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(Economic Analysis of Law)

        (Legal Economics)

            Ke Huaqing


Reference books and papers:

A. 法律经济学网www.law-economics.cn法律经济学教学cole   123456

B. Polinsky, An Introduction to Law and Economics. Aspen Publishers, 2003. in www.law-economics.cn.

C. Friedman, Law’s Order: what economics has to do with law and why it matters, Princeton University Press, 2000(弗里德曼《经济学语境下的法律规则》,法律出版社,2004年版。)

D. Shavell, Foundation of Economic Analysis of Law, Belknap Harvard, 2003. 

E. Cooter, Ulen. Law and Economics, fourth edition, Addison-Wesley, 2003.(《法与经济学》第3版,上海财经大学出版社,2002年),(《法与经济学》第2版,上海三联书店,1994年)。www.cooter-ulen.com


GBaird, Game Theory and the Law, Harvard University Press, 1994.(贝尔德、皮克、格特鲁《法律的博弈分析》,法律出版社,2004)

H. Avery Wiener Katz(ed), Foundation of the Economic Approach to Law. 影印版《法律的经济分析基础》,法律出版社,2005


Exam: writing an article about Law and Economics


I. What is economics?

A. An approach to understanding behavior, based on the assumption that Individuals have objectives and tend to choose the correct way of achieving them.


B. Some Examples:

1. Why have locks on doors?

a. A sufficiently determined burglar can get into anything short of a bank vault(银行保险库), with a sledgehammer(大锤) and crowbar(铁撬)or through the window.

b.A lock makes it harder, thus more work and a greater chance of being caught, thus a less profitable project.

c.So we put locks on our doors because we believe that burglars are rational.

d.Which locks? 度与最优

2. A policeman has evidence that will convict a criminal; what does he do with it?

a. Convictions costs the criminal $50,000, benefits the policeman's career by $10,000

b. Dragnet(法网) answer : arrest the criminal.

c. Economics answer: Sell the evidence to the criminal for some price between $10,000 and $50,000

d. To keep this from happening, some of the policemen have to be watching the other policemen instead of the criminals.

e. The solution proposed by Becker and Stigler was a bounty system, where the policeman receives as salary the fine paid by the convicted criminal. If he takes a bribe, he is merely cutting out the middleman.

f. Which is how our civil system works-we call the "bribe" an out of court settlement(庭外和解).

g. Question idealism “法网恢恢, 疏而不漏”.

3. If we impose the maximum possible penalty for armed robbery, the additional penalty for murder if you are already committing armed robbery is zero, so we have made it in the interest of armed robbers to kill their victims.


II. What is the Economic Analysis of Law?

A. First Project: The consequences of legal rules.

1. If we impose the maximum possible penalty for armed robbery,...

a. The implication is not necessarily that we shouldn't do it-it will deter some armed robberies

b. But increase the number of armed robberies with murder

c. And we should take that into account in deciding whether to execute armed robbers.

2. Plea bargaining:((被告请求从轻发落的)认罪求情协议,辩诉交易)arrangement where the accused pleads guilty to some charges and the prosecution drop other charges or asks for a lighter sentence

a. It seems as though it should weaken punishments, since a defendant will only accept a plea bargain if he thinks it is a better deal than the risk of being tried and convicted.

b. But it may strengthen them. Prosecutors have limited resources; if 90% of defendants plea bargain, resources can be concentrated on the remaining 10%, making conviction more likely-and making defendants willing to accept harsher bargains.

3. Requiring CD players in cars. Seems to benefit consumers-until we take account of the effect on the price of cars. The same argument applies to requiring hot water in apartments, safe jobs, .... Fixing one term of a contract in favor of one party is not in general a transfer, since prices, or other terms in the contract, shift to compensate(抵消).

B. Second Project: explaining why particular legal rules exist.

1. The Posner Conjecture: Common Law (that part of the law that comes not from legislatures but from the precedents created by judges in deciding cases) tends to be economically efficient.

2. One basis for this conjecture might be a plausible mechanism by which efficient law would be generated. Inefficient rule generate litigation, and litigation, eventually, generates changes in the rules.

3. An alternative basis might be evidence that the observed rules of the common law tend to be the same rules that economic theory tells us are efficient. Posner offers a lot of such evidence.

4. An alternative approach to predicting legal rules-legislated ones-is public choice theory, which tries to apply economics to the political marketplace. We will not be covering that in this course.

