Category: Economic Analysis of Law


Post-Nuclear Holocaust Movies and the Academic Job Market

thunderdom.jpgGordon Smith has a post about interview questions for prospective law professors. Having recently run the gauntlet of the meat market, this is a topic where memories are still fresh in my mind. I remember one question in particular. It was during an on-campus call back interview. I gave my job talk — a piece on the relationship between autonomy theories of contract and corporations — and then waited for the faculty questioning. By this time I had given the paper about a half dozen times, and I thought that I pretty well knew what points were going to get raised. Not so. A faculty member raised his hand and asked the following question: “Can you please explain to me how autonomy theories of contract would deal with the remedy provided for breach in Mad Max Beyond Thunderdome where the rule is ‘break a deal, face the wheel’?”

Mad Max Beyond Thunderdome, of course, is the classic Mel Gibson-Tina Turner movie about life in Australia after a nuclear holocaust has destroyed civilization as we know it. Those who breach their contracts in the post-apoclyptic world must spin a wheel — rather like the Wheel of Fortune — on which are written various punishments. Whatever punishment the wheel lands on is meted out to the breaching party.

I replied by pointing out that a commitment to an autonomy theory of contract requires a rather more expensive enforcement mechanism, because it is necessary for adjudicators to invest resources in discerning the actual intent of the parties in so far as they are able, rather than relying on cheaper, more formalistic modes of interpretation. Presumably in the post-apoclyptic world, the resources that society has available for the resolution of contractual disputes are reduced, and therefore they adopt remedies rules that require less fact finding. Spinning the wheel, for example, doesn’t require that the court invest any additional resources in calculating the value of the disappointed promisee’s expectation measure. In a world, however, that has not been devastated by nuclear war, society has the resources to devote to a more nuanced approach to contractual disputes, although if we take efficiency as the sole goal of contract law, then a process of largely randomized remedies like the wheel may be superior.

I thought it was a pretty good answer. On the other hand, I didn’t get an offer from that school…


If It Can’t Be Sold, It’s Worthless

tiger.jpgThom Lambert offers this post on a “property rights” theory of endangered species protection (in essence, creating a market to increase supply). The arguments (also found in this Times’ opinion piece) are standard neo-classical economics. Trading, not regulation, increases supply of “goods,” therefore permitting endangered species to be “farmed” by hunters and others will ultimately “manage” them toward a sustainable population. “Some objections might be raised to this scheme,” to quote Daniel Farber’s An Economic Analysis of Abortion, “but rigorous analysis shows them to be unfounded.”*

Even though the arguments are hoary, I still feel torn about this issue.

On the one hand, as Lambert observes, some empirical evidence suggests that prohibitions don’t work well to preserve populations against development pressure. On the other hand, (1) the approach is useless for species that are commercially worthless (the owl, for example); and therefore (2) it has all of the problems of ordinary market valuations, and produces irreversible results (extinction) among the losers. (For a really good discussion of this problem, I recommend Matthew Scully’s Dominion: The Power of Man, the Suffering of Animals, and the Call to Mercy. The chapter on hunting, economics, and commodification is amazing.)

*The fun goes on in Farber’s footnote: “One commentator has said that this approach ‘seems almost pathological in its disregard of the moral values on both sides.’ . . . That commentator’s work evidences all too clearly a lack of rigorous economic training.” 3 Const. Comment. 2 (1986)


Judge Posner and Limits of Smartness

brain.jpgRichard Posner, while explaining why he dislikes affirmative action, argues:

As discrimination declines, replaced by affirmative action, explanations for lagging achievement that are based on discrimination lose their plausibility. They were never entirely plausible, given Jewish achievement in the face of fierce discrimination, though it is argued by Stephen Pinker in a recent issue of the New Republic that discrimination against Jews in the Middle Ages, by forcing them into middleman occupations where intelligence is a more valued asset than in farming or soldiering, resulted in the more intelligent Jews having a higher birth rate (because they were better off) than the less intelligent Jews and so, through the operation of natural selection, discrimination can be “credited” with some of the responsibility for the high average IQ of Jews today–even its genetic component. (Hitler may have had something to do with this as well, as it is plausible that the most intelligent European Jews saw the handwriting on the wall earliest and left Europe in the 1930s before it was too late.)

