1. Economic Analysis of Law F.H. Buckley fbuckley@gmu.edu Sciences Po Salle 401 56, rue des Saints Pères October-November 2006

2. 2 A bit of economics…  Micro-economics examines the implications of the assumption that man is a rational maximizer of his ends or self-interest  Don’t confuse this with selfishness— my self-interest may include the concern I have for others generally, or for those close to me

3. 3 Now a bit of economics…  Man as a rational maximizer of his ends or self-interest  Nor is this a theory of consciousness. We want to see whether human choice conforms to our model whatever one’s state of mind.

4. 4 The hot new thing: Behavioral Law & Economics  What happens to the model when one adjusts for computation costs  Mental work is the costliest of human activities

5. 5 The hot new thing: Behavioral Law & Economics  What happens to the model when one adjusts for computation costs  To economize on calculation, we employ judgment heuristics as mental short-cuts  These are not infallible, when compared to choices we might make on the assumption of costless calculation

6. 6 A fundamental principle: the Law of Demand P2P2 $ P1P1 Q2Q2 Q1Q1 Quantity The Law of Demand: There is an inverse relationship between price and quantity

7. 7 A fundamental principle: the Law of Demand P2P2 $ P1P1 Q2Q2 Q1Q1 Quantity The Law of Demand: When the cost of an item increases, less is demanded

8. 8 A fundamental principle: the Law of Demand P2P2 $ P1P1 Q2Q2 Q1Q1 Quantity The Law of Demand: When the cost of an item increases, consumer will substitute other goods

9. 9 A fundamental principle: the Law of Demand  So what counts as a cost? More physical or mental effort required An increase in a criminal sanction Social sanctions, e.g. shame or ridicule

10. 10 Downward-sloping demand curves may take a variety of shapes $ Quantity

11. 11 An elastic demand curve $ Quantity Luxury goods A small change in price results in a large change in quantity demanded

12. 12 An inelastic demand curve $ Quantity Hard drugs? A large change in price results in a small change in quantity demanded

13. 13 A fundamental principle: Opportunity Cost  For economists, the cost of something is the value of the best alternative Your opportunity cost as students is what you would earn were you working (in total lifetime earnings) For a business, an investment opportunity has an opportunity cost of the next best alternative opportunity

14. 14 A fundamental principle: Opportunity Cost  A price below opportunity cost represents waste: “the game is not worth the candle.”  A price above opportunity cost will attract competitors in competitive markets  Competition tends to make opportunity cost both the minimum and the maximum price

15. 15 The economist’s use of assumptions  The economist abstracts from the mass of detail through simplifying assumptions, such as perfect rationality or costless bargaining  A model is evaluated on the basis of its predictive power, not on whether its assumptions seem realistic

16. 16 Does law-and-economics have an ideological bias?  Economics as a positive discipline

17. 17 Does law-and-economics have an ideological bias?  Economics as a positive discipline  Normative law-and-economics purports to say little about distributional or endowment issues

18. 18 Does law-and-economics have an ideological bias?  Economics as a positive discipline  Normative law-and-economics purports to say little about distributional or endowment issues  Normative economics takes intangibles into account (e.g., moral externalities)

19. 19 A few basic legal concepts  Private Law: The law of obligations Contract Quasi-contract Delict (tort)

20. 20 Contract  Contract Law as content-independent. Sed qu. contracts contra bones mores  The idea of a hypothetical contract as explaining the content of quasi- contract and delict  “Contractarianism”

21. 21 A few basic legal concepts  Remedies in contract law Damages as a compensatory award of money Specific Performance as the exceptional remedy

22. 22 A few basic legal concepts  Damages as a compensatory award of money A man undergoes an operation to repair an injured hand, after the doctor promises him that “it’ll be as good as new.” The operation is a failure. The hand is now much worse than it was before the operation. The doctor is at fault What measure of damages is the man is entitled to? How would you compensate him?

23. 23 A few basic legal concepts  Damages as a compensatory award of money A man undergoes an operation to repair an injured hand, after the doctor promises him that “it’ll be as good as new.” The operation is a failure. The hand is now much worse than it was before the operation. The doctor is at fault Compensatory awards repair the wrong by putting the man in the same position he would have been in had the contract been performed.

24. 24 A few basic legal concepts  Damages as a compensatory award of money A enters into a contract to custom make a piece of software for B. The contract price is $100,000, and A expects that he will incur costs of $50,000 in producing the product. After the contact is made, and after A has incurred costs of $10,000 in producing the software, B tells A he is canceling the contract. A has to junk what he has done thus far. What damages should be awarded to A?

25. 25 A few basic legal concepts  Damages as a compensatory award of money The expectation measure of damages as basic in contract law (contract price of $100,000 less cost of $50,000 = profits of $50,000) The reliance measure of $10,000 as delictual in nature

26. 26 Was the contract properly formed?  Lack of capacity: Infants, minors, the mentally incapable  Lack of consent Fraud Mistake Force or duress  Unconscionability or substantive unfairness

27. 27 Was the contract properly formed? Pateralism  Lack of capacity: Infants, minors, the mentally incapable  Might the law of capacity extend beyond this to mentally capable adults?  Of slaves and married women  The revival of paternalism: Of smokers, seatbelts and pension law

28. 28 Was the contract properly formed? Misrepresentation  Misrepresentation: a false representation which induces another to enter into a contract What is a representation When is it false? Simplex commendatio non obligat Fraud and negligent misrepresentations

29. 29 Was the contract properly formed? Misrepresentation Does a simple informational asymmetry constitute fraud? Bargaining over antiques? Land assembly in Texas Gulf Sulfur? Insider trading in Texas Gulf Sulfur?

30. 30 Was the contract properly formed?  What counts as unconscionability The special concern for standard form contracts or contrats d’adhesion Friedrich Kessler on a new form of fascism

31. 31 Was the contract properly formed?  What counts as unconscionability The special concern for standard form contracts or contrats d’adhesion Friedrich Kessler on a new form of fascism Can you offer some economic explanations for the use of standard form contracts other than oppression?

32. 32 Was the contract properly formed?  What counts as unconscionability The special concern for inequality of bargaining power Does this have anything to do with whether markets are competitive or monopolistic?