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Abstract:
During its relatively short history, the law and economics movement has developed three distinct schools of thought. The first two schools of thought, often referred to as the Chicago or positive school and the Yale or normative school, developed almost concurrently. The functional school of law and economics, which developed subsequently, draws from public choice theory and the constitutional perspective of the Virginia school of economics to offer a third perspective which is neither fully positive nor fully normative. Various important methodological questions have accompanied the debate between these schools concerning the appropriate role of economic analysis in the institutional design of lawmaking and the limits of methods of evaluation of social preferences and aggregate welfare in policy analysis. These debates have contributed to the growing intellectual interest in the economic analysis of law.

Law and Economics, Intellectual History, Methodology

Abstract:
Behavioral economists accept many of the premises of traditional economic thought: that situational outcomes are the result of individual decisions, taking place in a particular economic environment. But behavioral economists go a step further, arguing that the human action is shaped not only by relevant economic constraints, but is highly affected by people's endogenous preferences, knowledge, skills, endowments and a variety of psychological and physical constraints. Incentives matter and incentives drive human behavior, but incentives are often more than simple monetary gain. The rise of behavioral economics and the findings of experimental economics, have led to a clash between the theory of rational-choice and those who believe that this idea does not properly account for the montage of human emotions, biology and attitudes. However, it may be possible to end the intellectual tug of war between rational choice theorists and behavioralists without turning it into a zero-sum game. In this Introduction we consider the contributions of twenty-eight authors who have joined together to present such a possibility. Covering a wide range of fields from neuroscience, to economics, to law and sociology, these distinguished academics have presented an array of valuable contributions that, aware in their own application that rational choice theory can no longer be bought in a wholesale fashion, aim at revisiting its basic premises in such a way as to ensure a more rigorous analytical model. These authors then proceed to offer a practical application of this modified theory to a variety of economic and legal problems that have bedeviled traditional economic thought.

Abstract:
This article considers the applicability of the Coase theorem (in both its positive and normative formulations) to the political market. The article analogizes the choice of decision rules in the political market to the choice of legal rules in the traditional Coase theorem and further analogizes alternative initial coalitions to the different initial allocations of entitlements considered by Coase (1960). On the basis of these analogies, the paper examines the relevance (or lack thereof) of alternative voting rules and initial coalitions on the final political outcome. The article further shows that, if all voters are allowed to enter into Coasian bargaining over the policy outcome to be adopted by the majority coalition (i.e., if political bargains are possible and are enforceable), uniqueness and stability are obtained. The analysis of the axiomatic Nash bargaining equilibrium yields an interesting geometric intuition. If voters have similar utility functions centered around different ideal policy points, the Coasian bargaining will be conducive to the center of mass of the policy space, which weighs the agents' preferences as revealed in the bargaining process. Such ideal equilibrium satisfies most criteria of social welfare. The article concludes considering the various practical limits of this ideal political market, whenever collective action and agency problems affect the political bargaining in a representative or direct democracy.

Abstract:
Economic analysis has long been employed for the study of tort liability. This paper revisits the main contributions to the subject emphasizing the inherent impossibility for tort liability to set perfectly efficient first-best incentives to take precaution for all parties to an accident and the need to choose among second best outcomes. The paper provides a pathfinder through the literature in various areas of tort law and economics.

Abstract:
This paper considers the relative advantages and the respective limits of three main sources of law, namely, (a) legislation; (b) judge-made law; and (c) customary law. The traditional presentation of sources of law is revisited, considering the important issue of institutional design of lawmaking through the lens of public choice theory. This functionalist approach to legal analysis sheds new light on the process of law formation, emphasizing various criteria of evaluation, which include: (i) the minimization of agency problems; (ii) the minimization of direct and external rulemaking costs; and (iii) the stability and transitivity of collective outcomes.

Abstract:
Commons and Anticommons problems are the consequence of symmetric structural departures from a unified conception of property. In this paper, we endeavor to provide a dual model of property, where commons and anticommons problems are the consequence of a lack of conformity between use and exclusion rights. The general model is then extended to consider the different equilibria obtained under vertical and horizontal cases of property fragmentation. The paper concludes formulating a hypothesis of legal rules for promoting unity in property.

Abstract:
This article suggests that property is subject to a fundamental law of entropy, namely that it is affected by a one-directional bias leading towards increasing fragmentation. The application of the laws of entropy to property further indicates that one can avoid this tendency only in the purely abstract world of zero transaction costs. Building upon this consideration, I consider the choice of remedies in property law, focusing on legal rules that are designed to promote (a) functional, (b) legal, and (c) physical unity in property. I provide examples drawn from both common law and civil law systems, supporting the hypothesis that legal rules are instrumental in combating entropy in property.

