to say that the wife performs her part of the joing project early and the husband late, another is that women depreciate faster than men on the marriage market.
  • B. The problem with using contract to solve such problem
    • 1. It is hard to observe the performance of each party's contractual obligations.
    • 2. So if one party wants out and the other is not willing, he or she can simply degrade his performance until the other party is willing to let him go.
    • 3. Medieval Islamic story about a wife threatening to force her husband to divorce her.
  • C. Alternative contractual approaches:
    • 1. No divorce.
      • a. Solves the problems of opportunistic breach and opportunistic degradation of performance--there is no longer any point to that tactic, but ...
      • b. It means that where the parties have made a mistake and breach would be efficient, they are stuck.
      • c. This problem may be reduced, but not eliminated, by more careful search.
      • d. And, in practice, "no divorce" really means "no remarriage;" the parties can still separate.
    • 2. Divorce by mutual assent only (i.e. specific performance of the marriage contract)
      • a. Solves the problem of opportunistic divorce, permitting efficient breach through negotiation with appropriate side payments
      • b. But not the problem of opportunistic degradation of performance.
    • 3. Divorce with cause:
      • a. Depends on the court being able to judge when breach is efficient
      • b. In practice, if both parties wanted the divorce, they could manufacture cause, but ...
      • c. At some cost, if cause meant adultery and adultery was considered shameful.
    • 4. Divorce with damage payment--alimony.
      • a. Typically a payment by the man, since typically women performed early and men late
      • b. So that a breakup was likely to impose net costs on the wife.
      • c. This solves the problem of opportunistic divorce, assuming the payment is set properly, but ...
      • d. Makes opportunistic degradation of services by the wife who wants out even more attractive.
  • D. Alternative non-contractual approaches.
    • 1. More careful search before marriage.
      • a. Both to find a partner who won't want to breach
      • b. And one who will feel obligated to keep his contract
      • c. And one who will feel altruistic towards the other partner, thus easing the conflict of interests in the marriage relationship.
      • d. Gary Becker's economics of altruism is discussed at some length in _Price Theory_. The essential assumption is that one party's utility is an argument in the other party's utility function.
    • 2. Modifying the pattern of performance so as to reduce the opportunity for opportunistic breach.
      • a. For example, having children later
      • b. which is costly, since older mothers have more difficulty with pregnancy, higher risk of birth defects, and older parents are less able to deal with the strain of small children.
    • 3. And to reduce the cost of breach, by less specialization in relationship specific capital: i.e. the wife specializing less in the job of wife and more in market employment.

     

•  VII. The economics of wedding rings-argument from an article by Margaret Brinig (not in the packet):
  • A. Fact: diamond engagement rings became common only starting in the 30's, peaked in 50's, declined since.
  • B. Men preferred wives who had never slept with anyone else.
  • C. Men and women like sex.
  • D. This creates a problem for those not yet married:
    • 1. For woman, who knows that sex lowers her value on the marriage market
    • 2. For men, who can't find women willing to sleep with them, because ...
  • E. Solution?
    • 1. Each generation believes it invented sex, despite the evidence, but previous generations managed somehow.
      • a. H.L. Mencken, in his diary, casually mentions
      • b. Losing his virginity at age 14, along with a girl of the same age,
      • c. An event that would have occured c. 1894.
    • 2. Part of the solution is sex after engagement but before marriage.
    • 3. Which creates a problem of opportunistic breach. Seduce and abandon.
  • F. One way of controlling this used to be the legal action for breach of promise of marriage. The victim could collect damages, in large part for her reduced marital opportunities.
  • G. Between 1935-1945 the action was abolished in U.S. states containing half the U.S. population; it has now entirely vanished.
  • H.The custom of the male giving a valuable engagement ring, which the woman could keep if he walked out on her, arose--arguably to solve this problem. Think of it as a performance bond.
  • I. More recently, the custom has declined--along with the importance of virginity on the marriage market.

     

• VIII. The puzzle of the decline of marriage:
  • A. In the past fifty years or so, marriage has become less common, and less stable, than in most traditional society, and illegitimacy more common than in virtually any known past society.
  • B. This pattern is not limited to the U.S.; it holds, with some variation, for most of the developed world, which raises the obvious puzzle of why. Some possible explanatiosn are:
  • C. There is less relationship specific capital in marriage than there used to be, because:
    • 1. Infant mortality is much less than it was a century or two go.
      • a. It used to be necessary to produce children almost nonstop in order to be reasonably sure of having two or three survive to adulthood.
      • b. Now producing two will do the job.
      • c. If "completed children" are less costly, the cost of breaking up and starting over is less.
      • d. And women who are not producing and rearing small children for the first thirty years of their lives have more opportunity to develop skills useful outside of the household.
    • 2. Increasing division of labor means that less is produced within the household.
      • a. Clothes may still be washed at home--but by washing machines.
      • b. Food preservation is almost entirely outside of the house
      • c. And food production as well to a substantial degree.
    • 3. With less specific capital, the costs of divorce are less, so divorce becomes more common.
    • 4. Note that this is an optimistic explanation--the increased divorce rate represents a rational adjustment to a more attractive world.
  • D. There are more job opportunities for women outside marriage.
    • 1. Which implies both that more women would choose never to get married and that women unhappy with their marriages would be more willing to get divorced.
    • 2. But why did this change occur? There have always been some jobs that women could do outside marriage.
    • 3. For ideological reasons?
      • a. A change in views of the role of women? But why did it happen?
      • b. A rise in companionate marriage--the pattern we take for granted, where spouses are close friends as well as partners in the family enterprise.
      • c. Meant that husbands were more willing to trust their wives out of their sight, in places where they might meet other men.
      • d. But why did that happen?
    • 4. Because C above meant that there were more women available for jobs outside the home.
      • a. After all, through most of history one job description--mother/housewife--absorbed nearly half the adult labor force.
      • b. When that became a part time job for most wives, the labor market adjusted.
  • E. The rise of the welfare state provided an alternative for women who had, or wanted, children.
    • 1. That explains part of the international pattern. Sweden, which had a highly developed welfare system early, also had high illegitimacy rates early.
    • 2. And part of the domestic pattern. Illegitimacy rates are much higher in lower income populations, where welfare is a more attractive alternative relative to marriage, since poor people make less money than rich people but can collect the same amount in welfare.
    • 3. But probably does not explain the decline of marriage and rise of divorce in higher income groups.
  • F. Changing gender ratios lowered the price women could command on the marriage market.
    • 1. The most dangerous activity that many people engaged in used to be childbirth. With modern medicine that is no longer true.
    • 2. Presumably that change substantially increased the ratio of women to men in the childbearing ages
    • 3. Reducing the implicit price that women could command for their sexual and child-bearing services.
    • 4. With the result that some women who wanted children had to bring them up themselves.
    • 5. Argument on the exact timing:
      • a. Women typically marry men a few years older than they are.
      • b. When the women born in 1946 came onto the marriage market
      • c. There were few men born in 1944 for them to marry, so ...
      • d. Existing customs, in particular norms against sex without marriage or a commitment to marry, broke under the strain.
    • 6. This explanation is pessimistic from the standpoint of women, optimistic from the standpoint of men.
  • G. Improvements in contraception and abortion broke the link between the market for sexual services and the market for childbearing services.
    • 1. Consider two markets
      • a. A market for sex
      • b. A market for childbearing. Suppose that ...
      • c. On average, men want more sex than women, but ...
      • d. If cost of children is evenly divided, fewer children.
    • 2. In a world without contraception, the markets are linked
      • a. One act of sex produces one sex act worth of conception.
      • b. If we look only at the sex market, a woman who has sex risks having the whole cost of bearing children as a result, which makes her much less willing to have sex, so ...
      • c. The condition of having sex is a commitment to help support the children, if any, meaning ...
      • d. Either only sex within marriage, or a society which provides shotgun marriages if the woman gets pregnant.
    • 3. In a world with contraception, the link is broken:
      • a. Women can provide sex to men who don't want children (if accompanied by the cost of supporting them) at low cost to the women--by using contraception.
      • b. So women who want children are not in a position to demand guarantees of support from men who want sex, only from men who want children, and ...
      • c. On the childbearing market, the equilibrium price favors the man, so ...
      • d. Some women end up rearing their children themselves.
    • 4. Puzzle: This should have hit first at the high end of the income scale, not the low, because
      • a. Contraceptive knowledge and availability was greater among more educated people, and
      • b. Safe illegal medical abortions, or foreign abortions, were more available to higher income people
      • c. But it hit first at the low income end, which is evidence against this explanation of what was happening.
    • 5. This puzzle applies to explanation F above as well, since good medicine was available earlier for higher income people too.