Although I admire Judge Posner and have learned a great deal from his writing, I think it is fair to say that I disagree with much of this analysis. It isn’t just that the evolutionary science of intelligence is extremely complicated, which should lead us to doubt claims about the effect of time-limited selection pressures on economic outcomes. Nor is it just that Posner has violated Godwin’s Law.

The problem is rather that smart people are often anti-social geeks, who don’t make better life choices under conditions of uncertainty. It is true that there is evidence that intelligence and ability to perform statistical calculations under controlled conditions are related. But I haven’t seen any good real-world evidence that smarter folks are better able to discount those emotions/biases (such as patriotism, risk aversion, optimism) that would have led Jews in Europe to stay put. Indeed, the conventional wisdom is that smarter people have weaker “street-smarts”, which is another way of saying they are likely to be bad at reading others for social cues. So even if intelligence were hereditable in the way Posner evidently postulates, it seems unlikely to me that the smarter portion of European Jewry escaped the Holocaust.


Economists Say the Funniest Things

firefighter.jpgThese scorching days inspire writing about firefighters. In Montana, Senator Burns is under fire for having attacked a local brigade. And in Dallas, W. Michael Cox, chief economist for the Federal Reserve Bank of Dallas, is in a bit of hot water for commenting on a study that found that the middle-class is being priced out of urban life. Cox said (to the NYT):

Of course, cities need police officers, firefighters, teachers. But as long as they can get the labor they need from somewhere nearby, some economists say, middle-class shrinkage may not hurt. In Southern California, developers import construction workers from Las Vegas and put them up in hotels; costs go up but rich clients can pay. Firefighters who want to live in high-priced cities can work two jobs, said [Cox.] “I think it’s great,” he said. “It gives you portfolio diversification in your income.” Pay for essential workers like plumbers and cabdrivers will tend to go up, he said.

Cox has an optics issue here, but he’s also missing the point. Economically diverse neighborhoods, the argument goes, are a type of a public good. Believing that individuals will “pay” for that good through double-employment is foolish.


Must District Judges Give Reasons?

gavel.jpgJonathan Adler highlights this astonishing Ninth Circuit opinion on the alleged misconduct of now-embattled District Judge Manuel Real. Some interesting facets of the case (previously blogged about here, here, and elsewhere). First, dissents matter. It is more than tempting to attribute the current push to impeach Judge Real to Judge Kozinski’s harsh dissent from the panel’s order exonerating him on the misconduct charge. Second, the case raises a neat issue which relates to what I’ve been writing this summer. While the overall facts of the case are well worth reading in the original, if you’ve ten or twenty minutes, I want to focus briefly on part of Judge Kozinski’s charge against Real: that he failed to explain the reasoning for a controversial order.

The basic story is that Judge Real withdrew the petition in a pending bankruptcy case and stayed a state-court judgement evicting a woman who was appearing before his court in a criminal matter. Both orders were entered apparently sua sponte, or at least without hearing the evicting party’s arguments. According to Kozinski, Judge Real “gave no reasons, cited no authority, made no reference to a motion or other petition, imposed no bond, balanced no equities. The two orders [the withdraw and stay] were a raw exercise of judicial power…” In a subsequent hearing, Kozinski continued, “we find the following unilluminating exchange”:

The Court: Defendants’ motion to dismiss is denied, and the motion for lifting of the stay is denied . . .”

Attorney for Evicting Party: May I ask the reasons, your Honor?

The Court: Just because I said it, Counsel.