Abstract:
This article considers the emergence and evolution of punitive and compensatory remedies in ancient law. I describe how ancient practices of retaliation gradually evolved, through four general phases, into rules requiring victim's compensation. I suggest that the Biblical lex talionis ('eye for an eye...life for a life') and similar rules that emerged in other ancient legal systems triggered an important change in the ancient law of wrongs, marking the end of a system of retaliatory justice and the emergence of a system based on victim's compensation. The paper addresses four related questions. (1) Why was a single limit of 1:1 to talionic penalties introduced across all categories of wrongdoing, replacing older customary practices that had different multipliers according to the circumstances of the case? (2) In the presence of imperfect enforcement, did the 1:1 limit to retaliation result in underdeterrence? (3) Why did the practices of literal talionis rapidly fall into disuse after written formalization? (4) Where the kofer and blood-money payments made under a threat of literal retaliation likely to generate overextraction from the wrongdoer and excessive deterrence?

Abstract:
This paper considers the emergence and evolution of punitive and compensatory remedies in ancient law. I describe how ancient practices of retaliation gradually evolved, through four general phases, into rules requiring victim's compensation. I suggest that the Biblical lex talionis (eye for an eye ... life for a life) and similar rules that emerged in other ancient legal systems triggered an important change in the ancient law of wrongs, marking the end of a system of retaliatory justice and the emergence of a system based on victim's compensation. The paper addresses four related questions: (1) Why was a single limit of 1:1 to talionic penalties introduced across all categories of wrongdoing, replacing older customary practices which had different multipliers according to the circumstances of the case? (2) In the presence of imperfect enforcement, did the 1:1 limit to retaliation result in under-deterrence? (3) Why did the practices of literal talionis rapidly fall into disuse after their written formalization? and (4) Were the kofer and blood-money payments made under a threat of literal retaliation likely to generate over-extraction from the wrongdoer and excessive deterrence?

Abstract:
EC Directive 1999/44 represents a sizeable step towards the harmonization of European law of warranties in consumer sales. In this article, I consider the goal of harmonization of European sales and warranties law from an economic perspective and subsequently examine some of the main provisions of the Directive in light of current economic theories of consumer protection. I begin with an analysis of conventional and legal warranties, which the law and economics literature considers as promises of the seller to assume specific responsibilities in case the quality or the performance of the purchased item does not conform to the specifications and contractual expectations of the buyer. From an economic point of view, there are three main functions of conventional and legal warranties: (a) insurance; (b) signaling; and (c) incentive functions. In such context, the choice of optimal level and duration of a warranty depends on (a) the risk propensities of the parties; (b) the informational asymmetries between the parties; and (c) the determinants of the probability of a product's lack of conformity or breakdown. The analysis reveals that different optimal levels of warranty may be chosen in real life cases to create the optimal balance of risk allocation and parties' incentives. I consider the results of the economic model in the various scenarios and evaluate the consistency of the unified solution adopted by the European Directive.

Abstract:
Copyright scholars suggest that computer technology has reduced transaction costs associated with copyright transfer, allegedly eliminating the need for the fair use doctrines that were developed to allow limited use of copyrighted material in situations where the transaction costs of securing authorized use would be prohibitive. According to this emerging view, in an ideal world with no contracting costs, third party use of copyrighted material could realistically only take place with the express consent of the copyright holder. This would give the author absolute power to dispose of his work, including the right to veto uses, without the possibility of a fair use override of any sort.

This paper shows the limits of such transaction-cost based arguments. If transaction costs provide the dominant economic justification of fair use doctrines, an exogenous reduction of such transaction costs would limit the scope and application of the defense of fair use. Nevertheless, in this paper we suggest that, when viewed in light of the anticommons theory, fair use doctrines retain a valid efficiency justification even in a zero transaction cost environment. Fair use defenses are justifiable, and in fact instrumental, in minimizing the welfare losses prompted by the strategic behavior of the copyright holders. Even if copyright licenses can be transferred at no cost (for instance, in a click and pay frictionless computer world), the strategic behavior of the copyright holders would still create possible deadweight losses.

In this context we identify a number of critical variables that should guide and constrain the application of fair use doctrines. These variables include (a) the number of copyright holders; (b) the degree of complementarity between the copyrighted inputs; (c) the degree of independence between the various copyright holders in the pricing of their licenses; and (d) ability to price discriminate.

Abstract:
As Calabresi (1996) pointed out, no consideration has been given in recent legal and economic literature to the idea of distributing an accident loss among a faultless tortfeasor and an innocent victim on the basis of the relative causal contribution of the parties to the loss. This criterion of apportionment of liability, which we call comparative causation, is the object of this paper. We present a brief intellectual history of the principle of comparative causation and provide a positive economic model. In order to identify structural features of the rule, we first consider a rule of pure comparative causation where liability is allocated on the basis of causation, regardless of parties' fault. The economic model brings to light some interesting features of the rule, but also unveils the limits of such a criterion of liability with respect to induced activity and care levels. The paper then extends the economic model to consider the workings of the comparative causation rule in conjunction with negligence rules. Applying the comparative causation rule under a negligence regime induces a combination of incentives that no known liability rule provides.

