1. Efficient Rules for a Unicausal Accident
Strict liability is the straightforward Pigouvian answer
Negligence, as interpreted by economists, gives the right answer too
You are liable if you failed to take all cost justified precautions
If you are liable, it is in your interest to … .So either you do or you do
That assumes the court knows
What precautions you took
And what precautions you should have taken
So it is a partly regulatory solution
Strict liability only requires you to know—leverages your private information
Activity level is shorthand for unobservable precautions

2. Dual Causation: Coaseian accidents
Strict liability on either party
Gives that party a full incentive
The other party none, since he is being fully compensated for the cost to him
How about making both parties fully liable?
Each of us pays a fine equal to the other driver’s cost of the accident
Who reports the accident?
What about negligence liability? My simple case is cars and tanks.
The tank is liable if the driver was negligent–full incentive
If the tank is not liable, the car driver bears the full expense
And the tank won’t be liable, because it is not in its interest to be negligent
So both parties have the full incentive
But it only works for observable precautions

3. In a more realistic case than cars and tanks …
How do we decide which party is liable if negligent? The argument works poorly for auto collisions, better for
Situations where there is some consistent difference between the two parties
Driver vs pedestrian, for example
The same logic works for contributory negligence
I pay for your damage unless you were negligent
So you won’t be, so I will, so I will take the optimal precautions
Suppose the court cannot accurately judge negligence
The least bad rule may be to split the damage
Along the lines of the argument for coinsurance

4. Six Theories of Punitive Damages
No such thing, just ordinary damages for injuries that are hard to see
They serve to express moral outrage
They function as a probability multiplier (Landes and Posner)
If damages are hard to measure but the tort is almost always inefficient, set damages at a high estimate of harm done (Landes and Posner)
Because the optimal punishment is not really equal to damage done
Catching and punishing people is costly
Details this week
To deter strategic torts
My threat to harm you stops you from doing things I don’t like
Consider the case of shooting birds on my neighbor’s land to humiliate him
None of these does a fully adequate job of explaining current law

5. Why do Ordinary Damages Go to the Victim?
As a form of insurance, but not a very good form
To combine two incentives in one person
A reward to make the victim report and sue
Combined with the incentive to deter acts that harm him
But is it the right incentive?
The patent troll problem.
The Athenian solution: Losing tort plaintiff owed damages to the defendant
Getting the incentive right is a problem not limited to tort law
As we will be seeing this week

6. Damages Are Doing Triple Duty
The damage payment for a tort is
The penalty to the tortfeasor
The reward to the successful plaintiff
The compensation to the victim
There is no reason to expect the right value to be the same for each

7. Damages as Insurance
Damages only insure against a small subset of losses
You have to prove causation, negligence, etc, which is costly
And reputational incentives for the payer are backwards
An insurance company wants the reputation
Of being willing to compensate you with as little hassle as possible
So that people will buy its insurance
A tortfeasor wants the reputation
Of fighting as hard as possible not to pay damages
So people won’t sue it
So design tort law to deter tortfeasors and motivate victims

8. Product Liability Caveat Emptor: Let the buyer beware
Caveat Venditor: Let the seller beware: Seller is liable
Argument for: It gives him an incentive to make sure nothing goes wrong
Argument against:
The consumer also affects the probability that something will go wrong
The seller already has that incentive—reputation
Counter argument: Consumers may not know enough about quality of the product
Cave Canem: Beware of the dog
Conclusion: The case for caveat emptor is stronger
The better reputational incentives work
And the more things going wrong depends on the user
So the efficient rule is:
Specific to a specific problem
With a specific product
An alternative rule is freedom of contract

9. Eggshell Skulls, Himalayan Photographers, and Efficient Law
A tortfeasor takes his victim as he finds him
If the victim is unusually vulnerable, the tortfeasor pays for the unusual damage
Posner argues that this is the efficient rule
Because it gives potential tortfeasors the right average incentive
Including a high probability of low injury and damage payment, low probability of high
This is the same problem as sending valuable film to Walgreens
The vulnerable victim knows he is vulnerable, the potential tortfeasor doesn’t
Just as the Himalayan photographer knew his film was valuable
Posner could have made the same argument there, didn’t
Thus in each case concluding that the common law was efficient
Which points out a problem with evidence for his conjecture
First you see what the common law rule is
Then you construct an argument to show that that is the efficient rule

10. How Much is Information Worth?
If it doesn’t change your decision, nothing
If it barely changes your decision, not very much
So adverse selection problems only matter if the errors are large
A small error probably doesn’t change what you do
And if it does, you are only a little worse off than without the error
We are back with the second order of smalls
Wyatt v Davis: Was Wyatt negligent for not making sure patients knew the live polio vaccine could give them polio?
That depends on how likely the knowledge was to change their decision
The court found the annual benefit about equal to the lifetime cost
Concluded that the patient might decide against, hence Wyatt was liable
My favorite example of why judges should be liable for their errors

