Econ 522 Economics of LawSlide 1Over the last 2 ½ months, we have…Slide 4An example from Polinsky, “An Introduction to Law and Economics”Slide 6Slide 7Slide 8Slide 9Slide 10So what?Slide 11The legal processThe goal of the legal processAdministrative costs and error costsSlide 16Slide 16Why sue?Slide 19Slide 20Slide 21Slide 22Slide 23Number of lawsuitsSlide 25Filing costsSlide 27Slide 28Slide 29Class Action LawsuitsLawyers and clientsSlide 31Exchange of InformationVoluntary exchange of informationSlide 35What about involuntary exchange of information?Slide 37Effect of information disclosure on administrative and error costsSlide 38Pre-Trial BargainingSlide 41Slide 42Nuisance SuitsSlide 44Failures in negotiationsSlide 45TrialIncentivesWho pays the costs of a trial?Slide 50Slide 51Slide 52Unitary versus Segmented TrialsBurden of proofStandard of proofRules of evidenceSlide 56AppealsSlide 59Slide 59Slide 60Econ 522Economics of LawDan QuintSpring 2010Lecture 202The legalprocess3Developed theories of property/nuisance law, contract law, and tort lawLooked at how rules of legal liability create incentivesThought about how these rules can be chosen to try to achieve efficient outcomesOver the last 2 ½ months, we have…4To achieve efficiency, we’ve generally tried to set a party’s liability equal to the harm he caused someone elseDamages in nuisance lawExpectation damages in contract lawCompensatory damages in tort lawThat way, he internalizes the externality he imposes, leading to efficient decisionsIn doing this, we’ve been making two big assumptions:The legal system works flawlesslyThe legal system costs nothingOver the last 2 ½ months, we have…5I hit you with my car and did $10,000 worth of damageWe both know I was negligentBut courts aren’t perfectIf we go to trial, 80% chance I’ll be found liable, 20% I won’tIf I’m held liable, damages are correctly set at $10,000So on average, if we go to trial, you expect to recover $8,000But if we go to trial, we both have to hire lawyersSuppose this costs us each $3,000Now your expected gain from going to trial is $8,000 – 3,000 = 5,000And my expected cost is $8,000 + 3,000 = 11,000An example from Polinsky, “An Introduction to Law and Economics”6So…Going to trial gains you $5,000 (in expectation)Going to trial costs me $11,000 (in expectation)Maybe we can settle out of courtIf we avoid going to court and I pay you any settlement between $5,000 and $11,000, we’re both better offSo maybe this happensBut…An example from Polinsky, “An Introduction to Law and Economics”7Suppose I’m more pessimistic about my chances than youYou think I’m 80% likely to be found liableI think I’m 90% likely to be found liableYou think your expected gain is $8,000 – 3,000 = $5,000I think my expected cost is $9,000 + 3,000 = $12,000Now the range of possible settlements is even widerAny settlement between $5,000 and $12,000 is a Pareto-improvement over going to trialSo settling is more likelyAn example from Polinsky, “An Introduction to Law and Economics”8Now instead, suppose I’m more optimistic about my chances than youYou think I’m 80% likely to be found liableI think I’m only 10% likely to be found liableYou think your expected gain is $8,000 – 3,000 = $5,000I think my expected cost is $1,000 + 3,000 = $4,000Now an out-of-court settlement is impossibleThere are no settlements that you and I would both agree toAn example from Polinsky, “An Introduction to Law and Economics”9And, even if our beliefs are compatible and there are settlements that we would both prefer to trial……private information might lead to failure to reach a settlementRemember from before: if our threat points are private information, we might fail to reach an agreement because each of us is holding out for too big a shareSo even if we had the same beliefs about what will happen at trial, private information could prevent settlementAn example from Polinsky, “An Introduction to Law and Economics”10So when litigation is costly…If the two parties agree on the likely outcome of a trial, there are gains from settling out of court, and a range of settlements they would both prefer to going to trialIf the two parties are relatively pessimistic, settlement is even more likelyIf the two parties are relatively optimistic, settlement may be impossibleEven if the two have the same beliefs or are relatively pessimistic, private information may lead to failures in bargainingAn example from Polinsky, “An Introduction to Law and Economics”11Under strict liability…We said injurers internalize cost of accidents efficient precautionBut this assumes cost of being sued = damage doneIf courts are unpredictable and litigation is costly, private cost of being sued for damages could be > or < cost of accidentWhich could lead to too much or too little precautionBut also…If settlement talks break down and cases go to trial……then total social cost of an accident includes the harm done, and the resources expended during the trial!If trial costs $6,000, then social cost of the accident isn’t $10,000, but $16,000 – which increases the efficient level of precaution!So what?12The legalprocess13Once an accident has happened…Victim could sue or not sueThe victim and injurer might quickly settle out of courtIf the case proceeds to trial, the first step (in the U.S.) is a pre-trial exchange of informationAfter that, victim and injurer might still settle out of courtIf the case goes to trial, victim (now plaintiff) might win or loseLosing side at trial can choose to appeal (or not)The legal process14Tort law: efficiency meant minimizing the total social cost of accidentsActual cost of accidentsPlus cost of actions taken to prevent them (precaution)Goal of the legal process: minimize its social costsDirect (administrative) costsError costsThe goal of the legal process15Administrative costsHiring judges, building courthouse, paying jurors…More complex process higher costError costsAny legal process is imperfectErrors are any judgments that differ from theoretically perfect onesAn error in computing damages after the fact only affects distribution, not efficiencyBut anticipated errors affect
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