Abstract:
The Coase Theorem holds that, regardless of the initial allocation of property rights and choice of remedial protection, the market will determine ultimate allocations of legal entitlements, based on their relative value to different parties. Coase's assertion has occasioned intense debate. This article provides an intellectual history of Coase's fundamental theorem and surveys the legal and economic literature that has developed around it. It appraises the most notable attacks to the Coase Theorem, and examines its methodological implications and normative and practical significance in legal and policy settings.

coase theorem

Abstract:
In this paper we build upon existing literature on the evolution of the common law. We consider a model of legal evolution in which judges have varying ideologies and propensities to extend the domain of legal remedies and causes of action. Parties have symmetric stakes and are rational. Plaintiffs bring a case to court if the expected net return from the case is positive. The net expected value of the case depends on the objective merits of the case, the state of the law, and the ideological propensity of the judge. Plaintiffs have full control over whether to bring a case to court. In our model, the combined presence of differences in judges' ideology and plaintiff's case selection generate a monotonic upward trend in the evolution of legal rules and remedies. This may explain the stylized fact under which certain areas of the law have been granting increasing levels of remedial protection and recognition of plaintiffs' actions.

Abstract:
The concept of reciprocity gains importance where there is no external authority to enforce agreements. Many legal systems foster meta-rules of reciprocity to facilitate cooperative outcomes. This paper considers the role of reciprocity rules in various strategic environments. We start by considering the effect of reciprocity constraints in a classic prisoner's dilemma with two symmetric parties and linear payoffs. We extend the analysis to continuous strategies and then further extend the basic model of reciprocity to a) asymmetric players, and (b) non-linear payoff functions. Then we examine the welfare properties of the reciprocity-induced equilibrium. In many game-theoretic situations, reciprocity facilitates the achievement of cooperative outcomes. Yet the reciprocity-induced equilibrium is not always socially optimal.

Reciprocity, Prisoner's Dilemma, Cooperation

Abstract:
The effect of Civil law doctrines of precedent on the process of formation and evolution of case law is examined. Unlike the Common law systems, Civil law jurisdictions do not adopt a stare decisis principle in adjudication. In deciding any given legal issue, precedents serve a persuasive role. Civil law courts are expected to take past decisions into account when there is a sufficient level of consistency in case law. Generally speaking, no single decision binds a court and no relevance is given to split jurisprudence. Once uniform case law develops, courts treat precedents as a source of "soft" law, taking them into account when reaching a decision. The higher the level of uniformity in past precedents, the greater the persuasive force of case law. Although Civil law jurisdictions do not allow dissenting judges to attach a dissent to a majority opinion, cases that do not conform to the dominant trend serve as a signal of dissent among the judiciary. These cases influence future decisions in varying ways in different legal traditions. Judges may also be influenced by recent jurisprudential trends and fads in case law. The evolution of case law under these doctrines of precedents is modeled, considering the possibility for consolidation, corrosion and stability of legal rules. The effect of different doctrines of precedent on the patterns of evolution of the legal system is studied.

Judicial Precedent, Stare Decisis, Jurisprudence Constante, Legal Evolution

Abstract:
This paper applies a model of complementary oligopoly and anticommons pricing to the market for intellectual property rights. Our model demonstrates a surprising and interesting overlooked result: In the market for complementary goods, price coordination and monopolistic pricing do not necessarily represent inefficient equilibria, when compared to the alternative Nash equilibrium. Due to the peculiar cross-price effects in the supply of complementary goods, price coordination and monopolistic supply often constitute an improvement over the alternative equilibrium outcomes. To be precise, the welfare effects of competition and price coordination depend on the nature of the intellectual product concerned. This has significant and obvious implications for the economic analysis of copyright collectivization, as well as for antitrust regulation in this area.

Law and Economics, Property Law, Antitrust Law, anticommons, intellectual property, copyright collectives, complementary oligopoly

Abstract:
International public law, in a Hobbesian sense, exists in a state of nature - there is no overarching legal authority to enforce agreements. Inevitably, reciprocity has become an important element in the body of existing law. This paper explores the role of reciprocity in the context of the law of nations. This paper draws on earlier work to characterize certain types of interactions between countries in a game-theoretic framework. We then consider the types of games where reciprocity constraints would yield an optimal outcome, and when such constraints would be ineffective, in the context of examples from international law.