11. Criminal Law

12. The False Positive Rate
"It is better that ten guilty persons escape than that one innocent suffer”
What should the ratio be? How would you decide?
What is it?
A lot of opinions about the criminal justice system hang on that number
Which nobody knows
How would you find out?
Leverage a new technology, probably DNA testing
My plan
Get some cooperative jurisdiction to let you test tissue evidence for everyone convicted
Or at least a random sample
From before the testing (may be getting a little late for that now)
See for what percentage it proves innocence, for what percentage guilt
Some actual attempts
Rape/murder cases usually leave tissue evidence
By now they should all have been tested. What fraction turned out to be innocent?
About 3%. But were they all tested?
From a study of exonerations of defendants sentenced to death, an estimate of 4.1% should have been
From a study of 634 Virginia cases for which tissue evidence happened to have survived
For about 16%, the tissue evidence would have been evidence (not necessarily proof) against guilt
This one wasn’t limited to high level cases
Given plea bargaining, one might expect higher rates for lesser offenses

13. The Problem: Incentive to Convict
In order for anyone to be convicted of anything
Someone has to have an incentive to convict him
Which may include to convict people who are not guilty
Examples of the problem
Police incentive to clear cases
Testing labs’ incentive to get business
Which they get from police departments
That want to clear cases
Prosecutor rewarded for number of indictments and percent convictions
How can you make it in the individual interest to only convict the guilty?
Jury procedure to separate innocent from guilty? High standard of proof?
But ~95% of cases are plea bargained
Punish the prosecutor for false convictions?
But that’s a punishment for their discovery
So an incentive to make sure your mistakes are not discovered—or corrected
Make the reward depend on the person being guilty
How?

14. Deterrence as a Private Good
In 18th century England, criminal prosecution was private
Usually by the victim, like our tort system
Unlike tort, there was no damage payment, so why bother to prosecute?
One answer is in order to deter torts against yourself
If you were a likely target, you want the reputation
That someone who robbed you got convicted and hanged
And you get that reputation by prosecuting someone who does
If not a likely target, join an association for the prosecution of felons
The members, in one town, chip in annual dues to a fund
That will pay the cost of prosecuting anyone who commits a felony against a member
And the list of members is published in the local newspaper
For the felons to read
Think of it as a way of publicly precommiting to prosecute
This treats deterrence as a private good
If you catch the first beggar to pass your property and railroad him to the gallows
The real robber and his friends will know you are a safe target
So you have a private incentive to prosecute the right man

15. Tweaking The Technology of Trial
Eliminate plea bargaining, try all cases?
Given the number of felony convictions and the average trial length
That requires more judges than currently exist in the entire judicial system
And the full time work of about a million people
Prevent overcharging in plea bargaining?
That should make innocent defendants less likely to cop a plea
How do we do it?
The Athenian approach: Prosecutor is fined if fewer than 20% of jurors vote for conviction
In our system of public rather than private prosecution
If, for any charge, fewer than four jurors vote for conviction
Three strikes and the prosecutor is fired.
Adversarial vs Inquisitorial trials?
Advantage of inquisitorial—nobody need throw away evidence he doesn’t like
Advantage of adversarial—at least one person looking for each kind of evidence
Less obvious advantage–incentive to reveal private information
If I know I’m innocent, looking for more evidence should have a high payoff
If I know I’m guilty, … . But this also biases the process towards those who can afford good lawyers
Informed vs uninformed juries
Early English system used a jury of neighbors
We disqualify anyone who knows anything relevant to the case.
We are throwing away information in the attempt to eliminate bias

16. The Optimal Punishment Problem
First approximation: <P>=probability x penalty = Damage done.
So only efficient offenses occur
Those for which the value to the offender > damage to the victim
This assumes a risk neutral offender.
More generally, <P>=the certainty equivalent of the probability/punishment pair
That deters all and only inefficient offenses, but …
Catching and punishing criminals is costly
So perhaps some inefficient offenses are not worth deterring
Or perhaps some efficient offenses should be deterred to save the cost of punishing them
Step One: What combination of probability and penalty is optimal?
Consider all combinations that are equivalent for the criminal
Pick the combination with the lowest cost of catching plus punishing
You now know the total enforcement cost of any level of deterrence
What <P> is optimal?
For any <P>, calculate [cost to victims] + [cost of enforcement] - [benefit to criminals]
Find the <P> that minimizes it

17. Solving it To find the optimal value of deterrence
You keep increasing it until the result of increasing it a little more
Is that the cost of doing so just balances the benefit
The top of a mountain is level
Net damage = damage to victim - gain to criminal
For the offense that will be deterred if we raise the punishment just a little more
Gain to criminal = expected punishment—That’s why he was just barely deterred 
So Net damage = damage to victim - expected punishment
For the optimal punishment:
Cost of deterring one more offense = Net damage that offense would do
MC=damage to victim – benefit to criminal = damage - <P>
<P> =damage to victim - cost of deterring one more offense = D-MC
Marginal cost could be negative
Because when you increase <P> you deter some offenses
And if an offense is deterred you don’t have the cost of catching and punishing the offender
So the optimal expected punishment might be less or more than damage done.

