Law and Econometrics
Enrique A. Bour
August 2010
You probably already know that Law & Economics
is one of the main areas of research in economics -
The works by Coase, Demsetz, Manning,
Becker and Posner are very well-known
(not to mention Calabresi, Hirshleifer,
Rubin, Easterbrook, and many others who
did active research in this area).
In the past twenty or thirty years there has
been a strong revival of L&E using
statistics. Let me point to some examples:
• David H. Kaye & David A. Freedman, Reference Guide on Statistics,
in Reference Manual on Scientific Evidence (3d ed. 2009).
• Joseph L. Gastwirth, Statistics in the Courtroom (2007).
• Joseph B. Kadane ed., Statistics in the Law (2008).
• Hans Zeisel & David Kaye, Prove It With Figures: Empirical
Methods in Law and Litigation (1997).
For example, the organizing thesis of the latter book is the problem of
determining causation--causation defined not in a philosophical
sense but rather intended for the practical needs of dispute
settlement. By combining the research literature for examples of
how social research has been used by the authors and by others to
discern causation, Zeisel and Kaye have come close to writing a
handbook for general social science research.
This presentation shares the spirit of Robert M. Lawless,
Jennifer K. Robbennolt, & Thomas S. Ulen’s recent book,
Empirical Methods in Law (2010), whose Table of
Contents is the following:
Part I: Why Gather, Organize, and Evaluate Data: An Overview of
Empirical Methods
Chapter 1. Thinking Empirically
Chapter 2. Research Design
Part II: How to Gather Data: Empirical Research Methodologies
Chapter 3. Asking Questions: Surveys and Interviews
Chapter 4. Experiments
Chapter 5. Archival Methods
Chapter 6. Sampling
Chapter 7. Coding
Part III: How to Evaluate the Data: Statistical
Techniques
Chapter 8. Distributions and How to Describe Them
Chapter 9. Hypothesis Testing
Chapter 10. Inferential Statistics
Chapter 11. An Introduction to Correlation and
Regression Analysis
Chapter 12. Advanced Regression Techniques
Part IV: Communicating Your Results
Chapter 13. Reading, Presenting, and Writing About
Empirical Matters
Chapter 14. Conclusions
Some previous clarifications...
• I won’t bother you with econometrics nor law. I’ll
suggest the interested reader to follow my article.
• It’s very important to distinguish the
Economic Analysis of Law (L&E) from
Economic Law. In the legal system of the Soviet
Union, economic law was the legal theory and
system under which economic relations were a
legal discipline independent of criminal law and
civil law. In the Law of the United States and some
other legal systems this approximately
corresponds to the commercial law (business law).
(Source: wikipedia)
Additional clarifications
• Law and economics (also known as the
economic analysis of law) is an approach
to legal theory that applies methods of
economics to law. It includes the use of
economic concepts to explain the effects
of laws, to assess which legal rules are
economically efficient, and to predict
which legal rules will be promulgated.
Duality
• As pointed by Dr Julio H. G. Olivera in La
Doble Intersección de la economía con el
derecho, in the Tribute to Alfredo J. Canavese
(U. di Tella, April 16th, 2010) there is a
duality link between both approaches. My
interpretation of his remarks is as follows:
given the rules of the game as fixed by the
Economic Law, the duality theorem allows to
examine and solve the dual problem of
minimizing distortions produced by Law,
contributing thereby to maximize wealth (the
“Theorem of Posner”).
Influence of L&E
• In the United States, economic analysis of law has been
extremely influential. Judicial opinions utilize economic
analysis and the theories of law and economics with some
regularity. The influence of law and economics has also been
felt in legal education. Many law schools in North America,
Europe, and Asia have faculty members with a graduate
degree in economics. In addition, many professional
economists now study and write on the relationship between
economics and legal doctrines. According to Anthony
Kronman, former dean of Yale Law School,"the intellectual
movement that has had the greatest influence on
American academic law in the past quarter-century
[of the 20th Century] is law-and-economics”.