No external reciprocity constraint is necessary to achieve the Pareto optimum when the interests of all players coincide, as in a Common Interest game. In such a case, the reciprocity condition is termed structural. We find that different types of external reciprocity constraints are effective in Prisoner's Dilemma and Divergent Preference (Battle of the Sexes) games. Induced reciprocity, which eliminates the off-diagonal options is sufficient to get the players out of Prisoner's Dilemma. Stochastic reciprocity, based on the concept of role reversibility, can result in cooperation in a repeat Divergent Preference game. Reciprocity constraints are not effective in achieving cooperation in fixed sum games, or in what we term Unilateral games, where one player has a dominant strategy, regardless of what the other player does, and each player's dominant strategy could differ. We examine a number of areas of international law, including the law on the Continental Shelf, the GATT regime, the Law of the Sea and the CTBT to analyze the role of reciprocity. In view of the prevalence of reciprocity in the major sources of international law - treaties, custom and generalized principles - we conclude that, despite the occasional failure, as in the case of the CTBT, reciprocity is a meta-rule in international law.

Abstract:
A fundamental insight of the economic analysis of law is the notion that legal sanctions are "prices" set for given categories of legally relevant behavior. This idea develops around the positive conception of law as a command backed by an enforceable sanction. Law and economics uses the well-developed tools of price theory to predict the effect of changes in sanctions on individual behavior. One essential question, however, remains unanswered: How can the legal system set efficient prices if there is no market process that generates them? In other words, how can legal rules reflect the level of social undesirability of the conduct being sanctioned?

Although the legal system sometimes borrows a price from the actual market (e.g., when the sanction is linked to the compensatory function of the rule of law), there is a wide range of situations in which legislative and judicial bodies set prices in the absence of a proper market mechanism. In a law and economics perspective, customary law can be viewed as a process for generating legal rules that is analogous to a price mechanism in a partial equilibrium framework.

Here, I present the standard theory of customary law, discussing the domain of custom among the spontaneous sources of legal order. This study explores the formative elements of customary rules and their legal effects. The traditional theory is revisited with the aid of game-theoretic models to evaluate the possible role of constitutional rules in facilitating the emergence of customary law. This study attempts to characterize the institutional settings that remain outside the reach of spontaneous cooperation, and the situations under which inefficient customary rules may develop and persist. Further, this study will consider the public choice dimension of the process of customary law formation, considering the potential for norm manipulation. The conclusion will address whether an increased recognition and incorporation of customary norms by the legal system is desirable.

Abstract:
In this paper we consider the role that litigation and case selection play in the process of legal change. We examine the effect of judicial path dependence on the consolidation of liability rules and legal remedies, paying special attention to litigation between parties with different stakes. In the presence of asymmetric stakes, judicial path dependence may lead to consolidation or contraction of legal rules. We study the consequence of private litigation decisions on the contraction or consolidation of legal rules under various litigation and judicial environments. We also consider the relevance of the degree of asymmetry in the litigation stakes, the existence and nature of positive litigation costs, and the weight of past precedents on the ongoing process of legal evolution.

Abstract:
This paper considers the recent empirical findings on the application of the exclusionary rule for pure economic loss in European case law. Considering the judicial applications of the rule in 13 European jurisdictions, the analysis shows that a key factor in determining the optimal scope of the economic loss rule is in the relationship between pure economic loss and social loss. After identifying several factual categories, this paper considers a restatement of the exclusionary rule consistent with the economic model of optimal liability, according to which A plaintiff cannot recover damages for a purely private economic loss.

The observed trends in European case law support the hypothesis that the practical contours of European economic loss rules - difficult to illuminate with traditional legal doctrines - follow the predicates of the efficiency criterion.

Abstract:
This paper builds upon the existing literature on non-conforming property rights, suggesting that property is affected by a one-directional bias leading towards increasing fragmentation. This bias is the result of asymmetric transaction and strategic costs. In this context, the paper offers a revised formulation of the normative Coase theorem to define more precisely optimal remedies in situations characterized by asymmetric transaction and strategic costs. I formulate an efficiency hypothesis, suggesting that courts and legislators consider the asymmetric effects of property fragmentation when choosing among alternative legal remedies. This framework further explains some of the apparent anomalies in the comparative law of remedies.

Property division creates asymmetric transaction costs: unlike ordinary transfers of rights from one individual to another, reunifying fragmented property rights usually involves transaction and strategic costs higher than those incurred in the original deal (Parisi, Schulz and Depoorter, 2000). Such costs increase monotonically with the extent of fragmentation. In the realm of non-conforming property arrangements, this monotonicity generates a one-directional stickiness in the transfer of legal entitlements. Even reversing a simple property transaction can result in monopoly pricing by the buyer-turned-seller; reunifying property that has been split among multiple parties engenders even higher costs given the increased difficulty of coordination among the parties and the increased opportunity for strategic pricing by the multiple sellers.

This paper revisits the normative implications of the Coase theorem and considers the choice of optimal rules and remedies in the presence of asymmetric transaction costs.

