Econ 522 Economics of LawRemindersSlide 2A two-player game, similar to the investment/agency gameResultsSlide 6Let’s look just at the Player A’s who sent $10Slide 8Slide 8Our story so farSlide 11Slide 12Slide 13Slide 14Slide 14Tort lawAs always, we’ll be focused on achieving efficiencySomething to rememberSlide 19Slide 20Cast of characters“Classic” legal theory of tortsElement 1: HarmSlide 24Perfect CompensationSlide 26Element 2: CausationSlide 28Slide 29Slide 30Element 3: Breach of DutyHence the language in the trolly exampleSo under a negligence rule…How is the standard of care determined?Strict liability versus negligenceSlide 36Slide 36PrecautionActions by both injurer and victim impact number of accidentsWe will call all these things precautionTo answer these questions, we’ll introduce a very simple model of accidentsModel of unilateral harmSlide 43Slide 44Slide 45Slide 46Slide 46Effect of liability rules on precautionRule 1: No LiabilityRule 1: No Liability Injurer precautionRule 1: No Liability Victim precautionSlide 52Rule 2: Strict LiabilityRule 2: Strict Liability Injurer precautionRule 2: Strict Liability Victim precautionSlide 56So for accidents with unilateral precaution…Rule 3: Simple NegligenceRule 3: Simple Negligence Injurer precautionRule 3: Simple Negligence Victim precautionSlide 61Econ 522Economics of LawDan QuintSpring 2011Lecture 152HW3 due tomorrow (5 p.m.)Second midterm next Wednesday (March 30)Cumulative – covers property and contract lawNo tort law – covers everything through end of last lectureReminders3Results fromMonday’s experiment4Player A starts with $10Chooses how much of it to give to player BThat money is tripledPlayer B has $10, plus 3x whatever A gave him/herChooses how much (if any) to give back to player AFour treatmentsAnonymousPrivateFace-to-facePublicA two-player game, similar to the investment/agency game5In the anonymous version, trust was definitely an issueOn average, player A sent $5.72, so almost half potential gains went unrealizedOn average, player B sent back $7.34, so average payoffs were $11.62 and $19.83Of those player A’s who sent something, 21% got back less than they sent, and 13% got back nothingKnowing who you were playing with helpedIn second version, average A sent $7.62, average B sent $13.31Average payoffs of $15.69 and $19.55Only 4% of player A’s got back less than they sentResults6Results4%$13.31$7.6221%$7.34$5.72Average6%$17.121725%$11.888100%$11.0020%$11.8367-90%$10.29729%$5.5774-60%$1.00133%$2.6731-3$0.002$0.0050% B<AAvg B# obs% B<AAvg B# obsA sent…PRIVATE VERSION(NAMES)ANONYMOUS VERSION(STUDENT ID NUMBERS)7Let’s look just at the Player A’s who sent $10$17.12$11.88Average received53%37%% who got back $20 or more29%13%% who got back $11-$1912%25%% who got back $106%25%% who got back $0178# of Player A who sent $10PrivateAnonymous8Just knowing the name of the person you’re playing with helped a lotIncreased trust, and increased trustworthinessInteracting face-to-face completely solved problemEvery A sent $10, every B sent back $20That worked even better than playing the game in public!(Public version: one player A sent $10 and got back $20,one sent $0 and got back $0)Results9Let’s recap ourstory so far…10EfficiencyMaximizing total surplus realized by everyone in societyScarce resources are owned by whoever values them mostActions are taken if social benefit exceeds social costDesign a legal system that leads to efficient outcomesOnce we set up the rules, we don’t expect people to act based on what’s efficientWe expect people to do whatever’s in their own best interestSo the goal is set up the rules such that people acting in their own best interest will naturally lead to efficiencyOur story so far11Coase gives us one way to do thatIf property rights are clearly defined and tradable, and there are no transaction costs, people have incentive to trade until each resource is efficiently ownedSo initial allocation of rights doesn’t matter for efficiencyBut if there are transaction costs, we may not get efficiency this wayLed us to two normative views of the legal system:1. Minimize transaction costs (“lubricate” private exchange)2. Allocate rights as efficiently as possibleTradeoff between injunctive relief and damagesOur story so far12Property law works well for simultaneous tradeContracts allow for non-simultaneous tradeContract law can…Enable cooperationEncourage efficient disclosure of informationSecure optimal commitment to performanceSecure efficient relianceSupply efficient default rules and regulationsFoster enduring relationshipsOur story so far13So far, we’ve been talking about voluntary exchangeCoase is predicated on exchange being voluntary for both partiesContracts are an extension of voluntary tradeUp next: involuntary tradeYou’re bicycling to class, I’m texting while driving and I hit youYou didn’t want to deal with me, I didn’t want to deal with you…Our story so far14To put it another way…Property law covers situations where transaction costs are low enough to get agreement ahead of timeExceptions to property law – private necessity, eminent domain – when this isn’t the caseContract law covers situations when transaction costs are low enough for us to agree to a contract, high enough that we may not want to renegotiate the contract laterTort law covers situations where transaction costs are too high to agree to anything in advanceOur story so far15Tort law16Tort, noun. from French word meaning injuryContract law: situations where someone harms you by breaking a promise they had madeTort law: situations where someone harms you without having made any promises“If someone shoots you, you call a cop. If he runs his car into yours, you call a lawyer.”Tort law17I hit you with my car, do $1,000 worth of damageYou’re $1,000 worse off(No damage to me or my car)Should I have to pay you damages?As always, we’ll be focused on achieving efficiency –1,000–1,000–1,000Combined payoffs–50,000–1,0000My payoff49,0000–1,000Your payoffI owe $50,000I owe $1,000I owe nothing18Something to rememberdistributionbut notefficiencyefficiency19Question: how to structure the law to get people to behave in a way that leads
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