I. Introduction
A. The relationship between law and economics
2. Combining law and economics (cont'd.)

a. What economic analysis of law can do

    (1) Analyze existing legal rules
    ? What are some questions about laws that economics can help answer?

    What is the objective of the law?
    How will people respond to the law?
    Is the law efficient?
    Why does the law exist?

    "Legal rules exist...in order to change how the people affected by them act."
    "The legal rule that holds than any ambiguity in a contract is to be interpreted against the party who drafted it exists because someone wants people to write contracts more carefully."

    Example 1 (benefit-cost decision making) Standard of proof
    Criminal case versus Civil case: costs vs. transfers (F8-9)

    Example 2 (market incentives): Rental apartment contracts (example: nonwaivable implied warranty of habitability applies in CA since 1974--ex: no pests)

    See: Incentives and outcomes handout

    Related example: Statutory laws versus economic laws: tax incidence

    Example 3 (marginal analysis): Three-strikes law
    Thomas More, Utopia, 1516: "and it is plain and obvious that it is absurd and of ill consequence to the commonwealth that a thief and a murderer should be equally punished; for if a robber sees that his danger is the same if he is convicted of theft as if he were guilty of murder, this will naturally incite him to kill the person whom otherwise he would only have robbed; since, if the punishment is the same, there is more security, and less danger of discovery, when he that can best make it is put out of the way; so that terrifying thieves too much provokes them to cruelty."

    Example 4 (game theory): Plea bargaining (Friedman: Plea bargaining)
    The prisoner's dilemma

    Example 5 (public choice): The Posner Thesis: "The common law is best (not perfectly) explained as a system for maximizing the wealth of society." (Posner 25)

    Remarkable if so since the system of legal rules represents largely the "unplanned outcome of a large number of separate decisions" by legislators and judges.
    Much of common law derives from private standards of behavior (norms)

    Why might Posner be right?
    Many legal doctrines date back to the nineteenth century when a laissez-faire ideology based on classical economics was the dominant ideology of the educated classes. (Posner 25)
    "Common law consists, in large part, of the legal framework for voluntary transactions."

    Posner's corollary: statutory law tends to interfere with efficiency
    Because legal rules can result from special interest politics (Friedman: public choice theory)
    Posner suggests this applies to statutory law but not to common law due to greater independence of judges versus legislators

    But Posner might be wrong--do judges have an incentive to make efficient decisions?

    The Posner thesis is a testable conjecture--we will examine it over the term

    (2) Assist in the choice of legal rules
    Start with objective and assess how well alternative legal rules work

    Benefit-cost analysis
    Example: more cost efficient to use fines first, and use prison only after fines option has been exhausted. (C&U 5)

    Try to be more efficient
    -increase wealth, the size of the pie

    (3) Provide professional assistance

    (i) Technical support--expert testimony
    (ii) Empirical methodology--econometrics

b. Criticisms of the economic analysis of law

    (1) Economic analysis rests on poor assumptions
    simplistic / unrealistic / offensive 
    "reductionist" (Posner 25)
    "If simplicity would lend power to a social-scientific idea (such as to the rational-actor model itself), simplicity in a legal rule might also add to its instrumental force." This argues for stability of law. (LEA 71)

    The assumption of rational self-interest
    Responses:
    "[S]elf-interest should not be confused with selfishness; the happiness (or for that matter the misery) or other people may be a part of one's satisfactions." (Posner 3)
    The acid test is how well a model predicts

    The acceptance of tastes as given
    "In devising a normative theory one may wish to go beyond tastes as they exist as a benchmark of value. For if tastes derive from some social process, and defects in that process can be identified, one may wish, for example, to treat as controlling those tastes which would exist if the process had not been flawed." (Warren Schwartz, J. Legal Educ. 33 (1983)) (LEA 73)
    (There is a role for other institutions and disciplines to establish the framework--sociology and psychology)

    Overall: 
    "It takes a horse to beat a horse." (Stephen Gettinger, CNN Pundits and Prose, Nov. 4, 1996)