No full-text available
To read the full-text of this research,
you can request a copy directly from the author.
A Paradox of Spontaneous Formation: The Evolution of Private Legal Systems
Abstract
Scholarship on private legal systems (PLS) explains the evolution of norms created and enforced by PLSs, but rarely addresses the evolution of institutions that form PLSs. Such institutions are assumed to form spontaneously (unless suppressed by law) when law is either unresponsive or incapable of directing behavior in welfare-maximizing manners. But, as this paper demonstrates, PLSs typically cannot form spontaneously. Newly formed PLSs cannot enforce cooperation since the effectiveness of mechanisms used to secure this cooperation (e.g., the threat of exclusion) depends on the PLS's ability to confer benefits to its members, and newly formed PLSs do not yet confer such benefits. Successful PLSs bypass this barrier by building on extant foundations - preexisting institutions that already benefit members, typically through functions requiring less costly enforcement. The threat of losing preexisting benefits disciplines members to abide by the PLSs' rules, which in turn allows the PLSs to regulate behavior. This pattern indicates that rather than developing spontaneously, PLSs develop in phases, initially facilitating activities that are unrelated to regulating behavior and incur lower enforcement costs, the provision of which enables the PLS to regulate behavior in the second stage. The paper suggests normative applications of this observation in the fields of antitrust, critical infrastructure protection and corporate governance.
... Dit betekent in feite dat het netwerk pas kan bestaan wanneer het de leden ervan positief of negatief kan sanctioneren, en dat dit sanctioneren pas kan worden gedaan wanneer het netwerk bestaat. Een kip-ei probleem (Aviram, 2004). Volgens Aviram is evolutie de oplossing van dit kip-eiprobleem. ...
... Aangezien de positieve of negatieve sanctionering van de werkende gezinsleden ook buiten de kaders van het bedrijf kan plaatsvinden, kan gedragsregulering toch plaatsvinden. Op deze wijze kunnen opstartfases (het kip-eiprobleem) van nieuwe functies van netwerken worden overbrugd (Aviram, 2004). Wanneer later personeel in het familiebedrijf wordt opgenomen dat niet tot de familie behoort of wanneer kapitaalverschaffers worden aangetrokken die niet tot de familie behoren (Micklethwait & Wooldridge, 2005), veranderen de relaties binnen het bedrijf: meer en meer krijgen ze een louter economisch karakter. ...
This report deals with Dutch small and medium-sized companies, the companies with at most 99 employees who jointly make up little over 99% of the companies in the Netherlands. The research questions were:
1. What is the nature and frequency of the legal problems experienced by small and medium-sized companies?
2. How do companies deal with problems and which legal assistance providers do they engage in the process?
3. How do companies end their problems and how do they assess the performance of the legal assistance providers engaged by them?
Summary at URL: http://english.wodc.nl/images/Cahier%202009-13_summary_tcm45-258136.pdf
Dit rapport gaat over het Nederlandse midden- en kleinbedrijf, de bedrijven met ten hoogste 99 werknemers die samen iets meer dan 99% van de bedrijven in Nederland uitmaken. Centraal in het onderzoek staan de volgende vragen:
1. Wat is de aard en de frequentie van problemen die bedrijven hebben die tot het midden- en kleinbedrijf behoren? Met wie hebben die bedrijven deze problemen en hoe zijn de verschillen tussen de bedrijven in de aard en frequentie van deze problemen te verklaren?
2. Hoe gaan de bedrijven met problemen om en welke juridische dienstverleners worden door hen daarbij ingeschakeld? Hoe zijn de verschillen tussen bedrijven in dit verband te verklaren?
3. Hoe beëindigen bedrijven hun problemen en hoe beoordelen zij het optreden van de door hen ingeschakelde juridische dienstverleners in dit verband?
Samenvatting op URL: https://www.wodc.nl/images/cahier-2009-13-samenvatting_tcm44-258135.pdf
... 414 An illustration of such a situation was given by Aviram. 415 He explains that if two individuals were caught for robbing a bank, without being able to talk to one another prior to a criminal court's decision and both individuals were given two options, namely to betray the other person or not to talk at all, either party will choose the option that minimalizes his risk to go to prison, even though this would go against the common interest. Aviram exemplifies this by using the following three options that can, but do not necessarily, result in a prison sentence. ...
Some modern-day trade associations in commodities industries have complex systems of private commercial enforcement. These associations impose nonlegal sanctions on disloyal industry actors for not complying with awards stemming from specialized commercial arbitration after a business conflict. These extrajudicial measures undermine states’ rights to enact formal legal rules, and could violate US Antitrust Law and EU Competition Law. Yet, they could be viewed as a viable alternative to lengthy and expensive court litigation. This book provides best practice guidelines to highlight under what conditions nonlegal sanctions imposed by a trade association and executed by its members do not violate US Antitrust Law and EU Competition Law.
... They are distinguishable from end game norms (EGNs), which parties want contracts to include (Bernstein 1999). For another detailed examination of the game theoretic constraints on the evolution of norms, see (Aviram 2004). ...
Global legal pluralism has become one of the leading analytical frameworks for understanding and conceptualizing law in the twenty-first century. Wherever one looks, there is conflict among multiple legal regimes—some of which are state-based; some are built and maintained by nonstate actors; some fall within the purview of local authorities and jurisdictional entities; and some involve international courts, tribunals, and arbitral bodies, as well as regulatory organizations. Global legal pluralism has provided, first and foremost, a set of useful analytical tools for describing this conflict among legal and quasi-legal systems. At the same time, some pluralists have also ventured in a more normative direction, suggesting that legal systems might sometimes purposely create legal procedures, institutions, and practices that encourage interaction among multiple communities in order to foster dialogue across difference. Featuring works from a diverse set of authors touching on nearly every area of legal pluralism research, this book is the first comprehensive review of global legal pluralism scholarship ever produced. As such, it is a must-have for scholars and students seeking to understand the insights of legal pluralism to contemporary debates about law.
... Amitai Aviram (2004) argued convincingly that private ordering is generally insufficient to create an enforceable legal authority. A newly formed spontaneous order cannot alone enforce compliance, because mechanisms to secure this cooperation (such as the threat of exclusion) depend on its ability to confer benefits to its members, and a newborn order cannot yet confer such advantages, because it lacks the critical mass to do so. ...
Social scientists have paid insufficient attention to the role of law in constituting the economic institutions of capitalism. Part of this neglect emanates for inadequate conceptions of the nature of law itself. Spontaneous conceptions of law and property rights that downplay the role of the state are criticized here, because they typically assume relatively small numbers of agents and underplay the complexity and uncertainty in developed capitalist systems. In developed capitalist economies, law is sustained through interaction between private agents, courts and the legislative apparatus. Law is also a key institution for overcoming contracting uncertainties. It is furthermore a part of the power structure of society, and a major means by which power is exercised. This argument is illustrated by considering institutions such as property and the firm. Complex systems of law have played a crucial role in capitalist development and are also vital for developing economies.
... Critics of the spontaneous emergence of norms argue that there is no reason to assume that individuals will engage in interactions with others if the environment is not peaceful. In other words, norms are a public good and selfinterested individuals have no incentives to contribute to their creation, which implies that norms must be created by the state [see, e.g., Sened (1997) and Aviram (2004)]. 2 Private enforcement mechanisms may be decentralized (such as shaming) or centralized (such as private judicial institutions). What these enforcement mechanisms have in common is that they are private-i.e., non-governmental. ...
An important part of the debate about self vs. state-governance involves a discussion about enforcement mechanisms. While some scholars argue that private enforcement mechanisms work sufficiently well in supporting cooperation, others cite the downfalls of private mechanisms so as to legitimize government enforcement. This paper focuses on the interplay between government and private enforcement mechanisms. Using an experimental approach, we demonstrate two results. First, we show that government enforcement, in the form of a centralized monetary punishment in our experiment, can be useful if aligned with and implemented after a private form of enforcement, namely peer disapproval. However, our second result suggests that the removal of government enforcement leads to a substantial decrease in overall cooperation levels - cooperation levels are higher when subjects use private enforcement and had never experienced government enforcement compared to when they had been exposed to a government enforcement. Specifically, the removal of government enforcement undermines the power of the remaining private enforcement mechanism to affect the behavior of free-riders.
... Individuals would then hardly be motivated to join the network in the first place, and the private legal system may not form. This is the "paradox of spontaneous formation" (Aviram, 2003 and2004). Such paradox can be overcome by finding ways to exploit an existing network, with a functioning enforcement system, building the new private legal system on it. ...
... While the Lozi of Northern Rhodesia, whom Gluckman worked with, were entangled in a web of multiplex relations, they used litigation for resolving disputes. Nonetheless, the legal, anthropological, and sociological literature that has followed Gluckman tends to associate multiplex relations with extralegal dispute handling (Aviram 2004;Richman 2005;Schwartz 1954). A narrow version of the "continuing relations hypothesis" (Yngvesson 1985: 624) disregards the complexity of the ties and assumes that the longer a relationship continues, the less likely it is that the parties will use official forums for handling their disputes (Ellickson 1991;McMillan & Woodruff 2000;Richman 2004). ...