C. Third Project: Evaluating Legal Rules-Efficiency as a norm.

1.Difference between Efficiency(效率) and Benefit(效益或者收益)

EfficiencyGetting any given results with the smallest possible inputs, or getting the maximum possible output from given resources. Efficiency in consumption means allocating goods between consumers so that it would not be possible by any reallocation to make some people better off without making anybody else worse off. Efficiency in production means allocating the available resource between industries so that it would not be possible to produce more of some goods without producing less of any others. Efficiency in the choice of the set of goods to produce means choosing this set so that it would not be possible to change it so as to make some consumers better off without others becoming worse off. Efficiency is also referred to as Pareto-optimality.

Benefitbenefit-cost analysis

2. Economic efficiency is a value, and maybe the one law can best achieve. Controversial

Justice vs. efficiency

Justice: an individual, a firm, or a government claims to right or interest.

Efficiency: Justice of group

(参考柯华庆《科斯的国家主义视角》,载于《经济学家茶座》21辑;《法律:做蛋糕与分蛋糕》,载于《经济学家茶座》9辑。In www.law-economics.cn

3. Allocation vs. distribution

Allocation(配置)efficient resource allocation: A situation in which it is not possible to reallocate available resource so as to achieve more of one objective without accepting less another.

Distribution(分配):the shares of income received by different sections of the community. The functional distribution of incomes refers to the shares of income derived from the services of labor,land,and capital; personal income distribution refers to the relative number of  personal income of various sizes.

Equity vs. efficiency

III. What is economic analysis of law good for? Why should people study it?

A. One attraction of the economic analysis of law, from the standpoint of legal scholars (or potential legal scholars) is that it ties together diverse areas of law, providing a common theoretical structure. (concrete(practical) thinking vs. abstract(theory) thinking)

(Theory is the most important part of the dogma of law, as the architect is the most important man who takes part in the building of a house. The most important improvements of the last twenty-five years are improvements in theory. It is not to be feared as unpractical, for, to the competent, it simply means going to the bottom of the subject. For the  incompetent, it sometimes is true, as has been said, that an interest in general ideas means an absence of particular knowledge…….The danger is that the able and practical minded should look with indifference or distrust upon ideas the connection of which with their business is remote. (Holmes: The Path of the Law)) .“盲人摸象

B. It is also useful for understanding economics, because you learn about ideas by trying to concretize them.

Economics applies its general theory largely to abstract concepts-property, exchange, firms, capital, labor.     Quite a lot of what lawyers and law professors do involves dealing with the same concepts in their real world incarnation(化身).

Institutional Economics (Legal Economics):between concrete and abstract.

1. "Property" sounds like a simple idea-and isn't.

a. Does ownership of land include the air above-to what height? The earth underneath? Oil in the earth underneath?

b. What can you do to protect your ownership? Physically keep people out (build a high wall)? Shoot trespassers? Sue trespassers-but only for damage actually done?

2. "Cause an externality" seems like a simple concept-and isn't. When I play loud music while my roommate wants to sleep, there is a resulting cost-but it would be eliminated either by my turning off my music or by my roommate deciding to get up and party.

3. Coase revolutionized our understanding of externalities, market failure, etc., in part by looking at how the common law of nuisance(妨害) treated such problems.

For example, Someone builds a new hotel in Florida that shades the swimming pool of the next hotel down the beach.The owners of the old hotel sue for damages.

4. "Cause" is also a difficult concept more generally. Consider the case of two hunters simultaneously shooting a third-one in the head, one in the heart. Who caused the third hunter's death? Neither or both.


V. What is the relation?

We have been offering a broad definition of economics, one that goes far beyond prices, unemployment, and the like. What is the relation between economics defined in that way and economics more narrowly defined-what you find in the typical microeconomics text?

Economics is the study of the way in which goods and services are produced and distributed, and income generated and allocated.

(Mankiw: Economics is the study of how society manages its scarce resources.

Stiglitz: Economics is the study of how individuals, firms, governments, and other organizations within our society make choices, and how those choices determine how the resources of society are used. choices matter because resources are scarce.)

A. A broad definition of economics has been worked out in more detail.

B. A broad definition of economics helps us understand economics in the broader sense.

1. To understand marriage, use ideas developed in explaining long term contracts between firms. Talking about a marriage market is not merely a metaphor(隐喻)-it is a real market, even if the prices are not explicit or in money.

2. To understand your three year olds’ apparently irrational behavior ("I want ice cream and will throw a tantrum(发脾气) if I don't get it, even though you will then send me up to my room with any ice cream") think about the logic of commitment strategies in ordinary economics. If he persuades you that he has committed himself strongly enough, next time you may give him the ice cream to avoid the tantrum.

C. The broad approach helps us intuit the narrow. We do a lot of rational choosing in our daily lives, and can apply the intuitions developed there to understanding the behavior of firms, workers, etc.