However, a lot remains to be done
• Michael Myerson (in Significant Statistics: The Unwitting Policy
Making of Mathematically Ignorant Judges, 2010) explores several
areas in which judges, hampered by their mathematical ignorance,
have permitted numerical analysis to subvert the goals of the legal
system. He examines the perversion of the presumption of
innocence in paternity cases, where courts make the counter-factual
assumption that regardless of the evidence, prior to DNA testing, a
suspect has a 50/50 chance of being the father. He also explores the
unnecessary injection of race into trials involving the statistics of
DNA matching, even when race is entirely irrelevant to the
particular case. Next, he discusses how courts use race- and genderbased statistics to reduce damages in tort cases for women and
racial minorities, and silently assert that past racism and sexism will
continue. Finally, he examines how judges have improperly
allocated the risk of error in cases such as securities fraud, so as to
reward those who have attempted to manipulate stock prices
illegally.
Also, William Buiter said in his blog (2008):
• Excepting some lawyers, generally they know
nothing. They ignore the difference between
a necessary and a sufficient condition, or
between an Error of Type I or of Type II. To
be precise, any probabilistic concept escapes
to them. They don’t understand concepts of
trade-off or opportunity cost. They can’t
establish the difference between a positive
and a normative statement. (See Philip R.
Wood, Lawyers and Economists: Who Rules
the World?, May 2010)
To return to our argument, these defficiences explain the
surge of Magisters in L&E everywhere in the world,
• But let us indicate a danger pointed by the
great philosopher and sociologist Jon
Elster, in an exposition at the universidad
Di Tella on November 1, 2010, on The
Crisis in the Social Sciences. Elster
denounced the empty character of many
works in several areas of knowledge –
including economics, L&E, psychology, etc
Elster said:
• “Many areas of the social sciences are being now
plagued by void models of behavior and/or merely
abstracts statements without empirical support,
and this happens with more and more frequency.
Now one can present a mathematical paper at a
prestigious journal and get it published without
major obstacle.”
• I approached the author of Ulysses Unbound and
asked him if his concepts couldn’t be considered as
obscurantists, as a certain level of mathematical
and statistical literacy is absolutely necessary to
appraise a legal argument.
• Elster agreed with it, and considered that
econometrics as put forward in the
Reference Manual on Scientific Evidence
(US) is a good point, as it is a simple
ellaboration of good ideas in law.
• I have some doubts about this idea. As
exemplified in the text by Lawless,
Robbennolt, & Ulen, once causal
statements are introduced, hypothesis
testing and some advanced regression
techniques will be employed more and
more. We’ll see more of it in the future!
Now, a Short Summary of my paper:
• I begin with a recent example: The U.S. v.
Microsoft case, which is an appealing case
for analizing the economics of antitrust
policies. It is also interesting because it
gathered three very important economists
around it: Franklin Fisher and Daniel
Rubinfeld (both of them testifying for the
Government) and Richard Schmalensee
(as an expert of the pleading).
• United States v. Microsoft was a set of
consolidated civil actions filed against Microsoft
Corporation pursuant to the Sherman Antitrust
Act on May 18, 1998 by the United States
Department of Justice (DOJ) and 20 U.S. states.
The plaintiffs alleged that Microsoft abused
monopoly power on Intel-based personal
computers in its handling of operating system
sales and web browser sales. The issue central to
the case was whether Microsoft was allowed to
bundle its Internet Explorer (IE) web browser
software with its Microsoft Windows operating
system. Bundling them together is alleged to have
been responsible for Microsoft's victory in the
browser wars as every Windows user had a copy of
Internet Explorer.
• Microsoft stated that the merging of Microsoft
Windows and Internet Explorer was the result of
innovation and competition, that the two were
now the same product and were inextricably
linked together and that consumers were now
getting all the benefits of IE for free. Those who
opposed Microsoft's position countered that the
browser was still a distinct and separate product
which did not need to be tied to the operating
system, since a separate version of Internet
Explorer was available for Mac OS. They also
asserted that IE was not really free because its
development and marketing costs may have kept
the price of Windows higher than it might
otherwise have been.
• To be short, on November 2, 2001, the DOJ reached an
agreement with Microsoft to settle the case. The proposed
settlement required Microsoft to share its application
programming interfaces with third-party companies and
appoint a panel of three people who will have full access to
Microsoft's systems, records, and source code for five years in
order to ensure compliance. On August 5, 2002, Microsoft
announced that it would make some concessions towards the
proposed final settlement ahead of the judge's verdict. On
November 1, 2002, Judge Kollar-Kotelly released a judgment
accepting most of the proposed DOJ settlement. Nine states
(California, Connecticut, Iowa, Florida, Kansas, Minnesota,
Utah, Virginia and Massachusetts) and the District of
Columbia (which had been pursuing the case together with the
DOJ) did not agree with the settlement, arguing that it did not
go far enough to curb Microsoft's anti-competitive business
practices. On June 30, 2004, the U.S. appeals court
unanimously approved the settlement with the Justice
Department, rejecting objections from Massachusetts that the
sanctions were inadequate.
