Econ 522 - Economics of Law with Dan Quint

1. Questions about enrollment, prerequisites, or section? Please talk to me after lecture. Econ 522Economics of Law Dan Quint Spring 2017 Lecture 1

2. I’m Dan Quint, this is 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 or the equivalent elsewhere, talk to me after class • If you have questions about section, please talk with the TA (who I’ll introduce in a bit) • Section will not meet this week

3. This class is being recorded • Lecture capture for online course this summer • Video will not be ready for use this semester • Don’t want to be recorded? Avoid first couple of rows

4. Plan for today • Logistics, schedule, textbooks, etc. • Overview: what is the semester going to be about? • Some history • Common law and civil law traditions • Example: dead whales and baseballs

5. Logistics/Syllabus

6. Website • Course website: http://www.ssc.wisc.edu/~dquint/econ522 • (Or UW Econ  “Undergraduate”  “Course Information”  “522”) • (Or Google “Econ 522” or “Dan Quint” or…) • I’ll also be using Learn@UW for some things • Get there through learnuw.wisc.edu or my.wisc.edu

7. If you’re looking for something, it’s probably online Website will have: • Syllabus • Office hours • Homework assignments • Dates of midterms, date/location of final (once announced) • My slides/lecture notes • Section notes/handouts • Sample exam problems/solutions Learn@UW will have: • Access to supplemental readings • Homework submission • Grades 6

8. Logistics • Teaching Assistant: Wenqi Wu • Contact info on syllabus/website • Section meetings begin next Friday (January 27) • Any questions about section – talk to TA • Office hours • Wenqi: Thursdays 2-4 • Me: Tuesdays 4-5, Wednesdays 11-12, other times by appointment

9. Schedule • Homework generally due midnight on Thursday,so it can be discussed in section Friday • Online submission via Learn@UW • Please be sure it uploaded successfully! • Midterms – in class: tentatively Wed Mar 1, Mon Apr 10 • Final exam Sun May 7, 10:05 a.m., location TBA • Please let me know EARLYif… • you have an exam conflict, or • you’re a McBurney student and need accommodations for exams

10. Readings • “Recommended” textbook: R. Cooterand T. Ulen, Law and Economics (6th ed.) • AVAILABLE FREE ONLINE(link on syllabus, PDF on Learn@UW) • copies on reserve at Memorial Library andSocial Science Library (8th floor of Soc Sci) • Another book I like: D. Friedman, Law’s Order • available free online (link on syllabus) • (or it’s a $30 paperback)

11. Readings • Additional readings available online • Links on syllabus, PDFs on Canvas (Learn@UW) • Stars on syllabus next to most important • Other related books listed on syllabus

12. Grading • Grades are based on • occasional homeworks (probably 4) – 20% • two in-class midterms – 20% each • final exam – 40% • Joint work on homework • you’re welcome to work together on homework • I’m happy for you to discuss questions, ideas, answers together • but everyone should write up their own answers– copying someone else’s answers word-for-word is not OK • if you do work with others, please note who you worked with on your homework • Attending lecture/section

13. What is thisclass about?

14. What is this class going to be about? • This class is not about the law • 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 teach you to think like an economist • Economics is not a bunch of facts, it’s a set of tools • 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

15. What is this class going to be about? • 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 bit of game theory) to analyze laws and legal systems • the incentives they create • and the actions and outcomes they lead to

16. “thinking about the law like an economist”: different from thinking about the law like a lawyer • suppose something has happened • when a lawyer sees the case, the “damage is already done” • what’s left? • assign blame • maybe punish someone • maybe move money around • this is interesting to the people involved… • …but it’s not interesting to economists!

17. 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 decisionshave an impact on outcomes • and these decisions therefore affect how much value is created (or destroyed) by society • which is very interesting to economists

18. So what about the law is interesting to economists? Decisions/Actions THE LAW Compensation Compensation Litigation Litigation Somethinghappens ECONOMISTS LAWYERS LAWYERS (you and me)

19. How economists think – 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

20. So that will be our focus in this class

21. But of course, that’s not the whole story

22. But of course, that’s not the whole story

23. Areas of the law we’ll cover • Property law • Contract law • Tort law • Legal process • Criminal law • Other topics

24. Finally, a warning:I THINK THIS IS A HARD CLASS • “thinking about things like an economist” can be hard • This way of thinking comes naturally to some people… • …but not to others • If you “don’t get it”, you can’t get by 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 23

25. Plan for the rest of today… • A bit of history • the Common Law and Civil Law traditions • An example • dead whales (and baseballs)