     

• IX. Adoption market:
  • A. Currently, it is illegal for the adoptive parents to pay the natural mother for her consent to the adoption. It is legal to pay the lawyers who arrange the adoption, the mother's medical costs, etc. One consequence seems to be high transaction costs (as potential adopters bid via lawyers), and a market that shifts between surplus and shortage.
  • B. One argument against payments by adopting parents to the natural mother in exchange for her giving up her child to them for adoption is that the rich will be buying and the poor selling.
    • 1. This is surely a serious oversimplification; most buyers will be (most Americans are) neither rich nor poor.
    • 2. In any case, what is wrong with that? Would they ban the markets for housecleaning and child care on the same grounds?
    • 3. Is it better for the (richer, on average) adoptive parents to get the child from the (poorer, on average) biological mother, and not pay her--which is what happens now?
  • C. A more interesting argument, although not one that convinces me: Commodification
    • 1. How we act and observe other people acting affects how we think. If we treat something as a commodity, we and others will think of it as a commodity, which might have bad consequences.
      • a. If babies can be openly bought and sold, perhaps we will think of them more as possessions and less as people.
      • b. If sex can be openly bought and sold (legalized prostitution) perhaps men will think of women more as sex objects and less as people.
      • c. So perhaps this is an argument for banning certain acts, not because the acts are bad, but because they teach a bad lesson--"commodify" things that ought not to be thought of as commodities.
    • 2. But this argument has an odd feature, constitutionally speaking.
      • a. We have an act which is both an act and speech.
      • b. As an act it ought to be permissable (transaction with prostitute or baby seller)
      • c. We ban it because we disapprove of it as speech
      • d. Which seems to violate the first amendment.
    • 3. As one student pointed out, a similar argument would seem to apply to laws that impose special penalties for "hate crimes." If you punish a crime more because, in addition to doing injury, it also conveys the message "group X are bad people who should be hated," isn't the additional punishment a punishment for speech? After all, you couldn't punish someone (in the U.S.) for a speech or a book arguing that "group X are bad people who should be hated."

     

• X. It is often claimed that, when I have a child, I impose net costs on others, so that leaving people free to decide how many children they have will result in overpopulation.
  • A. But it is not clear what the sign of the net externalities from my having another child is. Positive externalities include:
    • 1. My child may find the cure for cancer and
    • 2. Will reduce the amount of the national debt your child must bear
    • 3. And the amount your child must pay for national defense, or scientific research, or any other government service whose costs is roughly independent of the population.
  • B. This argument is one example of an error common in political arguments. You calculate net externalities considering only the externalities of one sign (negative if you want to ban something, positive if you want to subsidize it) and ignoring those of the other sign.
  • C. How in principle do we define the optimal level of population?
    • 1. If we measure it by per capita income, utility, or something similar, we commit a fallacy of composition.
      • a. Consider one additional person, who will impose neither net costs nor benefits on the rest of us. How can we say that his life (utility 10) is a good thing if the rest of us have an average utility of 9, but the same life is a bad thing of the rest of us have an average utility of 11?
      • b. Mead's example: Consider a world with two communities, A and B. Both are attractive places filled with happy people, but A is a little happier than B. Is the world a better place if B is wiped out by a plague? Average happiness goes up.
    • 2. If we measure it by total utility, we need to define a zero point, so as to know if an individual contributes positive or negative utility to the total.
      • a. The obvious zero point is death, but ...
      • b. That leads to a rule very favorable to large populations.
      • c. Two unhappy people are better than one happy one unless they would be willing to flip a coin: heads they get to be the happy one, tails they die. They will have to be pretty unhappy to agree to that.

     

• XI. Regulation of Sex. Why do we do it? Adultery laws, fornication laws, ...
  • A. Contract enforcement? Like copyright--it makes it easier to enforce the contract against infringement involving partners not party to it.
  • B. Overenforce to protect third parties?
    • 1. Children--who may be injured if adultery leads to marital breakup
    • 2. Keep down VD, AIDS
    • 3. Law against prostitution can be viewed as a way in which wives enforce the marraige contract by making it harder for husbands to break it.
    • 4. Which suggest that such laws might decline in a world where casual sex with women who are not prostitutes has become more available, due to better contraception, less marriage, etc.

---

Tort Law

• I. What is a tort?
  • A. A wrong done by A to B which may be privately prosecuted by B, typically for monetary damages, although injunctions are also possible
  • B. Differs from criminal law in being a private rather than a state action.
  • C. And from contract law in not being based on any contract between the parties.
  • D. Four issues arise:
    • 1. What makes it wrongful: Competition is not a tort. Some system of rights is assumed, and a tort involves a violation.
    • 2. Causation: What does it mean to say A caused the harm?
    • 3. Liability--strict liability, negligence, contributory negligence, etc. Under what circumstances am I liable for the consequences of my actions?
    • 4. Damages--how calculated?
  • E. One can think of all these issues in terms of economic efficiency, although whether doing so describes how the law actually works is an open question.

     

• II. "Wrongful"
  • A. Tort damages are a version of a Pigouvian tax, so ...
    • 1. We want to treat as wrongful only acts that impost a net externality.
    • 2.And are worth the trouble of dealing with through the legal system.
    • 3. And can be dealt with better in this fashion than by a property rule.
      • a. We can use injunctions or punitive damages to enforce a property rule, where it is the injured party who owns the property.
      • b. Where the injuring party owns the property and is using it within his rights, we solve the problem by a transaction--the other party buys the property, or the right.
  • B. Should competition be a tort?
    • 1. When I become the 101st physician in San Jose, the wages of the first 100 physicians fall--should they be able to sue me?
    • 2. No, because their loss is their patients' gain.
    • 3. So I have imposed only a pecuniary externality--a transfer between two other people, not a net injury to other people.

     

• III. Causation complications:
  • A. Coincidental causation.
    • 1. I stop my friend for a moment in the street to talk, he then continues on and is killed by a falling safe. There is a real case along these lines:
    • A tree fell on a bus.
    • The plaintiff demonstrated that in order for the bus to be where it was, the driver had to have been driving above the speed limit, and ...
    • Breaking the law is per se negligence, meaning that it automatically classifies as negligent even if it isn't really. (We'll be getting to what "negligence" means shortly)
    • 2. Should I be held liable? If I had not stopped him he would not have died.
    • 3. No. My stopping him does not affect the probability of his dying--it might just as easily have resulted in his not being under the safe. More precisely, it does not affect the probability calculated on the basis of my knowledge.
    • 4. A different way of putting this is that if I do not get rewarded when I produce the positive externality (my stopping him happened to save him) I should not get punished when I produce the negative one.
  • B. Dual causation: The victim is accidentally shot by two hunters; each bullet would have been sufficient to cause death by itself. Should they be liable?
    • 1. This puzzle is based on a somewhat less dramatic real case: Summer v Tice.
    • 2. The benefit of my taking a precaution that reduces the chance I will shoot him is not the reduction in probability of shooting him but the reduction in probability of killing him (times the value of his life). Shooting a corpse does no damage.
    • 3. When I change my probability of shooting him, I should benefit only by the resulting change in probability that he will die, so ...
    • 4. I should not be liable in the two bullet case case!
    • 5. This ignores possible problems of proof, etc. It also ignores the possibility of agreements in advance between two hunters; I am assuming both were independently responsible for the accident.
    • 6. Finally, it assumes that we can costlessly impose a fine on a hunter that fully represents the damage done--which is unrealistic inthis case. If we can't, punishing the two bullet case may be an indirect way of raising the punishment for the action (careless shooting) that leads to the one bullet case.
  • C. Probabilistic injury.
    • 1. Suppose a radiation leak increases the number of cancer cases in the surrounding area over the next 20 years from 100 to 110. Is the reactor liable, for what, to whom?
      • a. If we must show that it is more likely the death is due to the radiation leakage than that it is not, the defendant always wins and the reactor pays nothing for the damage.
      • b. If we accept a much lower standard of proof, the plaintiff always wins and the reactor pays much too much--the cost of all the cancers, most of which it did not cause.
    • 2. One solution: Make the reactor liable for the increased risk to everyone, using a class action.
      • a. But diffuse costs are hard to litigate--class actions are driven by the interest of the lawyers, not the victims.
      • b. And immediately after the risk has been imposed, evidence on how large it is will not be very good--nobody has actually died, so we cannot start looking for evidence of increased cancer rates.
    • 3. What about giving each one who dies 1/11th damages?
      • a. When they start dying, we have at least some data.
      • b. Fewer cases to try.
    • 4. What about making tort claims marketable? One firm buys up all 110 claims, and sues on the grounds that some ten of its claims are the result of the reactor's ngegligence--even though it doesn't know which ten? Not an option in our current legal system.
    • 5. Real world equivalent--DES cases.
      • a. DES was a fertility drug which turned out to have serious side effects.
      • b. By the time the effects were discovered, it was no longer possible to determine which pharmaceutical company had manufactured the DES that a particular patient had used.
      • c. So if a victim sued a company, the company could (correctly) claim that it had probably not been responsible for that woman's injury.
      • d. Solution--divide the liability among the companies in proportion to what fraction of DES each had produced.

