Econ 522 Economics of LawLogisticsLast week…Slide 4That answered first of four questions we need to addressPublic versus Private GoodsSlide 7Slide 8Slide 9Slide 10A different view: transaction costsSlide 11What can an owner do with his property?So, what does an efficient property law system look like?Slide 14But first: dynamic games and sequential rationalityDynamic gamesWe can put payoffs from this game into a payoff matrix…Slide 19The key assumption behind subgame perfect equilibrium: common knowledge of rationalitySlide 20Intellectual PropertyInformation: costly to generate, easy to imitateInformation: costly to generate, easy to imitatePatents: one way to solve the problemBUT… patents solve one inefficiency by introducing anotherPatents: a bit of historyTwo variables in patent law: how broad patents are, and how long they lastSlide 29Slide 30Slide 31Slide 32Slide 33Slide 33CopyrightSlide 36Slide 37Slide 38Slide 38TrademarksSlide 41Slide 42Slide 42Trade SecretsSlide 44Wednesday…Econ 522Economics of LawDan QuintSpring 2010Lecture 62HW1 online, due next Friday (2/19)Pretty long – don’t wait till last minute to start!If you can’t attend section, can hand in to my mailbox (Social Sciences), or by emailFirst midterm Wednesday 2/24Logistics3Coase: in the absence of transaction costs, if property rights are complete and tradeable, voluntary negotiations will lead to efficiencySo initial allocation of rights doesn’t matter for efficiency if there are no transaction costsBut if there are transaction costs, the initial allocation of rights does impact efficiencySources of transaction costsSearch costs, bargaining costs, enforcement costsWhat to do about transaction costsNormative Coase: design law to minimize transaction costsNormative Hobbes: design law to minimize harm done by failures in bargainingLast week…4How to choose between two normative approaches?When transaction costs are low and information costs high, design law to minimize transaction costsWhat transaction costs are high and information costs are low, design law to allocate rights efficientlyApplication of this: choosing a remedy (Calabresi/Melamed)When transaction costs are low, use injunctions (property rules)When transaction costs are high, use damages (liability rules)C&U: this is what actually happens in many settingsLast week…5what can be privately owned?what can an owner do?how are property rights established?what remedies are given?That answered first of four questions we need to address6Public versus Private GoodsPrivate Goodsrivalrous – one’s consumption precludes anotherexcludable – technologically possible to prevent consumptionexample: applePublic Goodsnon-rivalrousnon-excludableexamples: defense against nuclear attackinfrastructure (roads, bridges)parks, clean air, large fireworks displays7When private goods are owned publicly, they tend to be overutilized/overexploitedPublic versus Private Goods8When private goods are owned publicly, they tend to be overutilized/overexploitedWhen public goods are privately owned, they tend to be underprovided/undersuppliedPublic versus Private Goods9When private goods are owned publicly, they tend to be overutilized/overexploitedWhen public goods are privately owned, they tend to be underprovided/undersuppliedEfficiency suggests private goods should be privately owned, and public goods should be publicly provided/regulatedPublic versus Private Goods10When private goods are owned publicly, they tend to be overutilized/overexploitedWhen public goods are privately owned, they tend to be underprovided/undersuppliedEfficiency suggests private goods should be privately owned, and public goods should be publicly provided/regulatedPublic versus Private Goods11Clean airLarge number of people affected transaction costs high injunctive relief unlikely to work wellStill two optionsOne: give property owners right to clean air, protected by damagesTwo: public regulationArgue for one or the other by comparing costs of eachDamages: costs are legal cost of lawsuits or pretrial negotiationsRegulation: administrative costs, error costs if level is not chosen correctlyA different view: transaction costs12what can be privately owned?what can an owner do?how are property rights established?what remedies are given?13Priniciple of maximum libertyOwners can do whatever they like with their property, provided it does not interfere with other’ property or rightsThat is, you can do anything you like so long as it doesn’t impose an externality (nuisance) on anyone elseWhat can an owner do with his property?14What things can be privately owned?Private goods are privately owned, public goods are publicly providedWhat can owners do with their property?Maximum libertyHow are property rights established?(Examples to come)What remedies are given?Injunctions when transaction costs are low; damages when transaction costs are highSo, what does an efficient property law system look like?15Up next:applications16Game theory we’ve seen so far: static games“everything happens at once”(nobody observes another player’s move before deciding how to act)Dynamic gamesone player moves firstsecond player learns what first player did, and then movesBut first: dynamic games and sequential rationality17Dynamic gamesFIRM 1 (entrant)Enter Don’t EnterFIRM 2(incumbent)Accommodate Fight(10, 10) (-10, -10)(0, 30)A strategy is one player’s plan for what to do at each decision point he/she acts atIn this case: player 1’s possible strategies are “enter” and “don’t”, player 2’s are “accommodate” and “fight”1818We can look for equilibria like beforewe find two: (Enter, Accommodate), and (Don’t Enter, Fight)question: are both equilibria plausible?sequential rationalityWe can put payoffs from this game into a payoff matrix…10, 10 -10, -100, 30 0, 30Accommodate FightEnterDon’t EnterFirm 2’s ActionFirm 1’s Action19Dynamic gamesFIRM 1 (entrant)Enter Don’t EnterFIRM 2(incumbent)Accommodate Fight(10, 10) (-10, -10)(0, 30)In dynamic games, we look for Subgame Perfect Equilibriaplayers play best-responses in the game as a whole, but also in every branch of the game treeWe find Subgame Perfect Equilibria by backward inductionstart at the bottom of the
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