Abstract:
While customary law is capable of creating universally binding rules, the rules that govern its formation allow states to gain an exemption from emerging norms of customary law by remaining persistent objectors. This form of objection requires the objecting state to take express action to oppose an emerging practice by making its objections widely known before the practice solidifies into a binding rule of custom. Likewise, after the custom is formed states have an opportunity to express an objection or depart from it. In this latter case, the departing state does not obtain an exemption from the binding custom unless other states acquiesce to its departure. We model the effects of persistent objector and subsequent objector doctrines in the formation and change of customary law when heterogeneous states are involved.

Customary law, persistent objector, subsequent objector, norms

Abstract:
Vicarious liability, secondary liability and mandatory insurance are three systems to attain judgment-proof or disappearing injurers' precaution through the direct control of a second party (the vicariously liable principal, the secondary liable party, or the insurer). In this way, the legal system delegates control over some injurers to private entities. Such mechanisms generate monitoring costs. In this paper, we consider who bears the cost of such monitoring and the effect thereof on the equilibrium level of precautions under different liability rules. We use these findings to explain some of the patterns in the coupling of substantive standards of liability and legal regimes of delegated control.

vicarious liability, secondary liability, insurance, negligence

Abstract:
This paper compares the adversarial system of adjudication, dominant in the common law tradition, with the inquisitorial system, dominant in the civil law tradition, using a rent-seeking, Nash equilibrium, model of litigation expenditure in which the litigants simultaneously choose their levels of effort with the goal of maximizing their returns from the case. The choice between the two systems is modeled as a continuous variable showing the equilibrium solutions of the game and their implications for procedural economy. The results are then utilized to characterize the optimal levels of adversarial and inquisitorial discovery with respect to the social benefits of truth finding and correct adjudication, and the private and administrative costs of litigation.

Abstract:
Functional law and economics, which draws its influence from the public choice school of economic thought, stands as a bridge between the strictly positivist and normative approaches to law and economics. While the positive school emphasizes the inherent efficiency of legal rules and the normative school often views law as a solution to market failure and distributional inequality, functional law and economics recognizes the possibility for both market and legal failure. That is, while there are economic forces that lead to failures in the market, there are also structural forces that limit the law's ability to remedy those failures on an issue-by-issue basis. The functional approach then uses economic tools to analyze market and legal behavior in order to create meta-rules which limit the extent of the failures in each realm. These meta-rules are designed to induce individuals to reveal their preferences in cases where collective choices are necessary, and to internalize the effects of their actions generally. This mechanism design or functional approach to law and economics focuses on ex ante social welfare maximization, rejecting both the ex post corrective function of law assumed by the normative school of thought and the naturally evolving efficient system view espoused by the positive school.

functional law and economics, public choice

Abstract:
This paper recasts current theories of regulatory or legislative competition. Building on the recent contribution of Buchanan and Yoon (2000), we consider alternative ways in which decision-making competence can be allocated among multiple legislative or administrative bodies. The general model is used to consider the equilibria obtained under different allocations of competence and to formulate some policy considerations.

Regulation, Commons, Legislatures, Duopoly

Abstract:
This paper reviews the existing law and economics literature on crime, noting where various models might apply to the terror context. Specifically, it focuses on two strands of the literature, deterrence and incapacitation. Challenging the conventional application of the basic rational agent model of crime in the context of terrorism, it considers anti-terror measures enacted by different countries, highlighting how the details of the laws correspond to the insights from economic models of crime. In conclusion, the paper proposes an efficient sorting mechanism in which individuals will be provided with adequate incentives to reveal their type to law enforcement authorities.

organized crime, basic crime model, communal liability, deterrence, incapacitation, penalty enhancements, terrorism

Abstract:
Notable scholars have considered the conditions under which rules of customary law can emerge spontaneously through the voluntary interaction and exchange of states in the international community. In this paper, we model the process of international customary law formation under different regimes. We start by considering a traditional model of customary law where legal rules emerge out of past practice. Once established by practice, legal customs enjoy reciprocal application among the states. Our model reveals the limits of the process of custom formation when choices are sequential and players know their roles at the time of strategy selection. After studying the effect of reciprocity, we examine the effects of "articulation" theories, which allow states to commit publicly to a strategy before their respective roles are unveiled. The welfare analysis of the alternative mechanisms of custom formation reveals the advantages and limits of the various processes of customary law formation.

Customary law, Custom Formation, Articulation, Norms

Abstract:
This paper develops a general model of anticommons fragmentation in property. To this end, we differentiate between different forms of property fragmentation. With the use of several functionally related examples, we consider the equilibria obtained under different scenarios. The various illustrations are later utilized as building blocks for the development of a general model of fragmented property. The model reveals that the private incentives of excluders do not capture the external effects of their individual decisions. Specifically, our model suggests that the results of underutilization of joint property increase monotonically in both (a) the extent of fragmentation; and (b) the foregone synergies and complementarities between the property fragments. Within this context, we explore some of the important implications for the institutional responses to issues of property fragmentation.