Private ordering—i.e., development of extralegal forums and forms of dispute processing by nonhierarchical groups—has preoccupied legal economists for nearly three decades. According to the prevailing analysis, private orders grow in socially-flat market communities without any intervention by the state. This article challenges the received view on two fronts: First, it establishes a causal connection between the development of private orders and a social hierarchy. Second, the article demonstrates that the state often intentionally assumes a proactive role in the creation of these orders. To illustrate this two-pronged theory of private ordering, this article offers a detailed analysis of three well-known cases that have been considered prototypes of private ordering by market communities: the Diamond Dealers Club of New York, the kibbutz in Israel, and ranch owners in Shasta County, California. Finally, the article argues for a need to re-evaluate the feasibility and desirability of private ordering and privatization of law.
... This article explains why successful PLSs rely on these core, cooperative norms, and develops a theory on the development and norm selection of PLSs. In doing so, this article heavily relies on, revises and expands my earlier work [Aviram (2003), Aviram (2004) and Aviram (2010. In a nutshell, reliance on cooperative norms is a product of the crucial importance of enforcement costs (rather than norm efficiency) to the development of PLSs. ...
Contrary to some idealized notions, Private Legal Systems (“PLS”) do not form spontaneously (that is, without reliance on preexisting institutions) upon the identification of norms that maximize the welfare of their members. Rather than being driven by the relative efficiency of the norm they attempt to enforce, the evolution of PLSs is primarily driven by the PLSs’ relative enforcement costs.Because of enforcement costs’ role, PLSs form in a path dependent manner, beginning by enforcing a collaborative core norm – typically one that provides religious or social identity – then gradually expanding to enforce increasingly adversarial expansion norms. PLSs sometimes attempt to reduce path dependence by “inventing tradition” (creating rituals and symbols that suggest a shared identity) – an activity that has thus far not received much attention by PLS scholars.
... Posner mentions a political conundrum, intractable from the economic perspective. Why do people vote (189)(190)(191)(192)? It makes no sense. ...
Bu makale özel yönetişim veya özel yasal sistemler hakkındadır. İşlem maliyeti iktisatçılarının vurguladığı doğal kısıtların yanı sıra (bilgiye erişim kısıtları, uygulama mekanizmalarının sınırlı olması vb.) gelişmekte olan ülkelerde yasal sistemin yetersizliği özel yönetişimin önemini arttırmaktadır. Spontane ve merkezileşmiş özel yönetişim olarak iki farklı biçiminden bahsedilmektedir. Spontane özel yönetişimde bilgi toplumsal ağlar aracılığı ile kolaylıkla yayıldığından tarafların davranışları çoğunlukla toplumsal normlar aracılığı ile kontrol edilmektedir. İstenmeyen davranışlarda bulunanlar kolektif bir cezalandırmaya maruz kalmaktadır. Merkezileşmiş özel yönetişimde topluluğun nitelikleri, doğru bilginin elde edilmesini ve kolektif cezalandırmayı güçleştirmektedir. Bu nedenle birlikler, piyasa aracıları gibi çeşitli organizasyonlar öncülüğünde ekonomik ve toplumsal düzen sağlanmaktadır. Üstün yanlarına rağmen, etkin bir yönetişim sağlayıp sağlayamayacağına ilişkin ortak uzlaşıözel yönetişim biçimlerinin formel hukuk sistemin ikamesi değil, tamamlayıcısı olabileceğidir.
Cybersecurity is a leading national problem for which the market may fail to produce a solution. The ultimate source of the problem is that computer owners lack adequate incentives to invest in security because they bear fully the costs of their security precautions but share the benefits with their network partners. In a world of positive transaction costs, individuals often select less than optimal security levels. The problem is compounded because the insecure networks extend far beyond the regulatory jurisdiction of any one nation or even coalition of nations. Originally published in 2006, this book brings together the views of leading law and economics scholars on the nature of the cybersecurity problem and possible solutions to it. Many of these solutions are market based, but they need some help, either from government or industry groups, or both. Indeed, the cybersecurity problem prefigures a host of twenty-first-century problems created by information technology and the globalization of markets.
Le développement de la théorie de la firme s’est souvent affranchi d’une analyse de la nature légale et politique des entreprises si bien que la réflexion sur la nature des ordres normatifs est elle-même demeurée marginale. Par ordre normatif, nous entendons un standard de régulation des relations industrielles qui s’applique pour une période donnée à des entités réelles, ici aux firmes. Cet article contribue à la littérature sur le pluralisme industriel en proposant une analyse des évolutions institutionnelles et historiques des firmes et en mettant en exergue une forme d’intrication des ordres publics et privés dans les entreprises. JEL Classification: A12, D20, J50, L20
Social scientists have paid insufficient attention to the role of law in constituting the economic institutions of capitalism. Part of this neglect emanates for inadequate conceptions of the nature of law itself. Spontaneous conceptions of law and property rights that downplay the role of the state are criticized here, because they typically assume relatively small numbers of agents and underplay the complexity and uncertainty in developed capitalist systems. In developed capitalist economies, law is sustained through interaction between private agents, courts and the legislative apparatus. Law is also a key institution for overcoming contracting uncertainties. It is furthermore a part of the power structure of society, and a major means by which power is exercised. This argument is illustrated by considering institutions such as property and the firm. Complex systems of law have played a crucial role in capitalist development and are also vital for developing economies.
Social scientists have paid insufficient attention to the role of law in constituting the economic institutions of capitalism. Part of this neglect emanates for inadequate conceptions of the nature of law itself. Spontaneous conceptions of law and property rights that downplay the role of the state are criticized here, because they typically assume relatively small numbers of agents and underplay the complexity and uncertainty in developed capitalist systems. In developed capitalist economies, law is sustained through interaction between private agents, courts and the legislative apparatus. Law is also a key institution for overcoming contracting uncertainties. It is furthermore a part of the power structure of society, and a major means by which power is exercised. This argument is illustrated by considering institutions such as property and the firm. Complex systems of law have played a crucial role in capitalist development and are also vital for developing economies.
The Straits Settlements comprised a group of British territories located in the Malay Peninsula in Southeast Asia. It initially comprised Penang, Singapore, and Malacca, and was formed in 1826. Unlike Malacca which was a thriving city with a substantial Chinese community, Penang and Singapore were relatively uninhabited when the British arrived, but Chinese immigration to both territories swiftly took place and on a large scale. For much of the nineteenth century, British policy towards the Chinese community in the Straits was one of minimal governance. They were largely left to order their affairs privately and this suited the Chinese, who tended to be aloof from the machinery of government and were also unfamiliar with English law. While there were many positive aspects of such private ordering, some negative features included the manner in which secret societies evolved and the treatment of coolies. It was only when the colonial government introduced strong measures that these negative aspects were ameliorated.
The most famous case in administrative law, Chevron U.S.A. v. Natural Resources Defense Council, Inc., has come to be seen as a counter-Marbury, or even a McCulloch v. Maryland, for the administrative state. But in the last period, new debates have broken out over Chevron Step Zero - the initial inquiry into whether Chevron applies at all. These debates are the contemporary location of a longstanding dispute between Justice Scalia and Justice Breyer over whether Chevron is a revolutionary decision, establishing an across-the-board rule, or instead a mere synthesis of preexisting law, inviting a case-by-case inquiry into congressional instructions on the deference question. In the last decade, Justice Breyer's case-by-case view has enjoyed significant victories. Two trilogies of cases - one explicitly directed to the Step Zero question, another implicitly so directed - suggest that the Chevron framework may not apply (a) to agency decisions not preceded by formal procedures and (b) to agency decisions that involve large-scale questions about agency authority. Both of these trilogies threaten to unsettle the Chevron framework, and to do so in a way that produces unnecessary complexity for judicial review and damaging results for regulatory law. These problems can be reduced through two steps. First, courts should adopt a broader understanding of Chevron's scope. Second, courts should acknowledge that the argument for Chevron deference is strengthened, not weakened, when major questions of statutory structure are involved.
This book provides a different perspective on the real causes of the ills plaguing the world's resources and environment. It re-examines the very nature of nature, and from this new perspective, argues that what is needed is for humans to grant to natural resources a legal right to be left alone-a right of nonuse. In the process, it explores the following questions: Why do natural resources continue to be depleted and removed at an alarming rate? Why are species becoming extinct at a pace that may be unprecedented? Why does the environment continue to be polluted? Why do the weather and climate seem to be changing? Perhaps most important, why have laws, legal institutions and governments been unable to address and correct these problems? This book reviews the history of our relationship with the natural environment and develops new ways of thinking about nature and its protection. Instead of proceeding with human-based goals, the book argues that we should protect environmental resources for their own intrinsic value. Instead of giving humans more and more rights to clean up the environment, and to halt resources depletion, a right of nonuse held by the resource itself should be created. Natural resources have always possessed this parallel nonuse function, and society should recognize and legitimize it.