18. Two Intuitions Let the punishment fit the crime
<P> = damage done by the offense
The right rule if the marginal cost of catching and punishing is ~0
Qualitatively right anyway—the greater the damage the greater the punishment
Enough punishment to deter
The right rule if there is a punishment
Below which there are many offenses
Above which there are few
Set the punishment just above that
The general rule is <P> = damage done minus MC of deterrence
That deters all offenses worth the cost of deterring
The ones for which net damage is at least equal to the cost of deterring them
There are two senses of “efficient crime” here
An offense it is efficient for the offender to commit: Benefit>damage done
An offense it is efficient to deter: cost of deterring it < net cost of the offense

19. Should Benefits to Criminals Count?
Throughout the analysis, we assumed they did
Which many would find strange
Why do we care how much someone enjoys murder or profits from robbery?
We are trying to derive law without morality
From a single assumption: economic efficiency
So we don’t know whose benefits shouldn’t be counted
Part of what is interesting about the project
Is that we don’t put moral assumptions in
But mostly get them out, in the form of legal rules
Such as “you shall not steal” or “you shall not kill”
Why does that happen?
If we start out by knowing whose benefits don’t count
We get our moral assumptions out by putting them in
Making the argument circular

20. Should the Rich Pay Higher Fines?
Argument for
A fine sufficient to deter a poor man won’t deter a rich man
And a fine that will deter a rich man a poor man cannot pay
Argument against
The maximand in efficiency is value measured by willingness to pay
A crime whose value to a poor man is less than damage done is inefficient
A crime whose value to a rich man is more than damage is efficient
John Lott’s most politically incorrect article
Rich people have better lawyers, so get, on average, shorter sentences
Which is efficient, since their time is more valuable
So you need a shorter sentence to get the same punishment measured in dollars
But this assumes punishment should be equal to damage done
Following out the argument that takes account of enforcement costs
Sometimes the fine should be higher for the rich, in order to deter
Or because the rich can pay a fine, making punishment costs low
Sometimes lower, because deterring the rich costs more than it is worth

21. Inefficiency of Punishments
Define punishment inefficiency as punishment cost/amount of punishment
That matters because we are comparing different ways of getting the same deterrence
So the punishment cost of equivalently effective (probability, punishment) pairs
A fine: What one man pays another collects
Punishment cost is zero.
So inefficiency is zero
Imprisonment: Punishment cost > amount of punishment
Cost to the offender is the amount of punishment—five years in prison
Cost to the rest of us is the cost of running the prison
So inefficiency > 1
Execution: Punishment cost = amount of punishment
The offender loses one life, nobody gets one
Inefficiency = 1
Execution (or corporal punishment) is less inefficient than imprisonment!

22. To Minimize Punishment Cost
Choose the most efficient punishment
A fine if the offender can pay it
Otherwise execution (or corporal punishment)
Consider an offense currently punished with five years in prison
We determine that that is equivalent, for the criminal, to 1/6 chance of execution
So when someone is convicted, we roll a die
1-5 we turn him loose
6 we hang him
Deterrence is the same, so victims are no worse off
The average cost to the criminal is the same
And we save the cost of running the prison
What is wrong with this argument?

23. The Inefficiency of Efficient Punishment
Consider first a less extreme version
Every sentence is X dollars or Y years
The criminal has the option of spending Y years in the state prison
Or accepting an offer from a private prison to pay his fine
In exchange for something less than Y years working in their prison factory
I proposed that idea in an old article. Someone responded
The colonial powers in Africa had a similar approach
If they needed a road built, they found an excuse to arrest a bunch of people
And sentenced them to work on the road
Larry Niven had sf stories with a different variant
There is always a shortage of organs.
So when a criminal is executed, his organs forfeit to the state for transplant
With that rule there is still a shortage, so increase the number of capital offenses
In the first story, three dangerous driving convictions add up to a capital offense
We need to think about the incentives of the enforcers as well as the enforcees

24. Prosecution as Rent Seeking
We are back with the incentive to prosecute
If it is too high, prosecutors, public or private, prosecute too much
Potential defendants spend resources defending against prosecution
Making all of us poorer
The civil version
Targeting deep pockets instead of guilt
Via punitive damages or class actions
Civil forfeiture for criminal offenses
My proposal puts your ownership of your labor at risk
Niven’s puts the value of your organs at risk
My dice rolling isn’t quite as bad, since there is no profit to hanging someone
But if punishment is cheap and potential defendants have little political power
We may be too willing to punish.
A new argument against (cheap) capital punishment

25. What is Wrong with Cannibalism?
People die, why waste the meat?
Yet cannibalism has been prohibited in almost all societies we know of
Is there a good economic reason why?
I can choose not to carry money, but not not to carry my body
So if meat is scarce, there is an incentive to murder me
Which means I have to be careful not to make it possible
This is the best argument I know of against a market for organs
It looks like an obviously good idea, but …
You could be worth $50,000 on the hoof
So better combine it with strong rules on chain of title
It also explains why rape is much more common than murder
“A virgin with a sack of gold can walk safely from one end of the empire to the other”
The sack of gold could be kept in a safe
Again rent seeking