• Microsoft's obligations under the settlement, as
originally drafted, expired on November 12, 2007.
However, Microsoft later "agreed to consent to a
two-year extension of part of the Final Judgments"
dealing with communications protocol licensing,
and that if the plaintiffs later wished to extend
those aspects of the settlement even as far as 2012,
it would not object. The plaintiffs made clear that
the extension was intended to serve only to give
the relevant part of the settlement "the
opportunity to succeed for the period of time it
was intended to cover", rather than being due to
any "pattern of willful and systematic violations".
The court has yet to approve the change in terms
as of May 2006.
Open Letter on Antitrust Protectionism
On June 2, 1999, 240 distinguished economists signed an open letter that
called for an end to speculative antitrust enforcement efforts. The ad,
sponsored by The Independent Institute, appeared in the June 2, 1999,
editions of The Washington Post and The New York Times. “Consumers of
high technology have enjoyed falling prices, expanding outputs, and a
breathtaking array of new products and innovations. High technology
markets are among the most dynamic and competitive in the world, and it is
a tribute to open markets and entrepreneurial genius that American firms
lead in so many of these industries. But, these same developments place
heavy pressures on rival businesses, which must keep pace or lose their
competitive races. Rivals can legitimately respond by improving their own
products or by lowering prices. Increasingly, however, some firms have
sought to handicap their rivals’ races by turning to the government for
protection.” The letter points out that such antitrust efforts, based upon
speculative rather than actual harm to consumers, “short circuit” market
forces and replace consumer choices with bureaucratic and political
decisions. The results of this, the letter noted, include weakened U.S. firms
and reduced international competitiveness.
Other criticism
• The late Nobel economist Milton Friedman believed that the
antitrust case against Microsoft set a dangerous precedent that
foreshadowed increasing government regulation of what was
formerly an industry that was relatively free of government
intrusion and that future technological progress in the industry will
be impeded as a result.
• Jean-Louis Gassée, CEO of Be Inc., claimed Microsoft was not really
making any money from Internet Explorer, and its incorporation
with the operating system was due to consumer expectation to have
a browser packaged with the operating system. For example, BeOS
comes packaged with its web browser, NetPositive, and Mac OS X
with Safari. Instead, he argued, Microsoft's true anticompetitive
clout was in the rebates it offered to OEMs preventing other
operating systems from getting a foothold in the market
• Nowadays, using multiple regression has become a useful practice in
the US courtoom:
In a case, the district court was unpersuaded by a statistical analysis of
capital sentencing, in part because of various imperfections in the
study, including discrepancies in the data and missing data;
concurring and dissenting opinion concludes that the district court’s
findings on missing and misrecorded data were clearly erroneous
because the possible errors were not large enough to affect the
overall results
Compare EEOC (that is, the U.S. Equal Employment Opportunity
Commission) v. Sears, Roebuck & Co., 839 F.2d 302, 312 & n.9, 313
(7th Cir. 1988) (EEOC’s regression studies showing significant
differences did not establish liability because surveys and testimony
supported the rival hypothesis that women generally had less
interest in commission sales positions), with EEOC v. General Tel.
Co., 885 F.2d 575 (9th Cir. 1989) (unsubstantiated rival hypothesis
of “lack of interest” in “non-traditional” jobs insufficient to rebut
prima facie case of gender discrimination); cf. the problem of
confounding and the effect of omitting important variables from a
regression model.