This book examines the prospects for business law reform to drive economic development in developing countries. It argues that, despite statements to the contrary, cultural factors and other local conditions in developing countries are not properly taken into account in current business law reform programs. Utilizing the city of Dakar as an example, this book investigates the consequences of this lack of fit between local needs and transplanted legal models by examining the potential and actual impact of the OHADA program of law reform on local business practices. Focusing on how managers make decisions and apply appropriate norms in routine business operations, the book documents how contractual disputes arise and are solved in Dakar and the role played by formal law in these processes. By examining imported law from the point of view of the end-users of legal reforms, the book reveals the complex relationship between formal law, local cultural norms and the activities of SMEs operating in developing economies, and calls for a reconsideration of current law and development theory as well as the role of contract law in business decisions. It will be relevant to all developing countries seeking to align their laws with 'best practice' as identified by aid institutions.
Some people dwell alone, many in family-based households, and an adventuresome few in communes. The Household is the first book to systematically lay bare the internal dynamics of these and other home arrangements. Legal underpinnings, social considerations, and economic constraints all influence how household participants select their homemates and govern their interactions around the hearth. Robert Ellickson applies transaction cost economics, sociological theory, and legal analysis to explore issues such as the sharing of household output, the control of domestic misconduct, and the ownership of dwelling units. Drawing on a broad range of historical and statistical sources, Ellickson contrasts family-based households with the more complex arrangements in medieval English castles, Israeli kibbutzim, and contemporary cohousing communities. He shows that most individuals, when structuring their home relationships, pursue a strategy of consorting with intimates. This, he asserts, facilitates informal coordination and tends ultimately to enhance the quality of domestic interactions. He challenges utopian critics who seek to enlarge the scale of the household and legal advocates who urge household members to rely more on written contracts and lawsuits. Ellickson argues that these commentators fail to appreciate the great advantages in the home setting of informally associating with a handful of trusted intimates. The Household is a must-read for sociologists, economists, lawyers, and anyone interested in the fundamentals of domestic life.
This thesis comprises a study of those socio-economic dynamics that establish and influence the existence, distribution, and evolution of rules for the outer space environment. In particular, this thesis analyzes how the initial State practice of launching objects into outer space led to the genesis of rules for the outer space environment. The presentation of this thesis includes an introduction, a methodology section, three studies, and a conclusion. The first study considers the formation of initial rules for the outer space environment as a consequence of State practice using historical analysis and game theory. The second study considers how States utilized their ability to practice foreign relations to produce and conclude the Outer Space Treaty and how the adoption of the Outer Space Treaty led to the subsequent adoption of specialized treaties regarding objects launched into outer space using economic analysis of public international law. The third study comprises a case study of the term “space object” and its adoption and subsequent evolution into State national laws that originated from the initial State practice of launching objects into outer space using comparative and economic analyses of public international law. Collectively, each study seeks to demonstrate how the rules for the outer space environment have evolved and converged in content (i.e., definition, meaning, and scope of a rule) as a result of the consumption (i.e., acceptance of the obligation of a supplied rule) of legal rules on which States depend to ultimately manage the risks and costs associated with activities to and in the outer space environment.
Diese Arbeit betrachtet zwei anspruchsvolle Probleme aus dem Bereich Computer- und Kommunikationssicherheit und Vertrauen. Beim Datenbank-Serviceprovider-Problem moechte ein Anwender seine Datenbank an einen Datenbank-Serviceprovider (DSP) uebergeben, damit dieser sie betreiben und ihm zur Verfuegung stellen kann. Er vertraut diesem DSP, und damit auch vertraglichen Abmachungen, nur bedingt und muss die Vertraulichkeit seiner Daten durch technische Massnahmen sicherstellen. Das zweite Problem ist das Verbreiten verlaesslicher Reputationsinformation ueber eine (moeglicherweise sehr grosse) Anzahl von Netzwerk-Knoten in einer Peer-to-Peer-Umgebung (P2P). Beide Probleme straeuben sich hartnaeckig gegen einfache Loesungen. Im Gegensatz zu traditionellen Sicherheitsproblemen in der Informatik hat der Gegner in beiden ein hohes Mass an Kontrolle ueber die Situation. Der nicht ausreichend vertrauenswuerdige DSP muss in der Lage sein, die Daten seines Kunden zu verarbeiten, ohne etwas ueber sie zu lernen, was intuitiv wie ein Widerspruch erscheint. In P2P-Anwendungen ist es wuenschenswert, dass Knoten anonym beitreten und jederzeit wieder austreten koennen, aber diese Anonymitaet erleichtert es, falsche Reputationsinformation zu verbreiten. Ein Knoten, der erstmalig in ein P2P-Netzwerk eintritt, muss den behaupteten Beobachtungen anderer Knoten vertrauen. Die Resultate dieser Arbeit sind keine Idealloesungen, und dennoch aufschlussreich in mehrerlei Hinsicht: Es werden gelockerte, aber immer noch nuetzliche Sicherheitsbegriffe fuer das DSP-Problem vorgeschlagen; es werden theoretische Grenzen des DSP-Loesungsraums gezogen; und die Auswirkung feindseligen Verhaltens in P2P-Reputationssystemen wird durch heuristische Methoden reduziert. Ein Nebeneffekt unserer Arbeit ist ein speziell fuer Reputationssysteme in P2P-Netzwerken geeignetes Simulations-Tool, das zum Vergleich und zum Fine-Tuning bestehender und zukuenftiger Forschungsarbeiten genutzt werden kann.
This article discusses axiological interferences of conceptions of justice associated with the nation-state in epistemological projects on transnational commercial law. It argues that the justice beliefs underlying classical legal positivism, which make us see law exclusively in state law, constitute an obstacle in our search for the rules and regimes that best fulfil the fundamental requirements of the rule of law. This is illustrated by focusing on one of the more polemical areas of this field—consumer protection—which provides a particularly clear illustration of the expansion of formal law in the twentieth century. The specific focus of the article is on the resolution of small cross-border consumer disputes. The study shows that international consumer protection requires a strict application of the provisions of a national law, even when the application of transnational non-state law would be more appropriate to attain the core political ideal that the rule of law seeks to further. This, it is argued, is due to mistaken conceptions of justice.
Legal theorists and other commentators have long established a distinction between property and possession. According to this usage adopted here, possession refers to control of a resource, but property involves legally sanctioned rights. Strikingly, prominent foundational accounts of the ‘economics of property rights’ concentrate on possession, downplaying the issue of legitimate legal rights (Alchian, 1965, 1977; Barzel, 1994, 1997, 2002; von Mises, 1981). Some authors in this genre make a distinction between ‘economic rights’ and ‘legal rights’ where the former are more to do with possession or the capacity to control. They argue that ‘economic rights’ are primary and more relevant for understanding behaviour. But it is argued here that legal factors - involving recognition of authority and perceived justice or morality - have also to be brought into the picture to understand human motivation in modern societies, even in the economic sphere. As other authors including Hernando De Soto (2000) have pointed out, the neglect of the legal infrastructure that buttresses property has deleterious implications, including a failure to understand the role of property in supporting collateralized loans for innovation and economic development.
China has enjoyed spectacular economic growth since the 1980s. Economic models based on production functions typically suggest that China's rapid growth will continue at similarly high rates, but they ignore pressing structural and institutional constraints on its development. Among the problems identified in this paper, we point to an impending demographic shift that will greatly increase the number of economic dependents, the inadequate corporate legal foundation for indigenous private enterprise, and the discriminatory, defective and disruptive system of land tenure. These issues point to a pressing agenda of institutional reform to help China develop in future decades. Reforms have to concentrate on political structures, state efficiency, incentives to educate and train migrant workers, land tenure, and on private enterprise.
Paul F. Diehl and Charlotte Ku's new framework for international law divides it into operating and normative systems. The authors provide a theory of how these two systems interact, which explains how changes in one system precipitate changes and create capacity in the other. A punctuated equilibrium theory of system evolution, drawn from studies of biology and public policy studies, provides the basis for delineating the conditions for change and helps explain a pattern of international legal change that is often infrequent and sub-optimal, but still influential. Reviews: "Diehl and Ku's book, particularly its focus on the normative and operating systems, contributes nicely to this growing literature on international legal change." Jacob Katz CoganUniversity of Cincinnati College of Law.