Abstract:
The process of treaty formation and reservations to multilateral treaties, enshrined in Articles 19-21 of the Vienna Convention on the Law of Treaties, establishes the principle that reservations are reciprocal. The treaty will be in force between a reserving state and a non-reserving state as amended by the reservation. Therefore if a state wants to exempt itself from a treaty obligation, it must let other nations escape that same burden. This paper presents an economic model of treaty formation and considers the effect of reciprocity on treaty ratifications among heterogeneous states. The economic model further reveals a hidden bias of the Vienna Convention. In spite of the apparent neutrality of the reciprocity principle governing the effect of reservations, the Vienna Convention creates a systematic disadvantage for states that have a comparative advantage in cooperation.

treaties, reservations, ratification, accession, Vienna Convention

Abstract:
This paper explores the idea that adopting a law is like investing in a productive asset. Investment involves incurring a present cost in the expectation of future benefits. Legal systems can be regarded as making investment decisions when incurring present lawmaking costs that will generate benefits over time. Lawmaking investments share, in varying degrees, three important attributes with other investment decisions. First, lawmaking costs cannot be recovered if the enacted rules prove to be ineffective or undesirable at a later time. That is, lawmaking investments are partially or completely irreversible. Second, there is often uncertainty over the future benefits of the legislation. Chosen rules may prove ineffective or changes in the social or economic circumstances may render them obsolete over time. Third, like any investment decision, timing is an issue for lawmakers to determine: lawmaking innovation or revision of current rules can be postponed. Often delays in such investment decisions come at a cost, given the forgone benefits of the investment in the immediate future. This paper focuses on the value of waiting in lawmaking, illustrating the interaction among the above factors in identifying the conditions that determine the optimal timing of legal intervention. The basic model is followed by two extensions. In the first extension, we allow for some learning and informational benefit from the immediate implementation of the new law. In a second extension, we allow for political time preference to affect the lawmaking choice.

Abstract:
In this article we analyze the expected effects of regulatory overlap in European competition law resulting from Regulation 1/2003. Drawing upon recently developed economic theories of regulatory competition, our model foresees a number of qualitative adjustments resulting from this reform. On one hand, the direct applicability of the exemption provision should increase the overall amount of exemptions. On the other hand, a decentralized system permits private litigants' forum shopping, and parallel enforcement by multiple national competition authorities will drive up the number of infringement findings. Although the precise direction of substantive competition law is unclear, the overall effect is higher levels of regulatory activity. This entails not only greater administrative costs but also suggests increased transaction costs for doing business in the post-Regulation 1/2003 European Union.

Regulatory competition, antitrust, european competition law

Abstract:
This paper defines a framework for anticommons analysis based on the fragmentation of property rights. In differentiating between sequential and simultaneous cases of property fragmentation, we describe and assess the equilibria obtained under each scenario. Our model reveals how the private incentives of excluders do not capture the external effects of their decisions. Moreover, our model suggests that the result of underutilization of joint property increases monotonically in both (a) the extent of fragmentation; and (b) the foregone synergies and complementarities between the property fragments. Within this context, we can therefore explore important implications for possible institutional responses to a range of issues raised by the concept of property fragmentation.

Abstract:
This paper considers the role of retaliation norms as a way to induce more socially desirable behavior among self-interested parties. The paper first considers the unregulated case in which individuals indulge in mutual aggression, in the absence of other legal or social constraints. Next the relationship between aggressors and their victims is investigated, concentrating on the effect of victim's propensity to retaliate when suffering harm from others. Two retaliatory regimes are examined: proportional retribution and fixed retaliation. Special attention is paid to the impact of these regimes on the parties' interaction. The results suggest that human instincts for revenge may indeed be as important as honesty for the evolution of cooperation. More generally, retaliation norms are an important ingredient for the evolution of desirable social behavior in the absence of other social constraints or legal intervention.

Negative Reciprocity, Retaliation, Revenge, Vindictiveness

Abstract:
The economic loss rule states that a plaintiff cannot recover damages for a pure financial loss. The comparative study of the pure economic loss rule reveals that in different jurisdictions, the legal definitions of the rule frequently lump together diverse situations. The actual significance of the notion of economic loss varies considerably across Western legal systems. Legal doctrines provide little insight as to why liability should, or should not, be denied. On the other hand, economic models of liability provide some valuable guidance for classifying different categories of economic loss, and identifying cases in which denial of recovery for economic loss would lead to inefficient outcomes. A law and economics analysis shows that a key factor in determining the optimal scope of the economic loss rule is in the relationship between pure economic loss and social loss. Economic loss should be compensable in torts only to the extent that it corresponds to socially relevant loss. After identifying several factual categories, this paper characterizes the optimal level of liability with reference to the relevant economic and social loss components and the resulting optimal incentives to reduce risk. In a few situations, the application of the optimal liability rule finds obstacles in entrenched principles of civil liability. Generally, however, the legal applications of the economic loss rule are consistent with the ideal liability rule identified by the economic model.