     

• II. What legal rule will get the efficient number of accidents?
  • A. What does that mean?
    • 1. Why isn't it zero? Because there is a cost to avoiding accidents.
    • 2. So we want the level of precautions by all concerned that minimizes the summed cost of accidents and precautions.
    • 3. For two parties, Expected Total Cost=Accident cost x probability(Precautions by A, Precautions by B)+Cost of Precautions by A + Cost of precautions by B.
    • 4. So the efficiency conditions areor ...
    • 5. Precautions to the point where an extra dollar spent on precautions saves a dollar in accident costs.
    • 6. We want legal rules that produce that outcome from individual self interested behavior.
    • 7. Note that precautions include any modification in behavior that affects the probability of an accident--including not driving.
  • B. Another way of putting this is that the efficient number of accidents means the accidents we would get if everyone took all and only cost-justified precautions. Or, if everyone took the precautions a rational individual would take if he were going to bear the cost of his actions himself.
  • C. Strict liability gives you the right answer with unicausal accidents.
    •  
    • 1. This a straightforward version of a Pigouvian tax.
    • 2. In a situation where only one party affects the external cost.
  • D. The problem arises where precautions by both parties affect the probability (or size) of the loss--Coase's critique of Pigou.
    • 1. Even a drunk driver is unlikely to run into my car if it is in my garage--so my decision of how much to drive should take into account the cost I impose, on myself and drunk drivers, by being there to be hit.
    • 2. And even if the other driver was doing something wrong, I might be able to avoid the accident by doing enough things right--defensive driving.
    • 3. And I affect the damage done, even if the accident was not my fault, by what kind of car I drive, whether I wear a seatbelt, etc.
    • 4. In all such cases, what does "not my fault" mean? Less than it seems to.
    • 5. And the strict liability rule, while it gives the right incentive to one driver, removes all incentive from the other.
    • 6. Imagine, for example, so as to avoid worrying about both vehicles being damaged, that some people drive cars and some drive tanks, and the tanks are strictly liable in any collision.
    • 7. Drivers of cars have no incentive to take care--or stay home.
  • E. Negligence as a solution?
    • 1. Negligence is defined (by economists, but not necessarily by legal scholars) by the Hand formula (named after Judge Learned Hand, who applied it in a famous case--T.J. Hooper)
      • a. Hand says that you are negligent if you failed to take a precaution whose cost was less than the expected benefit in accident reduction, in other words ...
      • b. If you failed to take all cost justified precautions.
    • 2. The rule "you are liable if negligent" gives the right answer for unicausal accidents if everything is observed by the court, since:
      • a. Either you take all cost justified precautions and are not liable, or ...
      • b. You don't take all cost justified precautions and are liable, and since you are liable you bear the full cost of the accident, and since you bear the full cost of the accident it is in your interest to take all cost justified precautions.
      • c. So you always take all cost justified precautions, which is the outcome we want,
      • d. And it even works for bicausal accidents, since it pays the tank driver not to be negligent, and since he won't be negligent he won't be liable, and the auto driver, knowing that, knows he will have to pay to fix his car himself, and so has an incentive to take all cost justified precautions, but ...
    • 2. What if the efficiency of some classes of precautions is observable by the actor but not the court?
      • a. The usual example is "activity level." The court may be able to observe how many trips you take, but not how much it is worth to you to take them.
      • b. Another example would be how much attention I pay to my driving.
      • c. Under a negligence rule, you take the optimal level of the observable precautions, you will therefore not be found negligent, you therefore ignore costs to other parties in choosing the level of the unobservable precautions.
    • 3. Negligence could lead to either more or less litigation cost than strict liability.
      • a. More because there is one more question to be settled (negligence)
      • b. More because there are more accidents, due to the problem of activity level and unobservable precautions
      • c. Less because accidents where the party responsible was obviously not negligent do not result in lawsuits--the plaintiff has no claim.

       

• VI. Liability alternatives
  • A. No liability--the tank pays nothing, the car owner pays for his own repairs.
  • B. Strict liability--the tank pays for fixing the car it ran over, whether or not its driver was negligent.
  • C. Negligence liability--the tank pays if its driver was negligent (i.e. Did not take all cost justified precautions), but not otherwise.
  • D. Strict liability with contributory negligence--the tank pays unless the car driver was negligent.
  • E. Note that A and B are really the same rule, with tank and car exchanged.
  • F. As are C and D.
  • G. The auto/tank model makes sense where there is a clear assymmetry between the parties, such that either only one is seen as "causing" the accident or only one suffers substantial losses.
  • H. If we generalize to auto/auto accidents, we get:
    • 1. No liability--each party pays his own costs.
    • 2. Strict liability makes very little sense--I pay your costs and you pay mine. That is because we don't have a clear meaning for who caused the accident.
    • 3. Negligence. Whichever party was negligent pays his costs and the other party's. If nobody was negligent, each party pays his own costs. If both parties were negligent? Each pays the other's costs???
    • 4. Strict with contributory. Like 3 above, but if both were negligent nobody pays???

       

• VII. Summary of implications:
  • A. Assume one dimension (care) is observable by the court, another (activity level) is unobservable.
    • 1. Note that "care" and "activity level" are merely convenient examples.
    • 2. The real categories are "activities with regard to which the court can tell whether or not the actor was negligent" and "activities with regard to which the court cannot ... ."
  • B. A sketch of the implications of the alternative rules. Notice the symmetry; the first two columns are the same, with the roles of the actors reversed, and similarly for the second two.

• VIII. Coase or Pigou
  • A. We have been assuming that the two parties do not bargain with each other over how they will behave.
    • 1. That is appropriate in the case of auto accidents, since I would have to bargain in advance with everyone I might run into. So Coasian solutions are mostly irrelevant, although ...
    • 2. One could imagine insurance companies bargaining with each other as to what precautions they will require their customers to take.
    • 3. But the assumption is inappropriate for some other torts, such as nuisance claims between neighbors--the sort of problem Coase built his analysis on.
  • B. If they can cheaply bargain over, and observe, all dimensions of the relevant behavior, we are back with the Coase Theorem--define rights and let the parties bargain to the efficient outcome.
  • C. We have also been assuming away strategic behavior:
    • 1. Perhaps I should deliberately drive dangerously on the theory that that will scare everyone else off the road, leaving it free for me--with no accidents resulting since there is nobody to run into
    • 2. But I won't do this--again because of the large numbers involved
    • 3. But I might engage in last minute strategic behavior:
      • a. For instance, playing "chicken" at an intersection--I'm obviously not going to stop so you had better stop--or else.
      • b. Or driving a dented car, so as to give other drivers an incentive to give you lots of room,
      • c. Either because they figure an additional dent won't cost you much, or
      • d. Because they take the dents as evidence of past behavior.
      • e. A tactic an ex-girlfriend of mine used to follow.
    • 4. And strategic behavior might be appropriate in torts involving smaller numbers of people.

       

• IX. Why are people sometimes found negligent?
  • A. In general, because our assumption that both courts and individuals have perfect information is not true.
    • 1. The court might be wrong about either what precautions the tortfeasor took or what precautions he should have taken, and so find him negligent when he was not.
    • 2. The tortfeasor might be wrong about what precautions he should have taken, and so really be negligent. Or ...
    • 3. The tortfeasor might gamble on the court thinking he wasn't negligent when he really was--and lose.
  • B. The "reasonable man" standard.
    • 1. One form that imperfect information by the courts takes is the rule that negligence is judged according to what precautions would be cost effective for an imaginary "reasonable man" rather than for the actual tortfeasor, since the court doesn't know whether the tortfeasor has better or worse reactions, higher or lower alcohol tolerance, etc. than the average.
    • 2. Suppose you have much better reflexes than the average:
      • a. One half of the argument for keeping down to what the court considers a safe speed is that if you don't, you will be liable for damages if you run into someone. That argument still applies to you.
      • b. The other half is that if you are liable, it is then in your interest to take all cost-justified precautions. But keeping down to what the court considers a safe speed is not cost-justified for you.
      • c. So you either keep down to the court's speed, in order to make sure that if there is an accident you won't have to pay for it, or
      • d. Drive at the efficient speed, which is faster than the court thinks, knowing that you will be liable if there is an accident.
    • 3. Prediction: Courts should (if Posner is right about the efficiency of the law) tend to use strict liability where actors vary a lot, such that the "reasonable man" standard works badly for many of them.
    • 4. More generally, strict liability not just where activity level is important (Posner's argument), but more generally where unobserved variables are important.
  • C. Effects of court error depend on the form of the error:
    • 1. Suppose the court correctly measures your precautions but sometimes overestimates or underestimates the efficient level of precautions. The higher the level of precautions you take, the greater your chance of not being found negligent, hence liable. This tends to push you to a greater than optimal level of precautions.
    • 2. Suppose the court simply makes mistakes at random--a third of the time it decides that the tortfeasor was not negligent, whether or not he actually was. The result is like a strict liability rule, with a punishment equal (on average) to 2/3 of the damage done. So tortfeasors are underdeterred, and take less than the efficient level of precaution.
    • 3. So it is hard to work out a theory that takes account of court error--the effect depends on the details of what sort of mistakes the court makes.