In United States v. Shonubi, 895 F. Supp. 460 (E.D.N.Y. 1995), rev’d, 103
F.3d 1085 (2d Cir. 1997), a government expert estimated for sentencing
purposes the total quantity of heroin that a Nigerian defendant living in
New Jersey had smuggled (by swallowing heroin-filled balloons) in the
course of eight trips to and from Nigeria. He applied a method known as
“bootstrapping.”He drew 100,000 independent simple random samples
of size seven from a population of weights distributed as in customs data
on 117 other balloon swallowers caught in the same airport during the
same time period; he discovered that for 99% of these samples, the total
weight was at least 2090.2 grams. Thus, the researcher reported that
“there is a 99% chance that Shonubi carried at least 2090.2 grams of
heroin on the seven [prior] trips . . . .” However, the Second Circuit
reversed this finding for want of “specific evidence of what Shonubi had
done.” Although the logical basis for this “specific evidence”
requirement is unclear, a difficulty with the expert’s analysis is
apparent. Statistical inference generally involves an extrapolation from
the units sampled to the population of all units. Thus, the sample needs
to be representative. In Shonubi, the government used a sample of
weights, one for each courier on the trip at which that courier was
caught. It sought to extrapolate from these data to many trips taken by a
single courier— trips on which that other courier was not caught.
Empirics
• As said by Ulen & others, “Once one starts to think
empirically about the world and about the particular
issues and problems that one faces, it is difficult to
imagine what one did before one thought empirically.
It is hoped that the lawyer will find that knowing how
to look for and evaluate empirical evidence will
broaden his horizons. It may give him access to an
entirely new literature that was previously beyond his
ability to read and appreciate. It may allow him to ask
new questions about the law and to suggest methods
by which those questions might be answered. It may
even inspire him to do empirical work of his own and
thereby contribute to our understanding of how legal
institutions work.”
The expert & the Parties
• Multiple regression analysis is taught to students
in extremely diverse fields, including statistics,
economics, political science, sociology, psychology,
anthropology, public health, and history. As
emphasized by D. Rubinfeld, any individual with
substantial training in and experience with
multiple regression and other statistical methods
may be qualified as an expert. The decision to
qualify an expert in regression analysis rests with
the court. Clearly, the proposed expert should be
able to demonstrate an understanding of the
discipline.
• In general, a clear and comprehensive statement of the underlying
research methodology is a requisite part of the discovery process.
The expert should be encouraged to reveal both the nature of the
experimentation carried out and the sensitivity of the results to the
data and to the methodology.
• To the extent possible, the parties should be encouraged to agree to
use a common database. Even if disagreement about the significance
of the data remains, early agreement on a common database can
help focus the discovery process on the important issues in the case.
A party that offers data to be used in statistical work, including
multiple regression analysis, should be encouraged to provide the
following to the other parties: (1) a hard copy of the data, along with
the underlying sources; (2) computer disks or tapes on which the
data are recorded; (3) complete documentation of the disks or tapes;
(4) computer programs that were used to generate the data; and (5)
documentation of such computer programs.
• The parties should be encouraged to resolve differences as to the
appropriateness and precision of the data to the extent possible by
informal conference. The court should make an effort to resolve
differences before trial. This is a requirement that goes along the
lines recently put forward by our Supreme Court.
Some Bibliography
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American Bar Association Section of Antitrust Law Economics Committee, Selected
Readings in Antitrust Economics: Applied Econometrics (July 2008).
Fisher, Franklin M. “Multiple Regression in Legal Proceedings”, 80 Colum. L. Rev.
702, 1980.
Fisher, Franklin M. and Daniel L. Rubinfeld, U.S. v. Microsoft - An Economic
Analysis, The Antitrust Bulletin, Spring 2001.
Jonathan B. Baker and Daniel L. Rubinfeld, Empirical Methods in Antitrust: Review
and Critique, American Law and Economics Review, Fall 1999, pp. 386-435.
Lawless Robert M. , Jennifer K. Robbennolt, & Thomas S. Ulen, Empirical Methods
in Law (2010).
Lichtman, Allan J. Passing the test - Ecological Regression Analysis in the Los
Angeles County Case and Beyond, Evaluation Review (ER), Vol.15, Nº 6, Dec. 1991.
Meyerson, Michael I. Significant Statistics: The Unwitting Policy Making of
Mathematically Ignorant Judges, Pepperdine Law Review and SSRN, 2010.
Rubinfeld, Daniel L. Econometrics in the Courtroom, Columbia Law Review, June
1985, pp. 1048-1097.
Rubinfeld, Daniel L. Reference Guide on Multiple Regression, in Reference Manual
on Scientific Evidence, 2nd ed., Federal Judicial Center (2000), pp. 179-227.
Sykes, Alan O. An Introduction to Regression Analysis, Chicago Working Paper in
Law & Economics.