Abstract:
This Article argues that recent developments in economic theory provide a new rationale for the dichotomous approach of land use arrangements in the law of servitudes that is almost universal in the modern Western legal tradition. The treatment of certain land-related promises as enforceable contracts between parties, rather than real rights that run with the land in perpetuity, can be explained as an attempt to minimize the transaction and strategic costs resulting from dysfunctional property arrangements. As demonstrated by the Authors, benchmark doctrines such as touch and concern, and the civil law principles of prediality and numerus clausus, have served as instruments to limit excessive or dysfunctional fragmentation of property rights. Section I of this Article describes the dichotomous approach of land use arrangements in the law of servitudes in Common Law and Civil Law systems. Section II provides a functional explanation of the legal rules in this area. Section III documents and explains the changing approach to land use law in both Common Law and Civil Law jurisdictions. Section IV discusses the role of property law in a changing economy. Section V reflects on the appropriate scope of freedom of contract in the law of servitudes. Section VI concludes.

property law, servitudes, fragmentation, anticommons

Abstract:
Recently, a new concept, the anticommons dilemma, has been introduced in economic literature. In an anticommons property regime, multiple co-owners have the right to exclude one another from benefiting from a common resource. The economic literature has unveiled symmetry between commons and anticommons problems. Our experimental results reveal an interesting asymmetry. Anticommons situations generate greater opportunistic behavior than an equivalent commons dilemma (Study 1), and anticommons dilemmas yield a greater risk for underuse compared to commons dilemmas (Study 2). It was therefore concluded that anticommons might be considered as having even more severe and problematic consequences than the commons dilemma.

Property Law

Abstract:
Human behavior is influenced both by internal norms or values (what people think is just behavior) and exogenous restrictions including legal sanctions. In the paper we study the interaction between these legal and extralegal forces and highlight the possibility of a countervailing effect of norms and individual behavior in the face of changes in the legal environment. Building on the stylized fact that people's individual values are partly static and partly subject to change over time, we consider these social and legal forces as two main factors that contribute to the change in individual values. Legal innovation that departs from current values may lead to private enforcement norms or civil disobedience. Through private enforcement of expressive laws and through civil disobedience, individuals reveal their approbation or disapproval of laws to other individuals. This may lead to a hysteresis effect on individual values that may have a reinforcing or countervailing effect on the legal innovation. Our model of countervailing norms complements the existing literature on expressive law, by showing conditions under which the equilibrium behavior may move in the opposite direction from that intended by the law. Our model studies the dynamics of such problem and unveils several important predictions and practical implications for the design of law.

Expressive law, Social Norms, Civil Disobedience, Legislation, Custom

Abstract:
Law and economics shows that a key factor in determining the optimal economic loss rule is found in the relationship between pure economic loss and social loss. Economic loss should be compensable in torts only to the extent that it corresponds to a socially relevant loss. In this paper we undertake a comparative evaluation of the economic loss rule to verify whether modern legal systems, although not formally adopting the economic criterion, define the exclusionary rule in light of efficiency considerations. The comparative analysis reveals that the substantive applications of the economic loss rule in European jurisdictions are consistent with the predicates of economic analysis.

Comparative law, Pure economic loss, Economic loss rule

Abstract:
In ancient societies, rules of communal responsibility permitted the imposition of retaliatory sanctions on a wrongdoer's clan. These rules followed the collective ownership structure of early communities. Over time, notions of personal responsibility emerged, terminating the transfer of responsibility from one member to the whole clan. This paper intends to provide an economic explanation for this transition.

communal liability, tort, ancient law, primitive society, group liability

Abstract:
Calabresi often lamented that insufficient consideration had been given in the legal and economic literature to the idea of distributing an accident loss among a faultless tortfeasor and an innocent victim on the basis of the relative causal contribution of the parties to the loss. This criterion of apportionment of liability, which Calabresi calls comparative causation, is the object of this paper. We present a brief intellectual history of the principle of comparative causation, and provide a positive economic model that explains the rise and fall of this criterion of liability in historical and contemporary societies. In order to identify the structural features of this standard, we consider how a rule of comparative causation would perform in the absence of other liability rules, when applied as a general and sole basis of liability. The positive economic model of comparative causation brings to light some interesting features of the rule, but also unveils the limits of such criterion of liability with respect to the induced activity and care levels. The paper then extends the economic model to consider the workings of the comparative causation rule in conjunction with negligence rules. The combined application of the comparative causation and negligence rules induces the parties to minimize their expected liability by moderating their activity level: a combination of incentives that no known liability rule provides.

torts, liability, comparative causation, negligence

Abstract:
In this paper I consider the twofold relationship between freedom of contract and entropy in property. Recent literature on property fragmentation suggests that property is subject to a fundamental law of entropy, leading towards increasing property fragmentation. After considering the legal responses to the problem of entropy, I revisit the above debate considering the relevance of freedom of contract to achieve optimal outcomes in a world of imperfect information and positive transaction costs. In such a context, I discern two analytically distinct ways in which freedom of contract contributes to minimizing the problems of entropy. I conclude that entropy is not an ontological problem, but is often the byproduct of the uncoordinated use of institutional and legal constraints on free contractual arrangements.