Societal constitutionalism presents us with alternatives to state-centered constitutional theory. But this alternative does not so much displace as extend conventional constitutional theory as a set of static premises that structure the organization of legitimate governance units. Constitutional theory, in either its conventional or societal forms, engages in both a descriptive and a normative project—the former looking to the incarnation of an abstraction and the later to the development of a set of presumptions and principles through which this incarnation can be judged. Constitutional theory is conventionally applied to states—that is, to those manifestations of organized power constituted by a group of individuals, bounded by a territory, and evidenced by the institution of government. But today a certain measure of disaggregation has managed to manifest a constituting power. Globalization has opened holes in the walls that used to serve to police and protect states and their power authority. Societal aggregations can exist now between borders. Groups of individuals (and not just natural persons) incarnate abstractions of governance and then judge them in ways that are consonant with constitutional theory. These emerging realities have produced societal constitutionalism. But like conventional constitutionalism, societal constitutionalism seeks the comfort of equilibrium and stasis as the basic operating premises of self-constituting governance systems. This paper considers societal constitutionalism in its dynamic element—as a system structures constant adjustment among the constituting elements of a governance unit (whether state, corporation, religion, etc.)—in three dimensional governance space. After an introduction, Section I engages in framework setting, focusing on the structures of societal constitutionalism within the logic of globalization. Section II provides an illustration of a societally constituted enterprise operating in three dimensional dynamic governance space. Section III then develops the more important characteristics of this new dynamic and permeable constitutional framework. The paper concludes where it started—suggesting the need to expand our understanding of constitutional theory to include communication among systems in a complex polycentric constituting universe.
Researchers have demonstrated the way the destruction of the critical nonuse component of natural resources is creating many of the alarming environmental changes that are so disturbing to the planet. They have also demonstrated through a series of analytical arguments founded in economic game theory that sustainable resource use can only be achieved when rights are bestowed upon human resource users, or humans who benefit themselves from resource nonuse, but also upon the resource itself. They state that establishing a right of nonuse effectively privatizes a resource, facilitating a cooperative game that is between three kinds of players, such as human resource users, humans who selfishly prefer resource nonuse, and the resource itself. An analysis under this three-player game, which includes the natural resource itself as a critical actor, provides a framework for moving toward an efficient and sustainable path of resource conservation.
This is the Introduction to a book that explains how law and economics works with civil law concepts. Lawyers and students in Quebec, in Scotland, in continental Europe, in Latin America, in China or living elsewhere under civil law systems who can cope with English do not have to face the additional burden of common law concepts to find out what law and economics is all about. The first part of the book presents a kit of economic tools useful for this purpose; the second part, after a presentation of the "Coase theorem," applies law and economics to property and real rights, intellectual property, civil liability and contract.The cover picture reproduces Breugel the Elder's Netherlandish proverbs. They often reflect wisdom that law and economics captures in a more formal way.
judges who apply it.5 In what follows, we will suggest that these problems arise, in part, from a dubious premise of the Chevron enterprise, one that should be rethought. The dubious premise is that the legal system should adopt a doctrinal solution—the Chevron rule— for what is, after all, an institutional problem: the allocation of interpretive authority between agencies and courts when congressional instructions are silent or ambiguous. We explore an alternative, which is to adopt an institutional solution to the institutional problem. The
HE current framing of the debate over the privatization of the State's legislative and adjudicative functions masks the fact that there are distinct and conflicting versions of the privatization of law model. The varying archetypes diverge on fundamental questions relating to the ontology of law, the role of social cooperation mechanisms in the lives of people, as well as the types of private legislative and adjudicative institutions that ought to replace the State's legal system. In light of such conflicting normative premises, the distinct models of the privatization of law pose different kinds of challenges to both proponents and opponents of the privatization of law. At the outset, the paper will juxtapose the distinct visions regarding the privatization of law and adjudication, and offer a taxonomy of the different privatization of law models. This analytical framework will then be used in order to offer a fresh look at the privatization of law debate. It will show that the theoretical distinctions between the privatization models, especially with respect to the depiction of the social agents that are to replace the state's lawmaking capacity, have great bearing on the generate types of costs and benefits associated with privatization.
Private legal systems ("PLSs") are to the universe of law as dark matter is to the physical universe: while PLSs are invisible to the casual study of law, they are observable by their impact on individuals' behavior and by their interaction with the public legal system. PLSs expand to fill voids where the public legal system cannot or does not wish to enforce norms, and contract when the public legal system moves to displace them. But the public legal system is not the only force shaping the course of PLSs' development. This chapter identifies two other forces that significantly affect the evolution of PLSs. The first - incumbent's enforcement advantage - impacts the identity of the PLS that will enforce the norm. The second - bias arbitrage - impacts the type of norms the PLS would choose to enforce. These forces challenge both parts of an idealized notion that PLSs form spontaneously (without reliance on pre-existing institutions) to enforce norms that maximize their members' welfare. Due to the influence of incumbent's enforcement advantage, PLSs tend to begin their life enforcing a core norm that has very low enforcement costs (typically, providing social or spiritual services). Once this core has developed, PLSs may then choose expansion norms that can be more expensive to enforce, and that benefit from the PLS's ability to compel compliance with the new norm by denying a member the benefits of its enforcement of the core norm and any expansion norms already successfully enforced. The expansion norms that are chosen will not necessarily be those that maximize the social welfare of PLS members. Rather, the PLS's will often attempt cause its member to perceive it as valuable by conducting bias arbitrage through enforcing norms that address risks that its members significantly over-estimate.
This essay explores the extent to which income and consumption taxes can be implemented using parallel designs. The economic differences in the two taxes is thought to be the taxation of pure time value returns under an income tax but not under a consumption tax. In theory, therefore, all differences in implementation methods should be traceable to the measurement of time value returns. To explore the extent to which this is true, the essay examines four major design elements of any tax system: (i) the use of cash flows or basis accounts to measure the base; (ii) remittance of the tax by firms or individuals; (iii) whether the system is open or closed; and (iv) how the system operates across borders.
Excessive borrowing, no less than insufficient savings, might be a product of bounded rationality. Identifiable psychological mechanisms are likely to contribute to excessive borrowing; these include myopia, procrastination, optimism bias, "miswanting," and what might be called cumulative cost neglect. Suppose that excessive borrowing is a significant problem for some or many; if so, how might the law respond? The first option involves weak paternalism, through debiasing and other strategies that leave people free to choose as they wish. Another option is strong paternalism, which forecloses choice. Because of private heterogeneity and the risk of government error, regulators should have a firm presumption against strong paternalism, and hence the initial line of defense against excessive borrowing consists of information campaigns, debiasing, and default rules. On imaginable empirical findings, however, there may be a plausible argument for strong paternalism in the form of restrictions on various practices, perhaps including "teaser rates" and late fees. The two larger themes, applicable in many contexts, involve the importance of an ex post perspective on the consequences of consumer choices and the virtues and limits of weak forms of paternalism, including debiasing and libertarian paternalism.
This paper considers tax expenditures from two related perspectives. First, it analyzes how the incentives on Congress to use a tax expenditure change when principal agent problems are considered. For example, it considers whether tax expenditures can reduce moral hazard or adverse selection problems created by delegations to expert agencies. Second, it considers the condition under which tax expenditures should be expected to be redundant with direct expenditures, as many are. The two, principal agent problems and redundancy, are related because redundancy is often seen as a solution to the principal agent problem. The paper concludes that both principal agent concerns and redundancy might lead to an increase in the use of tax expenditures, although the circumstances in which we should expect this are relatively narrow. The paper then examines the example of the low income housing tax credit, concluding that the credit should be replaced with a direct expenditure in the form of increased tenant vouchers.
To gain insight into how the developing world can attain the Rule of Law and thereby further economic development, a good place to start is to ask how countries in today's developed world did so. Western Europe, for example, did not enjoy the Rule of Law in the Middle Ages but successfully achieved it over a number of centuries, at least in the economic sphere of enforcing contracts and protecting property rights. The events in England culminating in the Glorious Revolution illustrate the importance of legal institutions and, especially, of public law. The private law of contract and property were not sufficient. The problem of the predatory ruler had to be overcome, and England did so by vesting control in Parliament over the King's revenues from public sources and his expenditures and by assuring the independence of the judiciary. The French revolution, in contrast, resulted in high quality unified private substantive law under the Napoleonic codes, but the public law system suffered from the subordination of the role of the judiciary.
Real estate is a major source of wealth in the developing world. And since in many developing countries the majority of the population lives in rural areas, land law and institutions are of special importance to economic development. The importance to rural incomes growth of legal certainty with regard to land titles and transfers is well established. It would nevertheless be a mistake to view communal land systems as necessarily standing in the way of economic development because they are usually not open access systems subject to the tragedy of the commons. Where economic changes, such as expansion of cities and exploitation of natural resources, impinge on communal land areas, attention to the administrative, financial and human capital challenges of implementing land titling systems is crucial.
Conventional wisdom suggests that high agency costs explain the (excessive) amounts and (inefficient) forms of CEO compensation. This paper offers a simple empirical test of this claim and the reform proposals that follow from it, by looking at pay practices in firms under financial distress, where agency costs are dramatically reduced. When a firm files for Chapter 11 or privately works out its debt with lenders, sophisticated investors consolidate ownership interests into a few large positions replacing diffuse and disinterested shareholders. These investors, be they banks or vulture investors, effectively control the debtor during the reorganization process. In addition, all the other players in compensation decisions - boards, courts, and other stakeholders - play a much more active role than for healthy firms. In other words, agency costs are much lower in Chapter 11 firms. Accordingly, if pay practices look the same in bankruptcy as they do in healthy firms, we can conclude that either (1) the current practices are efficient, or (2) that proposals to change executive compensation by reducing agency costs are incomplete. The data support one of these hypotheses: amounts and forms of compensation remain largely unchanged as agency costs are reduced, and look similar to those of healthy firms.