Kozinski wrote:

I could stop right here and have no trouble concluding that the judge committed misconduct. [Not only was there a failure of the adversary process . . . but also] a statement of reasons for the decision, reliance on legal authority. These niceties of orderly procedure are not designed merely to ensure fairness to the litigants and a correct application of the law . . . they lend legitimacy to the judicial process by ensuring that judicial action is-and is seen to be-based on law, not the judge’s caprice . . . [And later, Kozinski exclaims] Throughout these lengthy proceedings, the judge has offered nothing at all to justify his actions-not a case, not a statute, not a bankruptcy treatise, not a law review article, not a student note, not even a blawg. [DH: Check out the order of authority!]

So here’s the issue: in the ordinary case, to what extent are judges required to explain themselves?

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The Judicial Salary Problem

Peter Lattman highlights some recent comments by Chief Justice Roberts. The Chief Justice talked, in part, about the campaign to raise the salary of federal judges:

At current salaries, “you no longer can draw the best trial lawyers, on a regular basis,” to the federal bench, Roberts said. While no one becomes a judge to get rich, he said, the government “ought to pay them enough so they can educate their children and have a reasonable lifestyle.””We don’t want to get to the point where we have the judiciary staffed solely by people of independent means, or by people for whom the judicial pay scale is a raise,” he said.

A few comments.

First, I wonder why the Chief Justice refers to “trial lawyers” as the appropriate pool. Even to the extent that he means “litigators” (because there are vanishingly few trials for judges to preside over), is there any reason, in theory, to think that litigation departments produce better jurists than corporate departments? I wonder. Considering that most of the job of the modern district judge is management of a process through to settlement, it would seem that corporate attorneys – at least ones who like to write – have a leg up.

Second, I (along with many others) question the claim’s empirics. The studies I have seen suggest that pay is not correlated with judicial decisions to retire (early). (The evidence is concededly mixed). It would be also quite surprising if it is correlated with agreeing to be nominated to the bench in all but the anecdotal case. The legal profession is acutely status conscious: lawyers who are in the position to be nominated have already demonstrated (through public service, or political connections, or effort) that they are particularly motivated by prestige as a substitute for cash. Moreover, it is a well-accepted fact that it is better to be a hammer than a nail. In our system, judges aren’t the nails. (Most of the time). In short, I think that even if you cut real federal judicial starting salaries (by keeping them constant despite inflation) the applicant pool would not significantly change.

But those are, essentially, market-clearing arguments, and don’t persuade me that the Chief Justice’s “real” point is wrong. Roberts has a better argument.

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Wild KPMG Fees Decision

Barely one day old, and Gonzalez-Lopez is already making waves in corporate law. To see the connection, however, you’ll have to bear with me for a bit of brush-clearing.

Judge Lewis A. Kaplan (S.D.N.Y.) today ruled on certain individual defendants’ motions to dismiss an indictment arising from the KPMG tax shelter investigation. (Large pdf here.) According to the defendants, their due process rights were violated when the U.S. Attorney pressured their former employer (KPMG) not to advance and reimburse legal fees incurred as individuals defendants. Judge Kaplan found a due process violation, scolded the government, and suggested a new lawsuit against KPMG to recover those legal fees, in which today’s decision would have collateral effect and make the proceedings summary. In short: the decision seems to constitutionalize the right to receive indemnification from your employer.

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Markets for Markets

Rob Rogers and I recently completed an article on the development of information markets. Our motivating question was to ask why information markets have covered certain subject areas, sometimes of minor importance (like the Michael Jackson trial), while neglecting other subject areas of greater social or monetary significance. We trace part of the answer to the choice of business model that information market entrepreneurs have chosen to employ, but part of it remains unexplained and is, we propose, a product of the random walk. The article is here.


Update on Plea Bargains and Prediction Markets

In Let Markets Help Criminal Defendants, I wrote that “If I were running a public defender service, I’d consider setting up an online prediction market for the conviction of my clients.” I still think this is a good idea, but someone suggested a serious problem that would have to be remedied for the scheme to be possible.