       

• X. Amount of damages That Should be Awarded: Consider the one sided (i.e. Pigouvian) tort for convenience here.
  • A. If every tortfeasor is sued and convicted, then damage payment equal to damage done gives the Pigouvian rule--the externality is internalized. This is the standard rule of tort damages: The tortfeasor must make good the victim's loss.
  • B. But that doesn't happen because:
    • 1. The probability of being sued and losing is less than one.
    • 2. Traditionally, damages were narrowly defined, so on average less than damage done:
      • a. No damages for pain and suffering
      • b. Damages include only the value of the victim's life to other people, not (if he dies) the value to himself, since that is an injury to him and his claim dies with him.
      • c. Both of these have been changing in recent decades.
    • 3. And you are not making the victim good for the costs of suing you.
      • a. Under the "American rule" each party pays his own legal expenses, as opposed to
      • b. The "English rule" under which the loser pays the reasonable legal expenses of the winner
      • c. Which applies only occasionally in U.S. law.
  • C. And it shouldn't happen, because the Pigouvian rule is wrong if imposing the punishment is costly!
    • 1. The higher the damage award, the more is at stake in the litigation, hence the more both parties will spend litigating.
    • 2. Suppose damage done is $10,000,
    • 3. A damage payment of $9000 , (imposed with certainty) results in 101 offenses, $10,000 in 100.
    • 4. And litigation cost equals half of total amount awarded.
    • 5. Increasing the punishment from $9000 to $10,000 deters one offense, net cost <=$1000
      • a. How do we know the net cost the offense would have done was <=$1000?
      • b. It wasn't deterred by a punisment of $9000, so preventing the tort cost the tortfeasor more than $9000.
      • c. It was deterred by a punishment of $10,000, so preventing it cost him less than $10,000
      • d. Preventing it saved the victim $10,000 at a cost to the potential tortfeasor of between $9000 and $10,000, so ...
      • e. Net gain from preventing it was between 0 and $1000.
    • 6. And increases litigation cost from $454,500 to $500,000
    • 7. For a net loss of at least $44,500!
  • D. Could go the other way too:
    • 1. Punishment of $10,000 results in 100 offenses
    • 2. Punishment of $11,000 results in 0 offenses
    • 3. We have deterred 100 efficient offenses, making us worse off by <=$100,000 of gains (inefficient precautions)
    • 4. And better off by $500,000 in litigation costs.
  • E. Generalize the argument:
    • 1. The net damage done by an offense is damage to victim minus gain to offender.
    • 2. If we slightly increase the punishment, we are deterring an offense that was barely worth committing from the offender's standpoint, hence one for which gain to offende Å expected punishment cost.
    • 3. So the net damage done by a marginal offense is damage to victim - expected punishment.
    • 4. In an efficient system, we keep deterring offenses as long as marginal cost of deterring one more is less than net damage that offense would do, so ...
    • 5. At the optimum, damage-expected punishment=marginal cost of deterrence, so.
    • 6. Expected punishment=damage - marginal cost of deterrence.
    • 7. Which might be more or less than damage.

       

• VIII. Amount of damage payment awarded:
  • A. "Enough to make good the injury." Or in other words, enough to make the victim as well off as if the tort had not occurred.
    • 1. This is the right rule if we catch, sue, and win every time.
    • 2. Otherwise it gives too little expected punishment since sometimes tortfeasors don't end up paying damages, so there is too little deterrence.
    • 3. Why is this the standard rule in tort damages?
  • B. Punitive damages--more than enough to make good.
    • 1. Very uncommon until recently.
      • a. In the 19th century, the N.H. Supreme Court, and others, argued that "punitive damages" were ...
      • b. A misunderstanding of damages for non-pecuniary injuries.
    • 2. They are supposed to be awarded for a "deliberate or reckless" tort, and the amount is up to the court.
    • 3. Old examples:
      • a. King's messenger case:
        • i. The King's messengers forced their way into someone's house, held him prisoner while they searched his papers in an (illegal) attempt to find out if he was the author of articles in a newspaper they considered subversive.
        • ii. He sued, they argued that they only owed him for actual damages, which were small.
        • iii. He got punitive damages.
      • b. Insult case.
        • i. One landowner swore he would shoot birds on his neighbor's property without permission
        • ii. And did
        • iii. And the neighbor was awarded punitive damages.
  • B. Non-economic explanations:
    • 1. Punitive damages are really just compensation for hard to measure injuries--reputation, etc. Shooting on your enemy's land without his permission shames him, makes him unhappy, lowers his reputation, ... .
    • 2. To express condemnation
  • C. Other people's economic explanations.
    • 1. Punitive damages are a probability multiplier. If so, why not base punitive damages on how large a fraction of those who commit a particular tort get away with it, rather than on whether the tort was "deliberate or reckless?" A reckless tort should be very likely to result in a successful suit.
    • 2. Punitive damages are a way of playing safe if damage is hard to measure but efficient torts are unlikely.
      • a. A deliberate tort requires a positive cost to commit. So the optimal level is likely to be zero. But it doesn't have to be--there might be a large benefit.
      • b. An accidental tort requires a cost to avoid, so the optimal level is likely to be >0.
      • c. A deliberate tort, unlike an accidental one, can usually be replaced by a market transaction--the tortfeasor knows who he is going to injure and should be able to buy permission if the tortfeasor's gain is more than the victim's loss.
      • d. Or in other words, punitive damages are a way of enforcing a property rule within the legal framework normally used to enforce liability rules.
      • e. But what about a tort that is both deliberate and efficient--polluting, when you know it is tortious, because you are willing to pay the damage and there are too many victims to make a voluntary transaction possible. Or throwing sparks in the cases where doing so--and paying damages--was efficient.

       

• IX. My Explanation 1: Punitive damages are for very deterrable torts.
  • A. Economic theory of optimal damages with litigation etc. costs
    • 1. Without such costs, expected punishment (<P>) should = damage done. In civil law, <P> is the damage award times the probability that the victim will sue and win.
    • 2. Deterring the marginal tort at that point does no good, so ...
    • 3. If detering it is costly, don't do it.
    • 4. Cost depends on elasticity, because increased award decreases number of cases but increases cost per case.
    • 5. If supply is very inelastic, there is a positive cost to deter. So you only want to deter very inefficient offenses, so you set <P> < damage done
    • 6. If supply is very elastic, you want to deter even offenses that are (slightly) efficient, in order to avoid the cost of prosecuting them, so you set <P> > damage done
    • 7. So the optimal expected punishment is below or above the damage done according to how elastic the supply of offenses is.
    • 8. This is worked out in more detail in my punitive damages piece and my "Payne v Tennessee" piece.
  • B. A deliberate tort is very deterrable, so the supply of offenses is elastic, so you should overpunish
  • C. An accident may not be very deterrable, so the supply of offenses is inelastic, so you should underpunish.
  • D. The case where it is efficient to overpunish a lot, deterring almost all offenses and leaving almost none to be punished, brings us to a property rather than a liability rule.
     