This paper argues that discounting costs and benefits of projects for the opportunity costs of capital Pareto dominates decision criteria that do not discount. It considers and rejects several objections to the Pareto dominance argument, including the problem of making compensating transfers for the costs and benefits of projects and whether taking opportunity costs into account is different than discounting. It also argues that discounting future costs and benefits of projects does not under-value future generations.
No degree of substantive law improvement can bring the rule of law to a country without effective enforcement, and a sound judiciary is the key to enforcement. Judicial independence and the strength and efficiency of judiciaries are associated with economic growth. Some research finds legal formalism (that is, procedural complexity) undesirable. Though procedural complexity may be a barrier to judicial efficiency, it is also true that some procedural rules are designed to avoid legal error, also surely an aspect of efficiency. In any event, many of the measured differences in formalism between the common law and civil law are related to the far different role of counsel and judge in the two legal systems. Judicial efficiency measured in terms of duration of cases shows an extraordinarily wide variance among countries within individual legal families, suggesting that something at least as significant as legal origin may be involved. The related concepts of separation of powers and of checks and balances are not well-defined, and their meaning varies depending on the country and the objective of the constitutional founders. For economic development the constitutional provisions on review of administrative acts take on special importance. Judicial independence is not just a question of the structural independence of the judiciary within the governmental system, but also of the behavioral independence of individual judges. The latter is based both on law (for example, lifetime tenure) and on the method of appointment of the judiciary, but also on the education, economic security, and place in society of individual judges. Especially noteworthy in this regard is the traditional independence of English judges despite the absence of constitutional structural independence and of any power of judicial review.
This paper evaluates international law from a welfarist perspective. Global welfarism requires that international law advance the well being of everyone in the world, and scholars influenced by global welfarism and similar cosmopolitan principles have advocated radical restructuring of international law. But global welfarism is subject to several constraints, including (1) heterogeneity of preferences of the world population, which produces the state system; (2) agency costs, which produce imperfect governments; and (3) the problem of collective action. These constraints place limits on what policies motivated by global welfarism can achieve, and explain some broad features of international law that otherwise remain puzzling. These features include the central place of state sovereignty in international law despite the moral arbitrariness of borders; the weakness of multilateral treaties; the limited role of individual liability in international law; the predominantly legislative nature of international institutions and the weakness of executive and judicial institutions; and the absence of redistributive obligations in international law.
The powerful shift in copying technology over the last thirty years has destabilized how we produce copies and the economic arrangements associated with prior technologies. These technological changes have created a broad shift in the ability to make copies moving control away from producers towards consumers. As a consequence, these technologies have altered the practical enforceability of the rights that law assigns to copyright owners. Digital rights management technologies are an effort to make meaningful the legal rights of copyright owners. DRM faces severe obstacles. For preexisting products like the music CD, it has proven to be very difficult to add DRM after the fact. CDs need to work in standard CD players, and the limits DRM. The firestorm over Sony BMG's effort to produce CDs subject to DRM suggests that we are unlikely to see meaningful DRM for music CDs soon. But we are switching how we deliver content from products to services. Music CDs and eventually DVDs will be replaced by online services such as Apple's iTunes and Google Video. Both of these come with DRM built-in and both rely on identity-based DRM. Identity-based DRM ties identity to content. Content can be shared widely, but absent access to identity, the content is worthless. This is a substantial step forward for DRM, but may still be a step short of where we need to be. Content purchasers still have no reason to protect purchased content. Identity-based DRM coupled with bounty tags will create an incentives wedge between content purchasers and stripping/p2p software and with peers in a p2p network. We should want a system where content purchasers are as careful with content as they would be with identity and mistrust-based DRM may be that system.
This paper considers the arguments regarding the choice between an ideal income tax and an ideal consumption tax, focusing on an argument made by Atkinson and Stiglitz regarding neutral taxation of commodities. The argument shows that a properly designed consumption tax is Pareto superior to an income tax: it is more efficient and at least as good at redistribution. The major exception to the Atkinson and Stiglitz result is if individuals with equal wages have different propensities to save. In that event, a consumption tax may no longer be Pareto superior to an income tax. A consumption tax will continue, however, to be more desirable than an income tax. It will be strictly more efficient than an income tax, and under reasonable assumptions, better at redistributing from those who are better off to those who are worse off. This result holds true even if one heavily weights the welfare of the poor.
Credit markets generate more finance than equity markets, particularly in developing countries. In credit markets the central institution, again especially in developing countries, is the bank. In many such countries, directed lending, crony capitalism, and related lending are key problems. And since banks are corporations, self-dealing involving loans to shareholders, managers, and politically important people is added to the common forms of corporate governance issues. Initial efforts to analyze credit markets through the lens of legal origin had the shortcoming that the focus was on the law of bankruptcy rather than the law of secured credit. And even within the area of bankruptcy, the focus was on reorganization rather than liquidation, which is more common in both developed and developing countries. The law of secured credit is especially important in countries where mortgages on land are unavailable due to the absence of land titling. Secured credit law is often defective because of the absence of self-help remedies, especially in view of lengthy court delays. Legal origin may be important to the efficacy of creditors rights in developed countries, but there is evidence that it is an unimportant factor in developing countries. The assumption of commonalities within a legal family is doubtful in law pertaining to credit markets, as shown by the sharp differences between U.S. and U.K. bankruptcy law and the many differences in secured credit law found by the EBRD in the transition countries. Where, as in many developing countries, judiciaries are weak, the law of secured credit is especially important because bankruptcy proceedings are likely to be slow and undependable. In such countries credit registries may, by building on the concept of reputation, provide a partial substitute for judicial proceedings.
In a Chapter 11 reorganization, senior creditors are entitled to insist upon being paid in full before anyone junior to them receives anything. In practice, however, departures from such "absolute priority" are commonplace. Explaining these deviations has been a central preoccupation of reorganization scholars for decades. By the standard law-and-economics account, deviations from absolute priority arise because well positioned insiders take advantage of cumbersome procedures and inept judges. In this paper, we suggest that a far simpler and more benign force dominates bargaining in reorganization cases."Deviations" from absolute priority are inevitable even in a world completely committed to respecting priority as long as asset values are uncertain. Uncertainty accompanies any valuation procedure. Bargaining in corporate reorganizations takes place in the shadow of this uncertainty, and standard models of litigation and settlement show that valuation uncertainty alone can explain many of the departures from absolute priority we see in large corporate reorganizations. Even where rational and well informed senior investors expect the absolute priority rule to be strictly enforced, they must account for the uncertainty associated with any valuation. The possibility of an unexpectedly high appraisal will cause them to offer apparently out-of-the-money junior investors contingent interests in the reorganized business.The debate over absolute priority, the central principle of modern corporate reorganization law, has been misdirected for decades. It has failed to recognize that a substantive rule of absolute priority does not lead to an absolute priority outcome. A coherent account of absolute priority must incorporate relative priority. It must take account of the option value implicit in the junior investors' right to insist on an appraisal.
International News Service v. Associated Press held that a wire service had the right to prevent rivals from copying its bulletin. It established the doctrine of misappropriation and justified it on the ground that someone that invests in gathering and disseminating information is entitled to the fruits of its labor. The Supreme Court, however, missed the strong anti-competitive undercurrents in the case. INS and AP were not conventional rivals. The most important AP member (and the person who stood to gain the most from AP's anticompetitive activities) - also owned INS. Far from being about first principles, the case illustrates how common-law reasoning quickly loses its moorings in the absence of a bona fide dispute. The long-recognized failing of the case - that it sets out a principle with no obvious boundaries - was deeply embedded in the facts and illustrates, even in this iconic environment, that the domains of intellectual property and antitrust cannot be easily separated. Portions of this paper are adapted from a chapter to be published in JANE C. GINSBURG AND ROCHELLE C. DREYFUSS, INTELLECTUAL PROPERTY STORIES (forthcoming, Foundation Press, 2005).
Based on an address for a conference on Law and Transformation in South Africa, this paper explores problems with two twentieth-century approaches to government: the way of markets and the way of planning. It urges that the New Progressivism simultaneously offers (1) a distinctive conception of government's appropriate means, an outgrowth of the late-twentieth-century critique of economic planning, and (2) a distinctive understanding of government's appropriate ends, an outgrowth of evident failures with market arrangements and largely a product of the mid-twentieth-century critique of laissez faire. It emphasizes the need to replace bans and commands with appropriate incentives, and to attend to social norms and social meanings in leading human behavior in welfare-promoting directions. The ultimate goal is to promote some of the goals associated with America's New Deal and Europe's social democracy, but without using the crude, inflexible, and often counterproductive methods associated with those approaches. Some attention is devoted to the effects of globalization, the AIDS crisis, crime prevention, and the role of economic growth.