Right now, prediction markets bets on judicial events, like the conviction of Lewis Libby (whose graph is to the right), pay off at 100 for conviction, and 0 for any other ending of this set of charges, including a plea. This creates noise which renders them useless for criminal defendants looking to see if they ought to plea. That is, as I didn’t fully appreciate before, traders must be estimating the probability of conviction, tempered by the likelihood of a plea – prices are lower than the actual market estimate of a guilty verdict independent of a plea. That is, if the current price of Libby’s “stock” is .40, that means that incarceration is not 40% likely. It means that traders think it is 60% likely that Libby will win at trial, receive a mistrial, obtain a dismissal, be granted a pardon, or plea. I imagine that the likelihood of a plea accounts for a large percentage of this figure.

If traders thought that conviction prices affected defendant behavior, then presumably they’d seek to put in sell orders at prices above those where rational defendants would plea. This would put downward pressure on price and make the entire system useless from defense counsel’s perspective.

For my system to work, you’d have to exclude the possibility of a plea (i.e., nullify all bets if there is a plea). Of course, this still would create some dynamic tension, as bettors presumably would become eager to invest time and trade only as pleas become less likely – near trial, or in jurisdictions, like Philadelphia, where the District Attorney has a no-plea policy. But the resulting prices would be more informative than those offered by the current system.


Let Markets Help Criminal Defendants

ballandchain.jpgDan’s interesting post on plea bargaining made explicit the informational inequalities faced by criminal defendants and their lawyers. Indeed, one of the advantages public defenders have over private defense counsel is that they can more easily share information internally about the informal norms that “really” govern the system (judge sentencing practices; which cops tell what stories; which labs are sloppy; etc.) But even so, the instruments of law and order almost always will know more about the facts and the law than the defense, at least until the eve of trial and probably throughout the process.

That there are exceptions (Enron; OJ) proves the rule that informational asymmetry is a significant part of the prosecutor’s arsenal – indeed, this asymmetry justifies constitutional attempts to remedy the problem through mandatory discovery procedures. But I’m skeptical that legal rules alone are a panacea to structural problems. Why not try markets?

To be more concrete, the major decision that criminal defendants face is whether or not to plead guilty. The decision depends on a prediction about what will happen at trial. Assuming that defendants are risk averse, they will take pleas when rational actors would not, but generally will go to trial when the expected time served post-trial is less (by some margin) than the actual time proposed in the plea agreement. The problem is that (1) defendants are unsophisticated; (2) defendants’ lawyers are incented to push pleas; and (3) neither defendants nor their lawyers have as much information as prosecutors about likely verdicts.

If I were running a public defender service, I’d consider setting up an online prediction market for the conviction of my clients. Prediction markets did a fantastic job in the Enron trial. At the beginning of the trial, the odds of conviction were about 50% for each defendant; by the end, the odds were significantly higher. Now, I can understand why neither defendant would have pled facing a coin-flip’s chance at conviction. As I argued at the beginning of the trial:

I’d guess that the reason Skilling and Lay have not pled and Fastow has is demographics. Fastow is a young(ish) man, who can serve significant time and still emerge with earning power. Lay and Skilling don’t have the years left to do the time that the government (apparently) would find appropriate.

But for most criminal defendants, 50% odds would translate into a pretty hefty expected sentence that might make a plea more attractive. And, assuming that such markets would be sufficiently liquid, the predictions generated by traders ought to be both more accurate and less prone to bias than defense counsel’s odds. I imagine that the result would be a net decrease in pleas, and in the long term, as prosecutors reacted, less net jail time. That is, the current system is biased by risk aversion and agency problems – as others have observed – toward more jail. This effect may serve the forces of law and order, but it doesn’t necessarily serve the search for truth. Why not try something different?

Obvious objections: (1) the idea is “”utterly repugnant to a civilized society“; (2) thin markets are prone to manipulation; (3) incentives would increase to violate the attorney-client privilege; (4) it would look like public defenders are selling out their clients. Of these objections, I’d be most worried about #3.

Incidentally, if you are interested in thinking more about criminal law and the Enron trial, the Conglomerate is hosting what promises to be a great forum on the topic for the next two days. Check it out!