Econ 522
Economics of Law
Dan Quint
Spring 2010
Lecture 1
I’m Dan Quint
Welcome to Econ 522, Economics of Law
 If you’re trying to get into the class but not yet registered,
put your name and info on the yellow pad going around
 If you haven’t taken Econ 301, talk to me after class
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Logistics
 Course website:
http://www.ssc.wisc.edu/~dquint/econ522
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(Or google “Dan Quint” and click “Teaching”)
 Teaching Assistant: Fran Flanagan
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Sections on Fridays, starting next week
Questions about section – talk to Fran
 Office hours
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Me: Tuesdays, 9:30-11:30 (other times by appointment)
Fran: Thursdays, 12:30-2:30
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Grading
 Grades are based on
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occasional homeworks (probably 3 or 4) – 20% total
two midterms – 20% each
final exam – 40%
 Midterms tentatively scheduled for Feb 24 and Mar 24
 Final is May 10
 Please let me know EARLY if…
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you have an exam conflict, or
you’re a McBurney student and need special accommodations
 Attending lecture – I recommend it!
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Readings
 Textbook: R. Cooter and T. Ulen, Law and
Economics
 Another book I like: D. Friedman, Law’s Order
 Additional readings (links on syllabus)
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What’s this class about?
 It’s not about the law
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Well, OK, it’s sort of about the law, but…
You’re not in law school
I’m not a lawyer, I’m an economist
It’s not my job to make you a better lawyer
It is my job to make you a better economist
 Economics is not a bunch of facts, it’s a set of tools
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We can point these tools at just about anything
In this class, we’ll point them at laws and legal institutions
But we’re more interested in the tools than in the answers
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Relatedly, a warning:
THIS IS A HARD CLASS
 To do well, you’ll have to learn to think like an economist
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This way of thinking comes naturally to some people…
…but not to others
And if you “don’t get it”, you can’t get by just memorizing a bunch of
facts
Someone in this class will get a C who’s never gotten a C before
 Not trying to scare everyone off – I’d just rather say this
now than after the first midterm
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What is
“Law and Economics”?
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What is Law and Economics?
 unsatisfying answer:
“thinking about the law like an economist”
 microeconomics is about how people respond to incentives
 we’ll be using microeconomics (including a little bit of game
theory) to analyze laws and legal systems
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the incentives they create
and the actions and outcomes they lead to
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How do economists look at the law
differently than lawyers?
 suppose something has happened
 when a lawyer sees the case, the “damage is already done”
 what’s left?
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assign blame
maybe punish someone
maybe have someone give money to someone else
this is interesting to the people involved…
…but it’s not interesting to economists!
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So what about the law is interesting to
economists?
 before the incident happened, lots of decisions were made
 expectations/beliefs about what will happen after the fact
influence these decisions
 these decisions have an impact on outcomes
 and these decisions therefore affect how much value is
created (or destroyed) by society
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which is very interesting to economists
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In pictures…
Decisions/
Actions
THE LAW
Compensation
Litigation
Something
happens
ECONOMISTS
(you and me)
LAWYERS
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How economists think about the law
differently – an example
You live in a state where the most severe criminal punishment
is life imprisonment. Someone proposes that since armed
robbery is a very serious crime, armed robbers should get
a life sentence.
A constitutional lawyer asks whether that is consistent with the
prohibition on cruel and unusual punishment.
A legal philosopher asks whether it is just.
An economist points out that if the punishments for armed
robbery and for armed robbery plus murder are the same, the
additional punishment for the murder is zero –
and asks whether you really want to make it in the interest
of robbers to murder their victims.
Friedman, Law’s Order, p. 8
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So that will be our focus in this class
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But of course, that’s not the whole story
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But of course, that’s not the whole story
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Outline of the class
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Course outline…
 Property law
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what things can be owned?
what can (and can’t) owners do with their private property?
 Contract law
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what can and can’t we contract on?
what constitutes a legal contract?
what happens if one of us doesn’t live up to our end of a
contract?
what “default rules” stand in for terms we don’t specify?
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Course outline…
 Tort law
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who’s responsible for accidents? what do they owe?
 The legal process itself
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what is the goal of the legal system? how do we achieve it?