This paper explores how legal liability in the IPO context can impact an entrepreneur's decision of whether and how to take a firm public. Liability under the Securities Act of 1933 effectively embeds a put option in an IPO security, where the entrepreneur must insure the shareholder against poor firm performance, which inflates the price of the security and exposes the entrepreneur to risk. This may cause IPO firms to appear to underperform relative to non-IPO firms as the option value decays, and may lead the entrepreneur to undertake strategic (but destructive) responses to minimize the put value and his exposure to risk. Because of the value-destroying characteristics of these responses - which include initial underpricing, entrenchment, lower NPV projects, asset partitioning, and reduced disclosure - this state of affairs is inefficient compared to a system where the entrepreneur can simply allocate the risk to shareholders. While the Securities Act's risk-allocation regime may provide some benefits in the form of more accurate disclosure, the availability of substitute responses by the entrepreneur makes any such benefit uncertain.
Current estimates of regulatory benefits are too low and possibly far too low. This is because the standard economic approach to measuring costs and benefits, which attempts to estimate people's willingness to pay for various regulatory benefits, ignores a central point about valuation, thus producing numbers that systematically understate those benefits. Conventional estimates tell us the amount of income an individual, acting in isolation, would be willing to sacrifice in return for, say, an increase in safety on the job. But while these estimates are based on the implicit assumption that economic well-being depends only on absolute income, considerable evidence suggests that relative income is also an important factor. When an individual buys additional safety in isolation, he experiences not only an absolute decline in the amounts of other goods and services he can buy, but also a decline in his relative living standards. In contrast, when a regulation requires all workers to purchase additional safety, each worker gives up the same amount of other goods, so no worker experiences a decline in relative living standards. If relative living standards matter, an individual will value an across the board increase in safety more highly than an increase in safety that he alone purchases. Where the government currently pegs the value of a statistical life at about 4.7 million and $7 million. A conservative reading of the evidence is that when government agencies are unsure how to value regulatory benefits along a reasonable range, they should make choices toward or at the upper end.
Do animals have rights? Almost everyone believes in animal rights, at least in some minimal sense; the real question is what that phrase actually means. By exploring that question, it is possible to give a clear sense of the lay of the land - to show the range of possible positions, and to explore what issues, of theory or fact, separate reasonable people. On reflection, the spotlight should be placed squarely on the issue of suffering and well-being. This position requires rejection of some of the most radical claims by animal rights advocates, especially those that stress the "autonomy" of animals, or that object to any human control and use of animals. But this position has radical implications of its own. It strongly suggests, for example, that there should be extensive regulation of the use of animals in entertainment, in scientific experiments, and in agriculture. It also suggests that there is a strong argument, in principle, for bans on many current uses of animals.
A distinctive and pervasive problem arises when government regulation designed to diminish one health risk actually increases other health risks. For example, bans on the use of asbestos may lead companies to use other, more dangerous substitutes. This essay explores health-health tradeoffs, including those that arise because regulatory expenditures increase poverty and unemployment and in that way increase poor health. The essay proposes institutional changes designed to ensure aggregate risk reduction rather than mere risk redistribution. It includes some general remarks about individual and collective rationality in the context of health risks.
Although legal scholars have disagreed about whether juries should be allowed to award punitive damages and about how judges should instruct them, the debate has included little discussion of jurors' cognitive capabilities. In this Article, Professors Sunstein, Kahneman, and Schkade respond to this gap by offering an experimental study. The study seeks to separate the tasks that a jury is suited to perform from those that a jury can accomplish only with great inconsistency. In personal injury cases, the study shows, jurors' normative judgments about outrageousness and appropriate punishment are relatively uniform, at least when measured on a bounded numerical scale (0 to 6). Indeed, these normative judgments are uniform across race, age, education, wealth, and gender. When subjects map their judgments onto an unbounded dollar scale, however, outcomes become erratic and unpredictable. Drawing on these results, the authors question the current legal approaches to the regulation of punitive damages. They then analyze various reform proposals designed to overcome erratic awards, including damage caps, compensatory judgment "multipliers," and conversion formulas that translate either jury judgments on bounded numerical scales or jury arrangement of comparison cases into punitive damage awards. Finally, the authors discuss the implications of the study for many other issues of law, including contingent valuation and compensatory damages in such areas as pain and suffering, libel, sexual harassment, and intentional infliction of emotional distress.
The treaty creating the WTO replaced the GATT dispute resolution system, which contained no formal sanctions for breach of agreement as a practical matter, with a system that results in centrally authorized sanctions against recalcitrant violators of WTO trade agreements. We examine the important features of the new system, and argue that the institutionalization of a sanctioning mechanism was not motivated by a perceived need to increase the penalty. In particular, the GATT system relied on unilateral retaliation and reputation to police the bargain, and toward its end unilateral retaliation became excessive, interfering with opportunities for efficient breach. The WTO mechanism for arbitrating the magnitude of proposed sanctions is the major innovation under WTO law, and ensures that sanctions are not set too high.
In this article, Cass Sunstein explores the 104th Congress' attempts at regulatory reform. Professor Sunstein believes that the election of this Congress, with its distinctive approach to government, signals the dawning of a "constitutional moment" in which the role of government at all levels will be reexamined. Without full public support for sweeping changes in government, this moment has not yet materialized. When and if it does, regulatory reform will be one of its aspects. Indeed the nation has already begun to examine regulation to determine if the benefits justify the costs. Unfortunately, the 104th Congress has, thus far, failed adequately to address this burgeoning cost-benefit state. Sunstein claims that Congress' failure reflects its inability to redesign the massive federal regulatory scheme. He suggests that the executive branch should oversee regulatory reform, with Congress relegated to providing broad policy direction. Sunstein also suggests that Congress adopt an Administrative Substance Act, building upon the recent learning about the performance of regulation and modeled after the Administrative Procedure Act. Sunstein further calls for the enactment of a "substantive supermandate" requiring a general background rule of cost-benefit balancing for all federal regulation; but he contends that any description of costs and benefits should reflect the full range of diverse values expressed by the public at large.
Covenants not to compete (CNCs) are used in employment contracts to prevent employees from working for other employers. The legal enforcement of CNCs varies across jurisdictions in the U.S.: some states ban them (notably, California), while a majority of states enforce CNCs when they reasonably protect a legitimate interest of the employer. The discrepancy in the legal policy regarding CNCs is reflected in an academic debate over the economic efficiency of these covenants. One side argues that CNCs are bad because they restrict labor mobility; the other side argues that the restriction on the movement of workers is good because it prevents workers from appropriating their employers' human capital investments (and CNCs thereby encourage such investment). The paper addresses together the two objectives of ex post (labor mobility) and ex ante (human capital investment) efficiency. It compares CNCs with the the alternative contract breach remedies of specific performance and liquidated damages. A given CNC may be analyzed as a hybrid that adopts specific performance with respect to attempted movements to employers within its scope and liquidated damages equal to zero with respect to movements outside its scope. Among the results of the paper is the finding that, where a CNC can be renegotiated, first-best performance and first-best investment can be induced. The appropriate choice of the CNC scope can balance perfectly the overinvestment tendency of specific performance against the underinvestment effect caused by zero liquidated damages. Contracting parties, however, have the incentive to agree to excessively broad CNCs that enable them to extract rents from prospective new employers within the CNC scope. The law should be wary of this incentive in policing CNCs.
My research uses the economic approach to analyze social issues that range beyond those usually considered by economists. This lecture will describe the approach, and illustrate it with examples drawn from past and current work. Unlike Marxian analysis, the economic approach I refer to does not assume that individuals are motivated solely by selfishness or gain. It is a method of analysis, not an assumption about particular motivations. Along with others, I have tried to pry economists away from narrow assumptions about self interest. Behavior is driven by a much richer set of values and preferences. The analysis assumes that individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic. Their behavior is forward-looking, and it is also consistent over time. In particular, they try as best they can to anticipate the uncertain consequences of their actions. Forward-looking behavior, however, may still be rooted in the
This essay takes off on the famous phrase "good fences make good neighbors" from Robert Frost's poem "The Mending Wall" to explore the function of boundaries in setting up property rights. The first section of the paper begins by exploring how boundaries create spaces where individual decisions can be made without the costs of collective action. It then examines how this extreme separation can lead to the duplication of resources, which in turn prompts customary practices that allowed for shared space at the boundary lines which work to the mutual advantage of the two (or more) parties who share common boundaries. It gives illustrations from customary agricultural practices and the law of nuisance to explain why common law boundaries should be understood to be semi-permeable instead of absolute.
Bankruptcy rules often enable equityholders to obtain value even though debtholders are not paid in full. This paper addresses the ex ante effects of violations of absolute priority. These violations should influence decisions concerning project choice and human capital investment that determine the extent to which a firm's managers have an advantage over others in operating the firm's assets. In an absolute priority regime, managers will "entrench" themselves by overinvestment in assets that require their unique skills. Managers will also underinvest in firm-specific human capital. Allowing ex post violations of absolute priority decreases the severity of these two problems.