• X. My explanation 2: Punitive damages are for strategic torts.
  • A. Why did I beat him up, even though I knew I would have to pay damages?
  • B. To deter other guys from going out with "my" girl.
  • C. This only works if ordinary damages undercompensate, since otherwise he doesn't mind being beaten up--and paid damages.
    • 1. But they do undercompensate.
    • 2. Since they have no probability multiplier and ignore pain and suffering (until recently)
    • 3. And they should undercompensate, since ordinary damages are for offenses with an inelastic supply curve (or so I have just argued above).
    • 4. This is the same argument used earlier as an explanation of one reason why damages should go to the victim. Remember the strategic pollution by the factory case, back when we were talking about the difference between damage payments and fines? Factory pollutes, pays fine, resorts shut down, no more damage, so no more fine.
  • D. So we want extra damages in such cases, to deter strategic torts.
  • E. This makes sense where the tortfeasor is a repeat player.
    • 1. The insult cases--maybe the two landowners were really fighting over local political control and the like. Perhaps one of them was trying to shame the other so as to prove to other locals that they had better support his candidate for parliament--or else.
    • 2. The first punitive damages case I know of--king's messenger, North British Enquirer. The crown wanted to discourage people from writing for subversive newspapers.
    • 3. But it does not work against our equivalent of the king's messengers--law enforcement agents.
      • a. Governments are protected from tort liability by the principle of Sovereign Immunity
      • b. The federal torts act waives sovereign immunity in some cases, but not to the extent of permitting punitive damages.

       

• XI. Why pay tort damages to the victim instead of as fines to the state?
  • A. So he will sue. Private enforcement system
    • 1. But he could threaten to sue in order to be paid by the offender to drop charges.
    • 2. This may be what actually happened in 18th century (and earlier) English criminal law, where prosecution was private but punishment was by the state.
    • 3. But it works better if the victim owns the case--smaller bargaining range.
    • 4. We could give the right to sue and collect to anyone--but the victim is the one most likely to know that the tort has happened, and he has the additional incentive of deterrence.
  • B. To affect the incentives of the victim?
    • 1. That is a good reason in the strategic case with one tortfeasor who, if damages go to the state instead of the victims, can get the many victims to take precautions if he refuses to. This is one way of controlling strategic torts.
    • 2. But just the opposite is true in the non-strategic case (auto accidents). Paying the damages to the victims reduces their incentive to take precautions to below the optimal level.
    • 3. Note the difference between an anonymous victim tort (auto accident, many small players) and a known victim tort (deliberate trespass, conversion). where the tortfeasor knows exactly who the potential victim is, and can bargain with him.
      • a. Known victim tort introduces strategic problems, but also ...
      • b. Possibility of Coase Theorem bargaining
      • c. Moving us towards a property rule instead of a tort rule.

       

• XIII. The problem of measuring and compensating damages for loss of earning capacity, death, injury.
  • A. Lump sum vs periodic payments
    • 1. A lump sum reduces disincentive effect, but
    • 2. By the same token lowers the cost of fraud. Once the money is paid you get a ticket to Lourdes and come back without your crutches.
  • B. Triple effect of injury
    • 1. On income (readily dealt with)
    • 2. On utility (compensate with cash)
    • 3. On Marginal Utility of Income. This makes compensating for the loss of utility difficult, expensive, inefficient, perhaps impossible.
    • 4. And explains why the price of a life seems infinite if you try to buy one. It is not that the value of life is infinite but that the value of money to a corpse is zero.
  • C. Full compensation vs optimal insurance vs optimal deterrence.
    • 1. Suppose it takes $100 million to make up to you for loss of your sight.
    • 2. You would not insure yourself for that amount.
    • 3. You would not take the precautions, in a case where your actions may risk your sight, that are implied by that price.
    • 4. So full compensation over insures and over deters.
    • 5. But what if you would not insure at all (death for someone with no dependants)? Does it follow that the optimal deterrence price is zero? Obviously not.
    • 6. So these are three different values.
  • D. Correct solution in principle:
    • 1. Set damages at a level that makes people as well off ex ante with the risk as without, as judged by risk premia for jobs and similar criteria.
    • 2. Allow the sale of inchoate tort claims. Now if my tort claim leaves me "overinsured" I can sell part of it in advance (before the accident happens), so as to consume some of the money now when I am not dead/blind/whatever.
  • E. My article which discusses this at much greater length is on the web.

---

Criminal Law

• I. Differs from tort law in that:
  • A. Prosecution is by the state
  • B. State controls settlement, collects fines, imposes punishments.
  • C. No presumption that actual punishment = damage done.
  • D. Most punishments are not fines.
  • E. Moral Stigma: Clinton.
  • F. Note that the Tort/Crime distinction may be less clear than we usually think.
    • 1. Traffic tickets are state imposed, collected, fines w/o moral stigma.
    • 2. Criminal charges are often dependant on the victim complaining, and ...
    • 3. In some cases de facto out of court settlement is possible.
      • a. Michael Jackson was facing both criminal and civil charges for child abuse.
      • b. He settled the civil case--and the criminal case disappeared.
      • c. Presumably because the witnesses decided not to testify.
    • 4. There have been other societies where criminal law was privately prosecuted, or even ...
    • 5. Where all offenses were treated roughly as we treat civil offenses.

   

• II. Why Have Criminal Law: First Try
  • A. Simple story: Enforcing property rules.
    • 1. Optimal level of some offenses is close to zero
    • 2. Most obviously because there is a market substitute, so if the result that would be produced by the offense (your using my land) is efficient it will happen that way even if the offense is prevented.
      • a. Theft is the obvious example.
      • b. Assault not so clear.
      • c. Would we accept consensual market murder? A rich man offers ten adventurers $100,000 each, in exchange for their agreement that he may select one of them at random and try to kill him.
    • 3. So we set very high punishment, >> damage done, to deter everything. But ...
  • B. That doesn't describe the real system, since:
    • 1. Expected penalty for murder is <damage done.
    • 2. Lots of crimes happen--level is not zero. Do we think they are efficient crimes?
    • 3. So what determines the optimal punishment?
    • 4. If it were =damage done we again have a problem--that implies that the reason we don't raise the punishment for murder is concern that there would be too few murders, which seems implausible.

       

• III. The theory of optimal punishment part I: Price+Prodn fn->TC.
  • A. Think of any probability/punishment pair in terms of its certainty equivalent.
  • B. And its cost:
    • 1. Punishment cost=cost to the punishee-benefit (or +cost) to the punishor
    • 2. Enforcement Cost: Cost of catching and trying offenders.
  • C. For a given certainty equivalent, find the p/P pair that minimizes total cost, thus produces a given level of deterrence as cheaply as possible.
  • D. Repeat for every certainty equivalent and you have a total cost curve for deterrence, since
  • E. The ex ante cost the legal system imposes on the criminal for committing the crime is the certainty equivalent.
  • F. Which I call the "Effective Punishment"
    • 1. It would be the "expected punishment" for risk neutral criminals and money punishments.
    • 2. This generalizes it to all risk tastes, all forms of punishment.
    • 3. And includes the costs of risk aversion or the benefits of risk preference in the punishment cost
    • 4. As seen by considering a costlessly collected fine imposed on a risk averse defendant--with net social cost, due to his participating in a lottery he disvalues.
  • G. Note that this is just like deriving a total cost curve from prices and production functions in ordinary price theory. TC(E) where E is effective punishment.
     
• IV. Part II: TC ->optimal punishment:
  • A. Each offense does damage D.
  • B. We deter it by imposing an effective punishment E via the least cost combination of p,P.
  • C. There is some supply curve for offenses O(E)
  • D. From O(E) and TC(E) we could calculate the marginal cost of deterrence.
  • E. And just as with tort law we set E=E*=D-MC(deterrence)
  • F. This worked through in more detail in my "Payne v Tennessee" article.
     
• V. The intuition:
  • A. Punishment to fit the crime or enough punishment to deter?
  • B. If enforcement and punishment are cheap, E*~D, punishment to fit the crime--i.e. deter all and only inefficient offenses. Speeding ticket?
  • C. If enforcement and punishment are costly, and there is some level of E that just suffices to eliminate almost all offenses, we want that level of E.
  • D. This suggests the possibility of price discrimination--impose more severe sentences on those we believe are harder to deter, such as repeat offenders.
  • E. Should the rich and the poor pay the same fine or get the same prison sentence? Maybe
    • 1. Same fine means lower punishment in utility for the rich, and ...
    • 2. Same prison sentence means higher punishment in dollars (perhaps also in utility?) for the rich.
    • 3. Are the supply curves and cost functions the same for rich and poor?
  • F. Sometimes the same fine, sometimes not.
    • 1. Consider money crimes--the same fine will deter either.
    • 2. Consider utility crimes--it takes a larger fine to deter the rich person.
    • 3. Which is an argument for either higher fines for the rich (price discrimination) or not trying to deter the rich because it costs too much.
    • 4. What about punishment costs?
      • a. Rich can pay larger fines, which lowers punishment cost, but ...
      • b. Can higher better lawyers, which may raise conviction costs.