26. A bit of history

27. A bit of history • Two great Western legal traditions of the last millennium • (English) Common Law • Civil (Napoleonic) Law • A little confusing, because “civil law” also refers to a branch of the law within U.S. system • Criminal law – deliberate illegal acts punished by government • Civil law – lawsuits brought by one private party against another • We’ll touch on both, but most of class will focus on civil law issues, within both the Common Law and Civil Law traditions

28. Basis of modern legal systems 27 (Source: Wikimedia Commons, via Washington Post WorldViews blog)

29. Basis of modern legal systems Common Law Civil Law Common + Civil Religious Law Customary Law 28 (Source: Wikimedia Commons, via Washington Post WorldViews blog)

30. Basis of modern legal systems Common Law Civil Law Common + Civil Religious Law Customary Law 29 (Source: Wikimedia Commons, via Washington Post WorldViews blog)

31. Basis of modern legal systems Common Law Civil Law Common + Civil Religious Law Customary Law 30 (Source: Wikimedia Commons, via Washington Post WorldViews blog)

32. Basis of modern legal systems Common Law Civil Law Common + Civil Religious Law Customary Law 31 (Source: Wikimedia Commons, via Washington Post WorldViews blog)

33. Basis of modern legal systems Common Law Civil Law Common + Civil Religious Law Customary Law 32 (Source: Wikimedia Commons, via Washington Post WorldViews blog)

34. Basis of modern legal systems Common Law Civil Law Common + Civil Religious Law Customary Law Common law, civil law, or mixture of the two forms basis of legal systems covering 93% of the world’s population, and 97% of the world’s GDP 33

35. The Common Law • originated in 12th century England, underKing Henry II • 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 • basis for legal system in most English-speaking countries

36. The Civil Law • originated following French Revolution • 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 • attempt to explicitly spell out the law, starting from blank slate • borrowed from 6th century Roman source • legal arguments appeal directly to written law, and commentary • persists today in most of Western Europe, Central and South America, and parts of Africa and Asia

37. Comparing the Common Law and Civil Law traditions Civil Law • orig. 18th century France • persists in Western Europe and lots of other places • based on “ancient sources and pure reason” (group of scholars with blank slate) • legal arguments appeal to interpretation of the law itself, and to commentary which clarifies its meaning Common Law • orig. 12th century England • persists in U.S., U.K., other English-speaking countries • based on existing practices and social norms • arguments focus on legal precedents, so law evolves as new precedents are set

38. Comparing the Common Law and Civil Law traditions • “Spontaneous order versus planned order” • Civil law was laid down at a particular time, meant to be more static • “The common law is not shaped by a single mind, but a bottom-up aggregate of many individual plans” • Respects existing customs and practices • Evolves as new laws are passed and new cases decided • For an example of how the common law develops and responds to local practices…

39. Whaling

40. 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

41. 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

42. R. Ellickson, A Hypothesis of Wealth-Maximizing Norms: Evidence from the Whaling Industry • Examines 12 British and American court cases where ownership of a dead whale was contested • In each case, the local whaling industry had established norm for determining ownership • Norms differed from place to place… • …but were well-suited to that environment • And in each case, the common-law court ruled in accordance with these established norms

43. One norm: “fast fish/loose fish” • Established by British whalersin Greenland fishery • Prey were right whales • Hunting was done by harpoonattached 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

44. A different norm: “iron holds the whale” • Used in fisheries where sperm whaleswere hunted • 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” • if you harpoon a whale first, you own it… • …as long as you remain in “fresh pursuit”

45. Clear tradeoff between the two rules • “Iron holds the whale” is more complicated/ambiguous • “Fast fish/loose fish” is simpler/clearer • “[Whalers] would tend to prefer… bright-line rules that would eliminate arguments to fuzzy rules that would prolong disputes.” • But wouldn’t work well with sperm whales, given how they were hunted • Tradeoff between simpler rule versus better incentives • Simpler rule is easier to implement, fewer disputes • But more complicated rule might be able to provide better incentives

46. 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 • Ghen v Rich (1881)

47. Conclusions from Ellickson • Ellickson’s emphasis: in each location, norms developed which were well-suited to that particular environment • “When people are situated in a close-knit group, they will tend to develop for the ordinary run of problems norms that are wealth-maximizing.” • My point: in every case, the judge ruled in accordance with the local custom • “Anglo-American whaling norms seem to have emerged spontaneously, not from decrees handed down by either organizational or governmental authorities. In fact, whalers’ norms not only did not mimic law; they created law. In the dozen reported Anglo-American cases in which ownership of a whale carcass was contested, judges invariably held proven whalers’ usages to be reasonable and deferred to those rules.”

48. 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 • 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

49. 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)

50. So that’s a bit of law • Next week, we’ll do some economics! • Not registered? Name on the yellow pad • Haven’t taken Econ 301? Come talk to me • Questions about section? Talk to TA • See you all next Monday