This paper analyzes the voting rules of Chapter 11 using models from noncooperative game theory. Prior work has relied mainly on a model of bargaining between the debtor and a single creditor with perfect information. We expand on this work by considering two-party bargaining with imperfect information, and bargaining (with perfect and imperfect information) among a single debtor and multiple creditors. In addition, prior work has focused on explaining the role of the exclusivity period, the absolute priority rule, and the liquidation floor in Chapter 11 bargaining. We also consider the role of majoritarianism and supermajoritarianism, bicameralism, and classification, and the desirability of allowing creditors to purchase claims from each other.
The essence of the modern academic enterprise lies in the belief that research results should be promptly published and that academic researchers should have unfettered access to research results and data. Nonetheless, since the 1980 Bayh-Dole Act, U.S. universities have become enterprises in a different sense, seeking intellectual property exclusivity, especially patents. Current controversies involve gene sequence patenting standards and database legislation. Although concerns over an anticommons fail to consider cross-licensing solutions, and legislative compromise over database protection may be forthcoming, the tension between the two concepts of the academic enterprise is best understood as an illustration of the fundamental intellectual property trade-off between incentives for innovation and access to innovations. That trade-off is complicated by difficulty in distinguishing basic from applied research in fields such as biotechnology due to the speed with which basic research leads to new products and by the public goods aspect of such basic research.
Modern Chapter 11 places control decisions in the hands of the bankruptcy judge and insists on rigid adherence to absolute priority in all cases. In both respects, modern Chapter 11 departs sharply from the equity receivership. The equity receivership governed the reorganization of railroads and other large firms in the 19th Century, and it was fashioned in a way that strongly suggests that it vindicated the creditors' bargain. This paper suggests that, when a speedy auction of the firm is not possible, these twin principles of the equity receivership continue to make sense. When the managers and shareholders cannot be easily separated, control rights should lie in the hands of someone whose loyalties are aligned with the creditors, but the reorganization itself should not affect the value of the managers' equity interest. To use the language of the equity receivership, the "relative priority" of their interests should be preserved. The focus of modern scholarship on the absolute priority rule neglects the question of who controls the assets during the reorganization. It also fails to take account of the role that existing manager/shareholders will play in firms that possess going concern value and cannot be resold in the market. In this environment, the absolute priority rule triggers costly renegotiations that may yield no off-setting advantages over the relative priority rule.
This paper examines and rejects the commonplace view that the doctrines of classical contract law (offer and acceptance, consideration, damages) were logically linked to the political philosophy of laissez-faire. Many writers (Grant Gilmore, Patrick Atiyah, Lawrence Friedman) attribute much of the rigid and mechanical nature of nineteenth century contract law to its affinity with laissez-faire. In this paper I reject that connection. The key distinction is that between security of exchange and freedom of contract. Laissez-faire is strongly committed to both, but most of contract law only requires the former without the latter. Security of exchange ensures that the enforcement of legal contracts when, as commonly is the case, one party must perform before the other. Freedom of contract guarantees a broad sphere in which voluntary arrangements are permissible. Most contract law is devoted to the former, which can be supported even by those who favor extensive regulation of economic transactions. The strength or weakness of that law is largely determined by instrumental questions of whether they promote stable contracting over time.
The law of corporate reorganizations is conventionally justified as a way to preserve a firm's going-concern value: Specialized assets in a particular firm are worth more together in that firm than anywhere else. This paper shows that this notion is mistaken. Its flaw is that it lacks a well-developed understanding of the nature of a firm. Initially, it is easy to confuse size with specialization and overstate the extent to which assets are dedicated to a particular enterprise. Even when such dedicated assets exist, they often do not need to stay in the same firm. As Coase taught us, as the costs of contracting go down, so too does the value of keeping assets in a particular firm. But even when specialized assets must be kept inside a firm, two other forces limit the need for a traditional law of corporate reorganizations. Capital structures are increasingly designed with financial distress in mind. For these firms, control rights shift from one set of investors to another as the firm encounters difficulty. Such firms either never file for bankruptcy, or, if they do, it is only to vindicate the pre-determined allocation of control rights. Even where control rights are not sensibly allocated, a quick sale of the firm restores order. When firms can be sold as going concerns, the need for the traditional negotiated plan of reorganization disappears. The vast majority of firms in financial distress never enter bankruptcy. Today the Chapter 11 of a large firm is an auction of the assets, followed by litigation over the proceeds. To the extent we understand the law of corporate reorganizations as providing a collective forum in which creditors and their common debtor fashion a future for a firm that would otherwise be torn apart by financial distress, we may safely conclude that its era has come to an end.
This paper extends the Domar and Musgrave results concerning the effect of an income tax on risk taking to the case where different tax rates apply to different types of assets. Although the results depend on exactly how the differential tax rates are imposed, as a general matter, an income tax with differential rates can be seen as a tax only on the risk-free rate of return and a fixed ex ante subsidy for purchasing the lower-taxed assets. There are implications for measuring deadweight loss from differential taxation and for spending resources on accurately measuring capital income.
The traditional forms of public health law were directed largely toward communicable diseases and other externalities, such as pollution, with negative health impacts. The more modern view treats any health issue as one of public health so long as it affects large numbers of individuals, which would include such matters as obesity and diabetes. Historically, this paper examines the constitutional evolution of the public health principle from the narrower to the broader conception. It then argues that the narrower principle better defines the appropriate scope of coercive government intervention than the broader definition, which could easily authorize those forms of intervention in economic affairs whose indirect effects are likely to reduce overall social wealth and freedom, and with it the overall health levels of the population.
From the earliest times, animals were understood as objects of human rights. That result did not depend on some limited understanding of their capabilities for cognition and sensation, but rather rested on the strong sense that without domestication human beings could not secure their own advancement. The modern claims for animal rights cannot therefore be justified by an appeal to some newer and deeper understanding of the subject, but must rest on the claim that what they share with human beings is more important than what separates them. Those common elements do justify some level of animal protection but does not justify the radical transformation of social institutions that would flow from the recognition, as Steven Wise has advocated, of the basic libertarian rights of freedom from human domination and exploitation.
In this paper Professor Strahilevitz addresses the question of why individual members of peer-to-peer file-swapping networks such as Napster, Gnutella, and Kazaa consciously choose to share their unlicensed copies of copyrighted content with anonymous strangers despite the absence of economic incentives for doing so. Rational choice theorists and many social psychologists ordinarily expect that in the absence of face-to-face contact or other communication, strangers who expect neither to engage in repeat-player interactions nor to be sanctioned for free-riding will be unlikely to contribute to a public good if such cooperation is somewhat costly. Yet Strahilevitz's study found that a majority of those users who downloaded songs from the MusicCity/Kazaa network shared at least some portions of their music collections with anonymous peers, despite an absence of face-to-face contact and a near absence of other user-to-user communication and repeat-player interactions. Previous research has suggested that many of these users do incur real costs in order to share their content. Strahilevitz attributes this cooperative behavior in part to the file-swapping networks' "charismatic code." Charismatic code is a technology that presents each member of a group with a distorted picture of his fellow group members by magnifying cooperative behavior and masking uncooperative behavior. Strahilevitz argues that users who are exposed to charismatic code and benefit from other users' contributions to these networks are likely to mimic the cooperative behavior they observe. The social norm of reciprocity can therefore engender surprisingly robust cooperation in environments that are characterized by fleeting interactions among anonymous individuals. Strahilevitz concludes that cooperative uploading is nevertheless the weak link in peer-to-peer file transfers, observing that strategies that magnify the prevalence of free-riding or otherwise diminish users' impulse to upload present attractive possibilities for curtailing copyright infringement on the Internet.
Economic models of income-producing crimes are usually formulated as a labor supply decision (or a portfolio problem) under uncertainty. As such they are easily susceptible to income taxation. This paper incorporates the theory of the taxation of risk taking into such a model to derive results regarding the deterrent effects of alternative income tax rules. The key result is that taxation affects the level of crime not only by changing relative returns to legal and criminal activities, but also because it may affect the riskiness of crime and the willingness of offenders to assume risk. Deterrence is shown in general to be a function not only of primary sanctions, but also of tax rules and tax rates. The effects of taxation on crime when punishment takes the form of imprisonment are also considered. The precise results depend generally on attitudes toward risk and on the basis of comparison.
In deciding whether to issue a preliminary injunction, courts today focus on three factors: the likelihood that plaintiff will ultimately prevail on the merits; the harm defendant will suffer if the injunction is wrongly issued; and the harm plaintiff will suffer if the injunction is wrongly denied. The idea is to account for the possibility that the court might err in its prediction on the merits. If wrongful denial would be particularly harmful and there is a real chance of wrongful denial, the court is more reluctant to deny. By contrast, if wrongful issuance poses the greater threat, the court is more reluctant to issue. This decision rule has intuitive appeal but overlooks a key point: In most cases, the court will be just as uncertain about its estimates of the harms as it is about its prediction as to the outcome of the case. Thus, the conventional approach begins to unravel. A court cannot minimize the implications of its possibly errant prediction on the merits by blindly relying on its possibly errant estimates of relative harm. The optimal decision rule must account for both types of uncertainty.