VI. What is economic efficiency?

(Posner calls it "Wealth Maximization")

Marshall economic efficiency: The result of the change is to make some people better off and some worse off. In principle one could measure the magnitude of the effects by asking each person affected how much he would, if necessary, pay to get the benefit(if the change made him better off) or prevent the loss(if the change made him worse off). If total gains were larger than total losses, making the net effect positive, we would describe the change as an economic improvement.

A. The problem-evaluating different systems of rules, their outcomes, etc.

1. By whose values?

2. How aggregated?

B. The economic solution.

  1. Revealed preference: Heroin(海洛因) or Insulin(胰岛素), the fact that someone is willing to pay lots of money to get it is evidence that it is valuable to him. How valuable? It is worth to him the maximum amount he would be willing, if necessary, to pay for it.

2. Aggregate effects across people by using willingness to pay as a common unit. We are using value (utility measured by dollar willingness to pay) rather than utility (units of pleasure, or happiness, or something similar).

A dollar might represent more utility to one person (poor or materialistic) than to another (rich or ascetic(禁欲者)) but it represents, by definition, the same value. So we count a change that benefits Bill Gates by $10 and hurts a homeless person by $9 as an improvement, which seems wrong.

3. Note that value measured in dollars is not the same thing as pieces of green paper. If I am willing to pay $400 for a new printer and buy it for $300, I end up with $300 less money-but I am $100 better off than before the deal.

C. Defense(not prove) of the economic solution.

1. If we wish to describe behavior, it is revealed preference, not "value as known in the mind of God."

2. If we wish to predict outcomes, willingness to pay is more relevant than utility. Whether lobbying, litigating, or simply buying goods on the marketplace, one man's dollar will have about the same effect as another's, independent of how much happiness a dollar represents to each.

3. What about using efficiency as a normative criterion-to decide how society should be organized?

a. Both elements are then problems, but ...

b. God is not available to run the society. Other people are available to make choices for us, but even if they (sometimes) know what is good for me better than I do, they are less certain to seek my good than I am. They may take the opportunity to seek their own good at my expense. (serve for the people wholeheartedly)

c. Many economic choices involve gains and losses to large and diverse groups, in which case differences in utility/dollar may average out(算出平均数).

d. Even if efficiency is a good proxy for utility, however, is utility all that matters? If there are utility monsters (people who feel much more intently than the rest of us do) should we devote all of our resources to their pleasure? If you can save the lives of three people about to be lynched((一群人)私自处人死刑(尤指绞刑)) by framing(诬陷) one innocent person for the crime, should you do it?

e. Utility is probably not all that matters, but it is one big thing that matters, and if we know how to maximize it and don't know how to maximize the rest of what matters (or cannot agree about what it does), then rules that maximize utility (or efficiency as a proxy for utility) may be the best we can do.

Marginal Utility: The marginal utility of any good is the increase in utility that the consumer gets from an additional unit of that good. most goods depends are assumed to exhibit  diminishing marginal utility: The more of the good the consumer already has, the lower the marginal utility provided by an extra unit of that good.all men/women or most men/women?

Social efficiency or social well?

paraconsistent vs. consistent

D. Efficient vs. Inefficient outcome: "Efficient" is a sort of outer bound benchmark, the best result we could hope to achieve by any economic system.

1. We may define a "bureaucrat god" as someone who knows everything anyone in the society knows, and has unlimited ability to calculate how to coordinate people's actions and to make them do what he tells them to.planned economy

2. An outcome is efficient if a bureaucrat god could not improve it ("improve" in the sense we have been discussing-make a change that produces total benefits larger than total costs).

3. If an outcome is efficient, no change in the economic/legal system can improve it, since we have no tools available that the bureaucrat god does not also have.

4. If an outcome is inefficient, we might be able to improve it. But we also might not, since we have no bureaucrat gods available to run our economy.



E. Other definitions of efficiency.

1. Pareto:

a. An improvement is a change that benefits someone, hurts nobody. This definition avoids interpersonal comparison, but ...

b. In practice, few changes in legal rules and the like are pareto improvements.

Close thinking vs. open thinking

c. Difference between Pareto improvement/ superiority and Pareto efficiency/optimality

2. Hicks/Kaldor: potential pareto improvement

a. An improvement is a change that would be a pareto improvement if combined with suitable transfers among those affected.

b. This almost always gives the same conclusion as Marshall's definition (what we started out explaining).

c. Because if there are net benefits, then the gainers gain enough to compensate the losers, and if the gainers gain enough to compensate the losers, then there are net benefits.

F. What matters is that you understand these ideas, not that you agree with them.

1. Accept rationality as a working hypothesis for this course.

2. Take Posner conjecture as a conjecture, look at evidence for and against.

3. Focus on the third project.

positive legal economics

normative legal economics(basic aims of law)

TO understand the world is aimed at improving the world.



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