 Criminal law
 other topics if there’s time
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A bit of history
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A bit of history
 Two great Western legal traditions of the last millennium
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Common Law
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Civil Law
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The Common Law
 originated in 12th century England, under
King Henry II
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judges ruled according to local norms/customs
“go out and find the law as it’s being practiced”
now: new laws enacted by legislature
judges interpret law, rely heavily on precedents
each decision is a precedent for future cases
 so common law originally rooted in common practices; can
be changed by legislation; evolves with each new case
 still basis for legal system in many English-speaking
countries
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The Civil Law
 persists today in most of Western
Europe, Central and South America,
parts of Asia
 originated following French Revolution
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judges, like king, were viewed as “corrupt and worthless”
Napoleon commissioned a group of legal scholars to draft a new
set of laws – the Napoleonic Code
 less reliance on historical norms and precedents
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attempt to explicitly spell out the law, starting from blank slate
legal arguments appeal directly to written law, and commentary
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To sum up…
Civil Law
Common Law
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orig. 18th century France
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orig. 12th century England
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persists in Western Europe
and some other places
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persists in U.S., U.K., other
English-speaking countries
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based on “ancient sources
and pure reason” (group of
scholars with blank slate)
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based on existing practices
and social norms
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arguments focus on legal
precedents, so law evolves
as new precedents are set
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legal arguments appeal to
interpretation of the law
itself, and to commentary
which clarifies its meaning
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Whaling
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A nice example of how the common law
responds to local norms and practices
 Question: who owns a dead whale?
 1700s-1800s – whales hunted for
oil, bone, other valuable products
 a captured whale could be worth 3-4 times a typical
family’s yearly income
 conflicts would sometimes arise over ownership
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What’s the problem?
It frequently happens that when several ships are cruising in
company, a whale may be struck by one vessel, then escape,
and be finally killed and captured by another vessel….
[Or] after a weary and perilous chase and capture of a whale,
the body may get loose from the ship by reason of a violent
storm;
and drifting far away to leeward, be retaken by a second whaler,
who, in a calm, snugly tows it alongside, without risk of life or
line.
Thus the most vexatious and violent disputes would often arise
between the fishermen…
- Melville, Moby Dick
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Robert Ellickson (1989), A Hypothesis of WealthMaximizing Norms: Evidence from the Whaling Industry
 Examines 12 British and American court rulings where
ownership of a dead whale was contested
 In each case, the local whaling industry had established
norms which were well-suited to that environment
 And in each case, the common-law court ruled in
accordance with the existing norms
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One norm: “fast fish/loose fish”
 Discussed in Moby Dick
 Established by British whalers in Greenland fishery
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Prey were right whales – relatively slow and docile
Hunting was done by harpoon attached to whaling boat by rope
 A harpooned whale attached to a boat was a “fast fish”
and belonged to the boat it was attached to
 If the whale broke free, or had not yet been harpooned, it
was a “loose fish” and other ships were free to pursue it
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A different norm: “iron holds the whale”
 The rule in fisheries where sperm whales were hunted
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sperm whales swim faster, dive deeper, fight harder
hunted with harpoons attached to “drogues”
sperm whales swim in schools
 The rule that developed: “iron holds the whale”
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if you harpoon a whale first, you own it…
…as long as you remain in “fresh pursuit”
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Clear tradeoff between the two rules
 “Iron holds the whale” is more complicated
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What if a whale is found with multiple harpoons in it?
What constitutes “fresh pursuit”?
 “Fast fish/loose fish” is a simpler, “bright-line” rule
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Less ambiguity, should lead to fewer disputes
But wouldn’t work well with sperm whales
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Too dangerous to hunt sperm whales with harpoons tied to boat
Wasteful to let rest of a school swim away while trying to secure first
whale
 Tradeoff between simpler rule versus better incentives
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A third norm developed where finback whales
were hunted
 Finbacks are extremely fast swimmers
 19th-century whalers hunted them with bomb lances
 Dead finbacks would sink, wash up on shore days later
 Norm developed that original killer and the finder of the
whale would split it
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Ghen v Rich (1881)
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Conclusions from Ellickson
 Ellickson’s emphasis: in each location, norms developed
which were well-suited to that particular environment
 My point: in every case, the judge ruled in accordance
with the local custom
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So that’s whaling law
 To connect it to more modern concerns…
 I found a legal brief using same principles to determine
ownership of a souvenir baseball
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Ownership of Barry Bonds’ 73rd home run ball was disputed
Alex Popov had the ball in his glove first, but lost it in the scrum
Patrick Hayashi ended up with the ball, both wanted it
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The brief perfectly captures the essence of the
common law system:
“Simply put, the Court should adopt a rule of first possession for
baseballs that recognizes the longstanding customs and practices of
baseball fans who for more than seventy years have competed to catch
and gain title to baseballs that leave the field of play…
With these principles in mind, the Court should define the law of first
possession of baseballs… by answering two questions:
First, what is the custom, practice, and understanding of baseball
fans about first possession and title to baseballs that enter the stands?
Second, should the rules as practiced in the stands be modified to
minimize the risk of violence, misconduct, and tortious behavior?”
- Brian Gray, “Report and Recommendations on
the Law of Capture and First Possession”
(in the end, ball was sold for $450,000, proceeds were split 50/50)
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So that’s a bit of law
 Next week, we’ll do some economics
 If you’re not registered, make sure your name’s on the
yellow pad
 If you haven’t taken Econ 301 (or equivalent), please come
talk to me
 See you next Monday
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