       

• VI. Complications.
  • A. Differing probabilities of apprehension.
    • 1. Imply that the reason one person commits a crime and another does not might be a difference, not in the value of the crime to the criminal, but in his chance of getting caught.
    • 2. To some extent, the legal system can try to allow for differing probabilties at sentencing--higher punishments for experienced thieves, who presumably are better at getting away with crimes, for example.
  • B. Incapacitation
    • 1. We have discussed punishment entirely in terms of deterrence.
    • 2. Another reason to lock someone up, or hang him, might be to prevent further crimes.
    • 3. We could include this in our analysis by counting incapacitation as a negative term in punishment cost--a benefit to help balance the costs.

       

• VII. Taking Account of Marginal Deterrence.
  • A. If armed robbery gets the maximum possible punishment, then the additional punishment to an armed robber for killing the victim is zero.
  • B. More generally, in setting optimal punishments we must allow for the possibility that we may deter someone out of one crime and into another.
  • C. Which makes the calculation of an optimal set of punishments more complicated.
  • D. William Sjostrom and I wrote an article on this.
     
• VIII. How many innocents should we convict?
  • A. None?
    • 1. That would be the right answer if we could costlessly avoid convicting innocents.
    • 2. But the only way to be sure of doing that would be to convict nobody.
    • 3. By increasing the standard of proof, we can reduce the number of innocents we convict--at the cost of increasing the number of guilty defendants we acquit.
    • 4. How, in principle, do we find the right balance between the two?
  • B. What is the cost of convicting an innocent defendant?
    • 1. The cost of catching and trying him is paid whether or not you convict him.
    • 2. Convicting an innocent provides no benefit in deterrence--assuming that the criminals are well informed about your standard of proof and thus discount the number of people you convict to take account of the fraction who are innocent.
    • 3. So the net loss from convicting an innocent defendant is the punishment cost.
    • 4. Including, of course, cost to the defendant.
    • 5. Note that the net cost of stigma is large for an innocent defendant, since the stigma conveys false information, but low and possibly negative for a guilty defendant.
  • C. What is the cost of acquitting a guilty defendant?
    • 1. If you wnat to maintain the same deterrence, you have to catch and convict another guilty defendant
    • 2. So it is the cost of catching and convicting one guilty defendant
    • 3. No extra punishment cost, since you are still punishing the same number
    • 4. But remember that in order to convict one guilty defendant you must, on average, convict some fraction of an innocent defendant, so the costs associated with that must be included.
  • D. In an efficient system, you keep raising the standard of proof until, for an additional increase, the gain from convicting fewer innocents is just balanced by the cost from acquiting morel guilty.
  • E. If the ratio of the cost in B above to the cost in C above is R, you want to raise the standard of proof until a small increase will result in aquitting one more innocent defendant and R more guilty ones.
     
• IX. The Paradox of Efficient Punishment:
  • A. Why not hang them all?
    • 1. Argument for efficient punishments.
      • a. If we shift to a lower cost punishment probability combination giving the same deterrence ...
      • b. The expected cost to the criminals is the same
      • c. The crime rate, hence the cost to the victims is the same
      • d. And the enforcement system saves money.
    • 2. What would such an efficient system look like?
      • a. Fine if collectable.
      • b. Make it collectable by threat of worse punishment if they can't pay.
      • c. Temporary slave labor if they cannot pay a fine.
      • d. Execution if they cannot produce more as slave labor than they cost to feed and guard.
      • e. And after you execute them, use their organs for transplants.
    • 3. English 18th century example.
      • a. No imprisonment for serious crime.
      • b. Hang, transport, or pardon.
      • c. No imprisonment for serious crime.
      • d. Costs of slave labor too high to make imprisonment an efficient crime... It looks as though galley slaves (easy to guard and monitor) more than paid their costs, other forms of slavery for violent criminals did not. The English didn't use galleys, because the Atlantic is too rough for them. So their only cheap imprisonment option was transportation. For more details, see my article on 18th c. English law.
    • 4. If the sort of efficient system of punishments I have described is a bad idea, as most people believe, why?

• X. Why benefits to criminals count:
  • A. The lost hunter problem.
    • 1. If a hunter is lost and starving and comes to a locked, empty cabin containing food and a telephone, it is efficient for him to break in.
    • 2. Because the benefit to him is greater than the loss to the owner.
    • 3. Which seems right--but only if we are allowed to count the benefit to him.
  • B. Even if you want to deter it, how much do you want to deter it?
    • 1. Deterrence is costly.
    • 2. Its benefit is the net gain from deterring an offense.
    • 3. Which is greater the greater the damage done to the victim, but also ...
    • 4. Greater the less the gain to the offender.
    • 5. We are willing to pay more to deter an act of arson committed for the fun of watching buildings burn than to prevent a hungry man from stealing food--and would be even if the total damage done to the victims was the same (the hungry man steals lots of food over a period of years, say).
  • C. How do we know what is bad before we know what is inefficient?
    • 1. Part of the attraction of the economic analysis of law is that we can start with one very simple "moral" assumption--the desirability of economic efficiency--
    • 2. And deduce from that that robbery and murder ought to be illegal, contracts ought to be enforced, ...
    • 3. If we start out already knowing that robbery is bad, hence gains to robbers don't count, we are rigging the game--guaranteeing that we will get out as efficiency what we put in as ethics.

   

• XI. Why have criminal law anyway?
  • A. We have two legal systems: If someone breaks your arm you call a cop, if he breaks a contract you call a lawyer. Why?
    • 1. Is there any reason why we could not treat all current torts as crimes, or ...
    • 2. All current crimes as torts?
    • 3. I'll be talking mostly about the latter option.
  • B. Some related questions are:
    • 1. Why bundle rules the way we do? In other words, why to criminal and civil law differ in the particular ways they so?
    • 2. Why sort acts the way we do? In other words, why are particular things crimes and other things torts?
    • 3. In both cases, of course, the answer might be "there is no good reason."
  • C. Note that an answer must take account of ways in which the law would change if we changed these things. For example, a tort system that included offenses with low probability of apprehension might introduce probability multipliers on a more regular basis.

   

• XII. Should we abolish the criminal law?
  • A. Why have criminal law at all?
    • 1. It is hard to get people to prosecute if the defendant is judgement proof, and ...
    • 2. If you put in probability multipliers, offenders who commit crimes that are hard to prove are particularly likely to be judgement proof, since the damages they will owe if convicted will be very large.
  • B. Other possible reasons.
    • 1. Diffuse injury. But that does not apply to most of criminal law, and does apply to some of tort law--dealt with by class actions, could be dealt with by transferrable tort claims.
    • 2. To express moral outrage?
    • 3. Because victims can't afford to sue? Make claims tranferable.
    • 4. To get the optimal probability/punishment bundle.
      • a. The theoretical solution--for each level of deterrence (i.e. of effective punishment), find the combination of probability and punishment that gives that amount of deterrence at the lowest (punishment cost + apprehension cost) cost. The result is the total cost function for deterrence--just like deriving an ordinary TC function from a production function and input prices.
      • b. In a private system, the fine is both the punishment and the payment to the enforcer, so you can't separately set punishment and probability, so ...
      • c. You get the Landes/Posner argument on the inefficiency of private enforcement. There is no reason to expect that the optimal fine will result in the optimal probability of being caught.
      • d. And my solution to it: Let the court set the effective punishment not the actual punishment. The enforcement firm buys a bunch of offenses from the victims, pays to catch them, imposes the punishment that combined with the fraction it catches yields the right effective punishment. Punishment paid by the offenders is being fixed, the firm gets punishment collected (fines minus cost of jails etc.), pays for apprehension, so apprehension+punishment cost is a subtraction from its profit, so it minimizes the sum, giving us the efficient probability/punishment combination.
      • e. Which runs into a problem if the market price of an offense is negative, and ...
      • f. Victims are anonymous.
    • 5. But note that we have no theoretical reason to expect optimal litigation expenditure in ordinary tort law, which is the analogous problem. So this is an argument for public enforcement but does not explain why we have private enforcement for the sorts of things that are now torts.
    • 6. And inefficiency is relative to ideal, not to real alternative. There is no good reason to believe that the internal incentives in a government run system will generate the optimal combination either.
  • J. Why do we have a higher standard of proof for criminal law?
    • 1. Because false positives are more expensive when you are using more costly punishments.
    • 2. In fact, in an efficient system,
    • 3. The cost of punishing an innocent defendant is punishment cost.
    • 4. The cost of acquitting a guilty is apprehension+litigation cost.
    • 5. So the number of one error that trade off against another is the ratio of the two numbers.
  • K. Why does civil law normally not have probability multipliers?
    • 1. Reducing the negative incentive to be a victim vs increasing the positive incentive.
    • 2. Faking an injury can pay even without multipliers, but ...
    • 3. Making an accident happen cannot.
    • 4. With probability multipliers, there is an incentive to "arrange" an accident, with friendly witnesses to make sure that the probability of conviction for this accident is near one.
    • 5. Think of the distinction between multipliers less than one and multipliers greater than one as analogous to the difference between insuring a building for 90% of its value and for 110% of its value--something special happens when you pass 100%.
    • 6. This suggests that another reason for criminal law is to permit probability multipliers, given the fake offense problem.
    • 7. But criminal law is only a partial solution. Police can frame you, get paid off in money or information or assistance for not hanging you.
    • 8. But it does imply that a pure civil system would have to either do without probability multipliers or have institutions designed to deal with false offenses--presumably liability for faking an offense.
  • L. Why does civil law assign the claim to the victim?
    • 1. The right rule for transfers to give appropriate incentive.
    • 2. Reduces transaction costs since he has the evidence.
    • 3. And the deterrence incentive.
  • M. Why does the same person control prosecution and collect the fine in both systems?
    • 1. In 18th c. England, didn't.
    • 2. Which leads to compounding, so
    • 3. Why not eliminate the complication?