Since September 11, 2001, insurance markets have been struggling to adjust to new information about the magnitude of risks posed by terrorism, and to the loss of tens of billions of dollars in reserves because of claims relating to the September 11 attacks. Insurance coverage for terror-related losses has become more expensive and for some risks difficult or impossible to obtain. As a result, various interest groups have called for the Federal government to provide coverage for terrorism losses, and proposals for increased government involvement are moving forward in Washington. We question the wisdom of any further measures of this sort. They are likely to come too late to address short-term market disruption, and in the long run may well supplant or distort desirable market responses to the new information about terrorism risk.
This paper examines the effect of tort rules on behavior if people are optimistic or insensitive relative to true probabilities. The paper shows that under certain conditions both strict liability and negligence cause levels of care that are higher than, or equal to, what is efficient (rather than lower). The paper also shows that under certain conditions strict liability and negligence cause the same level of activity among optimists (more than is efficient). Other implications for tort law are discussed, as are the sensitivity of the results to the choice of how to model probability errors. Implications for contract law, and some normative issues, are also discussed.
The laws of war govern the weapons and tactics that belligerents may use against each other. This paper uses a model of conflict to explain and evaluate the laws of war. In the model a nation's propensity to engage in conflict is a positive function of the effectiveness of military technology, and a negative function of the destructiveness of technology. Accordingly, in theory nations would want to agree to laws of war that permit destructive weapons and tactics but limit their effectiveness. However, nations with different endowments and resources will enjoy differential advantages, and this makes agreement on specific laws of war very difficult. The paper discusses empirical implications of the argument, and discusses whether the Hague Conventions are consistent with the model.
Encryption propertizes copyright. Prior to the rise of encryption, intellectual property wasn't really property. Instead, these rights consisted of rights to sue to block use or seek damages for after-the-fact use. Encryption makes possible before-the-fact limits on use of the sort that we associate with physical property. Copyrighted works are becoming real property in a way that will never happen for trademarks or patents. This essay traces the role of consent and refusal for copyrighted works in the context of mass media entertainment. Early phonograph and movie projector manufacturers sought to limit the use of the equipment to specified music or films, almost certainly in an effort at price discrimination. With the rise of radio, we see similar use restrictions imposed by the record companies, but these restrictions should be seen first as a form of raising rival's costs. The fight over home-taping use of the VCR should be seen in consent terms as well, where entry was clearly facilitated by the absence of any requirement of advance consent from copyright holders. Now with the current dispute over a possible broadcast flag for digital TV, we may complete the path started by Edison and his contemporaries. In considering the extent to which we should embrace full propertization of copyrighted works through encryption, we should expect transaction forms to vary with transaction costs and technological possibilities and should not somehow privilege a narrow set of institutional arrangements that arose under different constraints.
Courts have recently developed a new principle of interpretation: Administrative agencies are not bound by the literal language of regulatory statutes, if they are attempting to ensure against absurd or patently unreasonable outcomes. This principle is an effort to allow agencies to overcome the occasionally pathological rigidity of regulatory statutes, at least when those statutes must be applied in circumstances that Congress could not possibly anticipate. The new principle deserves widespread approval. After all, courts have long refused to interpret statutes literally in cases of absurdity. While it is possible to question the extent to which courts should feel free to inquire into the absurdity of an application of a statutory text, agencies have strong advantages over courts, because they are in a better position to know whether literalism, or departures from literalism, will improve the regulatory system. These points are connected with a more general one: Theories of interpretation should focus less on abstractions about democracy and legitimacy, and more on institutional capacities and concrete consequences. An appreciation of this suggestion fits well with courts' emerging enthusiasm for allowing agencies to interpret statutes more flexibly than courts do.
Why do so many executives and other employees receive fixed stock options as part of their compensation packages? There is an impressive literature on compensatory options, and yet it raises more puzzles than it solves. Tax law, option theory, and agency theory all suggest that we might have expected to find quite different practices than we do observe. In particular, there is a puzzle in the popularity of conventional fixed options when indexed options would seem to be relatively attractive. The solution or story offered here develops arguments about signaling, in the form of employees' disinclination to be seen as preferring cash over options in their own employer's future. It relies on the idea that indexed options encourage more risk alteration, or inefficient differentiation, than other forms of compensation. And it introduces the notion that there is something of a norm in favor of nonconflicting fortunes within a community. The norm part of the argument says something about the more general norm of privacy with respect to money matters and it illuminates the occasional practice of confidentiality regarding one's own compensation. This practice might be stable because of the negative signals emitted by defectors. The same analysis might help explain why stock option practices are somewhat sticky.
Law and economics has failed to produce plausible descriptive theories of contract doctrines. This paper documents these failures and suggests that they are due to a methodological problem involving the concept of transaction costs. If transaction costs refer to writing or information costs, then rational individuals would agree to complex contracts that are not in fact observed, and contract law would, for the most part, have no other function than that of specifically enforcing contracts. If transaction costs refer to limits on foreseeability and other cognitive restrictions, then law and economics assumes implausibly both that people are rational enough to allow legal rules to influence their investment and breach decisions, but not rational enough to allow legal rules to influence contractual design. Implications for normative analysis are discussed, and non-economic approaches to contract law are surveyed and criticized.
In this paper, I consider how copyright law influences entry in digital distribution of music and video. The subject encompasses past and current successes in distribution-cable TV and the VCR-current and recent controversies-Napster and the pending cases addressing its successors-as well as possible next steps in distribution, such as web radio, interactive music services and the digital video recorder. Section I of the paper considers six ways that online distribution matters: 1. as a new medium, online distribution adds to the existing set of versioning opportunities for producers; 2. distributional bottlenecks are weakened and gatekeeping roles minimized; 3. sellers receive direct, detailed information about consumer preferences; 4. bundling and packaging opportunities are greatly expanded; 5. pay-per-view or pay-per-listen is easier to implement; and 6. it is possible to devolve control over distribution through peer-to-peer distribution. Section II of the paper considers two cases of distribution entry, devices and online radio. Much of the relevant distribution entry policy is set through copyright law. For new devices that facilitate distribution-the VCR, Napster and the DVR-key features of the reigning copyright test are not sufficiently demanding of entrants. The Sony test for contributory copyright infringement-whether the object in question is capable of substantial noninfringing uses-is far too weak and fails to take into account at all the scope of the infringing uses that will result. It is bad third-party copyright policy. Sony may fare better as a matter of independent entry policy and the flexible fair use doctrine of copyright law creates room for courts to operate in setting that policy in an economically sensible fashion. As to online radio, we have severely constrained potential entry in digital radio through recent copyright enactments. Incumbent over-the-air stations are substantially favored and diversity and entry are limited by statutory fiat. The current statutes as written are troubling enough, but the statutory distortions are being exacerbated through the royalty setting process before the Copyright Arbitration Royalty Panel.
This paper, presented as the Coase Lecture at the University of Chicago Law School, summarizes in a non-technical fashion the recent literature on the use of legal rules to redistribute income. The argument, as made in prior literature, is that the tax system is likely to be superior to legal rules for redistribution of income because it focuses directly on the relevant margins.
This paper critiques the elaborate system of privacy safeguards that are found in the 1996 Health Insurance Portability and Accountability Act (HIPAA). On the more specific level, it explains how the detailed rules for the protection of privacy interests are likely to impact the ability to organize new medical research projects or to pursue follow-up with long-term studies already in place. On the more general level, it criticizes the requirement for individuated consent for discrete medical or financial transactions as an impediment to freedom of contract by precluding the use of generalized consent at the formation of the health care provider/patient relationship. The extreme set of ex ante regulatory provisions might make some sense if the current systems in place for the protection of medical privacy had shown some demonstrated failure that more limited after-the-fact remedies could not correct in individual cases. As no such showing has been made, the current explosion in regulation is best understood as the aggrandizement of regulatory power under the large grant of delegation contained in the original statute.
When strong emotions are triggered by a risk, people show a remarkable tendency to neglect a small probability that the risk will actually come to fruition. Experimental evidence, involving electric shocks and arsenic, supports this claim, as does real-world evidence, involving responses to abandoned hazardous waste dumps, the pesticide Alar, and anthrax. The resulting "probability neglect" has many implications for law and policy. It suggests the need for institutional constraints on policies based on ungrounded fears; it also shows how government might effectively draw attention to risks that warrant special concern. Probability neglect helps to explain the enactment of certain legislation, in which government, no less than ordinary people, suffers from that form of neglect. When people are neglecting the fact that the probability of harm is small, government should generally attempt to inform people, rather than cater to their excessive fear. But when information will not help, government should respond, at least if analysis suggest that the benefits outweigh the costs. The reason is that fear, even if it is excessive, is itself a significant problem, and can create additional significant problems.