     

• XIII. A real world example of a pure civil system--more private than ours. For details, see my article
  • A. The history of Iceland
    • 1. In the ninth century, King Harald put together Norway under his authority
    • 2. The people who didn't like it left--many of them to Iceland
    • 3. Where they set up a legal system based on traditional Norwegian law--minus the King.
  • B. The formal structure: .
    • 1. Godar and Thingmen. Franchise feudalism.
    • 2. Making laws.
    • 3. Enforcing them--fines and outlawry.
  • C. Considered as a fully private system: Why was it stable?
    • 1. Because if you tried to defy the law, relying on the power of yourself and your friends,
    • 2. Every conflict would lead to law cases which your side would lose,
    • 3. Forcing you to either pay for the damage you had done, or pull the relatives of the people on the other side who you had hurt into the coalition against you.
  • D. Considered as a fully civil system--how did it solve the problems?
    • 1. Poor victim problem:
      • a. Claims were transferable.
      • b. A certain amount of "pro-bono" defense, possibly to establish a reputation.
    • 2. Judgement-proof defendant problem:
      • a. Debt thralldom
      • b. Informal credit arrangements
      • c. If you couldn't pay you got outlawed, so you had an incentive not to be judgement-proof.
    • 3. Probability multiplier problem.
      • a. No probability multipliers in the law.
      • b. Penalty and social pressure to prevent concealing an offense.
    • 4. Fake offense problem. Abusing the legal system seems to have been tortious.
  • E. How well did it work?
    • 1. The rest of the history:
    • 2. Amount of violence? Easy to overestimate from the sagas.
    • 3. Estimate--350 in 50 years, 1/10,000 per year. Aprox our murder rate.
    • 4. Compare to 1066; in three weeks there were three big battles (Fulford, Stamford Bridge, Hastings) that may well have killed a larger fraction of the population of England, Norway and Normandy than fifty years of Icelandic feuding killed of the population of Iceland.

   

• XIV. Eighteenth Century England: The puzzles
  • A. Pattern of punishments:
    • 1. Clergyable and non-clergyable felonies.
      • a. In the Middle Ages, clergyment could insist on being transferred from the royal courts to the church courts--which did not have capital punishment.
      • b. Over time, the doctrine developed that anyone who could read counted as clergy, and ...
      • c. Reading was usually tested on a particular verse of the bible--which a prudent felon would memorise.
      • d. Eventually benefit of clergy was expanded to cover everyone, but ...
      • e. Since it amounted to a get out of jail free charge--the Church courts having mostly disappeared except for family law and the like
      • f. More and more offenses were made "non-clergyable"
      • g. And eventually a (lower, non capital) punishment was established for clergyable felonies.
    • 2. Capital punishment for all major offenses--burglary with someone in the house, stealing more than forty shillings, sheep stealing, ...
    • 3. But often a pardon on condition of transportation or enlistment, and ...
    • 4. Sometimes a pardon gratis.
    • 5. In one sample, of those charged with a non-clergyable felony, 40% were convicted of it.
    • 6. Of those convicted, 40% of one sample were hanged.
    • 7. No use of emprisonment as a punishment for serious crimes
      • a. Offenders were in prison while awaiting trial or execution or transportation.
      • b. Or for vagrancy and the like.
  • B. Private prosecution:
    • 1. No govt prosecutors.
    • 2. Anyone could prosecute; the prosecutor was usually the victim.
    • 3. Changed de facto c. 1830 with police, who prosecuted offenses--legally speaking as individuals.
    • 4. It changed de jure c. 1880, when they finally started having public prosecutors.
    • 5. Private prosecution of crimes is still possible in the UK, and occasionally occurs.
  • C. Punishment puzzle, explanation.
    • 1. Why there was no imprisonment--too expensive for dangerous criminals whom you have to guard
      • a. Why not penal slavery? Hard to run it at a profit.
      • b. Galley slavery the exception, and ..
      • c. transportation--penal slavery far away, hard to get back.
      • d. Someone who was convicted of a capital offense and transported was taken (usually) to the New World, sold into 14 years of indentured servitude.
    • 2. Some numbers from France suggest that the one time cost of transportation to the British government was comparable to the annual cost of imprisonment for non-violent prisoners in France.
    • 3. Why the switch to imprisonment at the end of the century?
      • a. England got richer, or ...
      • b. Developed more scruples about hanging people, or ...
      • c. There was an ideological shift from belief in deterrence to belief in rehabilitation.
  • D. Prosecution puzzle: Explanation
    • 1. Why did anybody prosecute? It cost money and, unlike a civil system, they didn't get a damage payment. If the prosecution succeeded, the defendant was hanged, or transported, or pardoned.
    • 2. Private deterrence via reputation, or ...
    • 3. Via associations for the prosecution of felons.
    • 4. In order to have a threat to compel a covert out of court settlement--a transaction called "compounding a felony."
    • 5. Which was legal and proper for a misdemeanors; there is some evidence that it happened for felonies, although illegal.
  • E. Pardoning puzzle: Why pardon people?
    • 1. How it happened:
      • a. A petition was sent to the crown asking for a pardon.
      • b. It might be at the instigation of the judge, or ...
      • c. The convicted felon's friends and anyone they could get to support them.
    • 2. Price discrimination according to how much punishment is needed to deter.
      • a. If the defendant was a "good boy gone bad," holding him in an unpleasant prison for a couple of months awaiting trial, then scaring him half to death by sentencing him to hang, might be enough punishment to deter the next "good boy" from going bad.
      • b. We do that sort of price discrimination too--via judicial discretion in sentencing (less since the Federal guidelines went into effect).
    • 3. Price discrimination according to how much punishment costs.
      • a. Does he have a family that will "go on the parish" (i.e. on welfare)
      • b. Is he a valuable citizen, as shown by petitions etc.,
      • c. On the other side, is he a habitual offender, so that hanging him will save us the cost of his future crimes?
      • d. So different punishments for different people, by judicial discretion in our system, by royal pardon in theirs.
    • 3. Selling pardons?
      • a. Done quite explicitly by the crown in the Middle Ages, for cash.
      • b. Might be done implicitly here--your friends get you off by offering informal services, such as political support, to local powerful people, who can help persuade the judge to pardon you.
      • c. In a modern society, having an in with a judge can also be valuable--to fix traffic tickets, for example.
      • d. Note the problem of keeping punishments inefficient--selling pardons converts a slightly inefficient punishment (cost positive but small--transportation) to an efficient one.
  • F. Rewards, as ...
    • 1. Large rewards for convicting offenders of particular crimes was seen as a possible solution to the problem of incentive to prosecute, especially for victim anonymous crimes such as highway robbery, but ...
    • 2. It created a problem of entrapment, perjury, framing innocent defendants, etc.
    • 3. The system of rewards was mostly abandoned c. 1750.

   

• XV. Shasta County California:Ellickson Book
  • A. Coase and Shasta County:
    • 1. Rancher/farmer prediction: They will behave in the same way whether the law provides for open or closed range.
    • 2. Correct prediction.
    • 3. Wrong reason.
      • a. Coase's reason was because of side payments.
      • b. Ellickson's explanation was that such issues were determined by local norms, not by the official legal rules--and the norms in open and closed range areas were the same.
  • B. How the system of norms works:
    • 1. Self enforced
    • 2. With a range of sanctions
      • a. The first time his cattle stray into your wheat field you call up to complain; if he is a responsible neighbor he comes over promptly to get the cattle, apologizes, if the damage was serious helps undo it, and is more careful next time.
      • b. If he doesn't act that way, you start spreading true negaltive gossip about him.
      • c. If that doesn't work, you drive his cattle a long distance in the opposite direction from his property, and leave them there for him to find--eventually.
    • 3. No arbitrator beyond public opinion. Depends on a society of neighbors who know who to believe.
    • 4. Suing is ruled out by the norms, so the "official" legal rules become irrelevant.
  • C. The efficiency of inefficient punishment.
    • 1. The reason you don't punish your neighbor by slaughtering one of his straying cows is
    • 2. That you would have too much incentive to do so even if he didn't deserve it
    • 3. As per our discussion of the disadvantages of efficient punishments.
  • D. Fence building--the same story.
  • E. But not accidents with motorists who run into cattle. They are strangers, hence not a part of the system of norms of neighborly behavior.
  • F. Other norms Ellickson discusses: Whaling. Photocopying.
  • G. The economics of norms.
    • 1. Locally efficient.
    • 2. But not globally efficient.
      • a. Whalers efficiently hunted one species after another into near extinction.
      • b. They would probably have been better off limiting their catch so as to preserve their prey, but ...
      • c. Any whaler or group of whalers who did so would be bearing the cost of catching fewer whales, while sharing the benefit of more whales in the future with everyone, including the whalers who did not restrict their catch.
  • H. Implications. Crime rates?
    • 1. The facts about U.S. murder rates.
      • a. Most of the U.S. has murder rates comparable to those in European countries.
      • b. The high national average reflects very high rates in the inner cities.
    • 2. Explanation? Perhaps ...
      • a. Crime control is mainly by norms and reputation.
      • b. And they break down in a society where many people do without marriage or jobs.

   

• XVI. Medieval England:
  • A. The same offense could be prosecuted in four ways.
    • 1. Appeal of felony: A private criminal action.
    • 2. Indictment of felony: Public criminal action.
    • 3. Write of Trespass: Private civil
    • 4. Indictment of Trespass: Public civil (plus some criminal punishment as well)
  • B. Pre 1208 vs post 1208 Appeal vs indictment.
    • 1. Somewhere around 1208 A.D. the legal rules changed.
      • a. Before that date, if you were prosecuted privately, as an appeal, and the prosecutor dropped charges, it was over.
      • b. After that date, if the private prosecutor dropped the case, the Grand Jury could pick it up again as an indictment of felony.
      • c. Before the change, a sizable majority of the cases were prosecuted as appeals, afterwards as indictments.
      • d. Presumably because the incentive to prosecute an appeal was lower once the prosecutor could no longer guarantee the defendant that, if he settled, the case was over.
  • C. Puzzle: Why the long shift from privately to publicly enforced law?
    • 1. Anglo-Saxon England was rather like saga period Iceland, although a less extreme version, since they had kings. From there you go to the mixed public private system of the 12th century, and by the 17th or 18th century essentially all criminal cases are, at least nominally, public--the King vs X.
    • 2. Why did this long change happen?
      • a. People got smarter. This doesn't seem very pluasible--surely the Anglo-Saxons knew more about the factors determining how their legal system worked than we do.
      • b. Circumstances changed and the legal institutions changed accordingly. Private deterrence via reputation works a lot better in a society with little mobility and small populations.
      • c. A revenue grab by the crown. One consequence of the change was that the revenue from punishing criminals went to the crown, as fines, forfeits, or payment for pardons, instead of to the victim.
  • D. Why was there a temporary reversal (if it happened) to give the 18th c. system, in which prosecution was nominally public but actually private.
    • 1. Blackstone described the appeal of felony as an action that was still on the books, but no longer actually used, so it looks as though private criminal actions had vanished, but ...
    • 2. The indictiment of felony, although nominally a public action, was in practice privately prosecuted.
    • 3. Presumably, the profits from enforcing the criminal law were getting divided--some to the victim via covert out of court settlements, some to the crown via political payments for pardons.
    • 4. Which may explain why compounding was illegal--in an attempt to cut down the victim's share.
    • 5. One possibility is that the reversal was a result of the English civil war and ensuing political turmoil.
    • 6. Another is that the indictment of felony was always, in practice, privately prosecuted--we just don't know as much about law enforcement in the Middle Ages, so the fact isn't as obvious as it is for the 18th century.

   

• XVII. The civil/Criminal puzzle: Again.
  • A. Is there a good reason to have the system we have?
    • 1. Do we need both civil and criminal law?
    • 2. Does it make sense to allocate offenses the way we do?
    • 3. Does it make sense to bundle characteristics the way we do?
      • a. Victim prosecutes/state prosecutes.
      • b. Victim owns claim/state owns claim.
      • c. Fine vs punishment
      • d. Moral sanction
      • e. Level of proof required for conviction
  • B. Historical light on these questions:
    • 1. Iceland had a pure civil system.
    • 2. Medieval England mixed the bundling, had multiple options for the same offense.
    • 3. 18th century England used private prosecutions for criminal offenses.
  • C. How did Iceland deal with some of the potential problems?
    • 1. Judgement-proof defendant: Credit mechanisms through the extended family and allies. Debt slavery. Marginal punishment for concealing offenses.
    • 2. Poor plaintiff: Transferable torts.
    • 3. Diffuse injury: Anyone can prosecute, if necessary draw lots.
    • 4. Negative price problem: Reputation--deterrence as a private good.
  • D. How did 18th century England deal with them?
    • 1. Incentive to enforce: compounding.
      • a. You start the case in the hope of being paid to drop it.
      • b. Note that this suggest one reason for combining victim prosecution and victim ownership.
      • c. It is going to happen anyway, since the prosecutor is the de factor owner, so why try to stop it?
      • d. This incentive to does not solve the problem of negative price cases--cases where the cost of prosecution is larger than the expected (informal, out of court) fine.
    • 2. Deterrence as a private good solves negative price cases
      • a. for non-anonomous offenses, via prosecution associations or individual reputation.
      • b. But not for offenses where the offender does not know enough about the victim to know his reputation, or whether he is a member of an association
      • 3. Rewards were established to fill in this gap--but led to problems with entrapment and framing.

   

• XVIII. Summary of last week:
  • A. We looked at three+ different systems for doing what we do with tort and criminal law:
    • 1. Iceland: Private enforcement, full civil
    • 2. 18th c. England: Private prosecution, punishment at the extremes
    • 3. Shasta county: Norms as a substitute for law.
    • 4. A little on medieval England.
  • B. Some of what we learned:
    • 1. Different allocations to tort/crime are possible: Iceland, (Shasta), Medieval
    • 2. Different bundling of legal rules, not fitting our tort/crime distinction, are possible. Some of the relevant choices are:
      • a. Who controls prosecution
      • b. Who collects the punishment
      • c. Price or prohibit behavior
      • d. Moral stigma?
    • 3. For example, we observed:
      • a. Privately prosecuted law with "criminal" punishments and government collection of the punishment (it was the crown, not the victim, that could pardon the convicted offender, transport him, etc) in 18th c. England.
      • b.Privately prosecuted law with criminal punishments and private collection in the medieval appeal of felony.
      • c. Publicly prosecuted law with "civil" punishments (plus criminal) in the medieval indictment of trespass.
    • 4. Incentives to prosecute privately include not only
      • a. Collecting damages, but also
      • b. Reputation as a private good (18th c. England, probably Iceland, Shasta County, Medieval England)
      • c. Possibility of out of court settlement (Medieval--there is evidence that the appeal of felony declined in popularity after it became impossible for the plaintiff to guarantee the defendant immunity in exchange for a settlement. Probably 18th c. England)
    • 5. Too much incentive can be a problem for private prosecution:
      • a. 18th c. reward system
      • b. Why Shasta county uses inefficient punishments
      • c. 18th c. England, at both the public and private level, may have converted inefficient punishments to efficient punishments (compounding a felony, selling a pardon)
    • 6. Some of the ways of solving problems with private enforcement that might not have occurred to us if we had not observed them are:
      • a. Punishing the offense of concealing an offense, thus raising the probability of convictions, which reduces the efficient punishment and thus the risk that defendants will be judgement proof. We punish hit and run accidents more seriously than ordinary accidents.
      • b. Temporary slavery (Icelandic debt thralldom) as a solution for judgement-proof defendants.
      • c. Or giving them an incentive to raise the fine from their friends and relations.
      • d. Marketable torts as a way of making it possible for poor people to get their rights enforced.
    • 7. Distinction between locally efficient and globally efficient.
      • a. Why norms give only local efficiency.
      • b. This is related to the issue of efficiency of common law. The law may embody pre-existing norms--and their efficiency characteristics. Also, getting individual judges to take account of the influence of their precedents on people not before them is a problem analogous to getting groups of individuals to take account of the influence of their norms on people not in the group.
      • c. So is the problem of getting governments to take account of the influence of what they do on people other than those controlling the government.

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