Abstract:
One of the most controversial theoretical issues of our time is the governance of cybersecurity. Computer security experts, national security experts, and policy analysts have all struggled to bring meaningful analysis to cybersecurity; however, the discipline of law & economics has yet to be fully applied to the issue. This introduction presents work by leading national scholars who examine this complex national security challenge from a law and economics perspective. The focus spans from a discussion of pure market solutions to public-private issue analysis, providing a valuable basis for policy considerations concerning the appropriate governmental role on the issue of cybersecurity.

Cyberlaw, Criminal Law, Regulatory Law

Abstract:
In this paper we revisit Tullock's (1980) paradox and consider a rent-seeking game in which parties face increasing returns to effort. We allow parties to randomize their strategies and give them an exit option. Given the mixed participation strategies of the parties, valuable rents may occasionally remain unexploited. We consider such a lost-treasure effect as an additional cost of rent-seeking and examine how the expected value of such a lost rent varies with changes in the parameters of the problem.

rent-seeking, rent dissipation, Tullock's paradox

Abstract:
The presence of multiple sellers in the provision of (nonsubstitutable) complementary goods leads to outcomes that are worse than those generated by a monopoly (with a vertically integrated production of complements), a problem known in the economic literature as complementary oligopoly and recently popularized in the legal literature as the tragedy of the anticommons. We ask the following question: how many substitutes for each complement are necessary to render the presence of multiple sellers preferable to a monopoly? Highlighting the asymmetries between Cournot (quantity) and Bertrand (price) competition and their dual models, we show that the results crucially depend on whether firms compete by controlling price or quantity. Two substitutes per component are sufficient when firms choose price. However, when firms choose quantity, the availability of substitutes, regardless of their number, is ineffective. Considering more complex cases of multi-complementarity, we ask the related question of how many complements need to be substitutable and offer comments on equilibrium prices and quantities under different scenarios.

D43, D62, K11, L13

Abstract:
The presence of multiple sellers in the provision of (non-substitutable) complementary goods leads to outcomes that are worse than those generated by a monopoly (with a vertically integrated production of complements), a problem known in the economic literature as complementary oligopoly and recently popularized in the legal literature as tragedy of the anticommons. We ask the following question: how many substitutes for each complement are necessary to render the presence of multiple sellers preferable to monopoly? Highlighting the asymmetries between Cournot (quantity) and Bertrand (price) competition and their dual models, we show that the results crucially depend on whether firms compete by controlling price or quantity. Two substitutes per component are sufficient when firms choose price. However, when firms choose quantity, the availability of substitutes, regardless of their number, is ineffective. Considering more complex cases of multi-complementarity, we ask the related question of how many complements need to be substitutable and offer comments on equilibrium prices and quantities under different scenarios.

Anticommons, complementary inputs, oligopoly, antitrust, competition

Abstract:
The legal landscape is changing, adapting to the global market. Differences between legal systems hinder transnational commerce. Countries reduce legal differences through non-cooperative and cooperative adaptation processes that alternatively lead to legal transplantation or harmonization. Switching costs render unification difficult. Cooperation reduces differences to a greater extent but rarely leads to legal unification. In this paper we unveil a paradox of legal harmonization. When switching costs are endogenous, countries engaging in cooperative harmonization may end up with less harmonization than those pursuing non-cooperative strategies.

legal harmonization, legal transplantation, transnational contracts, legal change

Abstract:
In most legal systems, Copyright law provides a copyright holder a vast choice of remedies against infringement of his work, including property-type remedies (e.g., injunction to restrain the infringer from violating his rights or even the impoundment and destruction of the unauthorized reproductions of his work) and liability-type remedies (e.g., actions to recover the actual damages and to disgorge the additional profits realized by copyright infringer or to collect statutory damages). In the U.S. all the above choices of remedies are made available by the Copyright Act, which also provides that, in a civil action for copyright infringement, a court may grant temporary and final injunctions to prevent or restrain infringement of a copyright.

This paper suggest that a selective use of remedies may be appropriate to minimize the effect of fragmentation and strategic pricing. As a matter of ideal theory, anti-commons losses will result from the imposition of property-type (i.e., injunction) remedies. If copyright owners are given only a damage remedy for the infringement of their work, there is no opportunity for strategic pricing and thus no anti-commons deadweight loss. If liability-type remedies are limited, the infringer has considerable leverage with the copyright owner because he always has the option to use without permission and pay damages. Under a liability rule, the prospective buyer of a copyright license could not be induced to pay more than the cost of his expected liability for copyright infringement. At the limit, a copyright holder can obtain a judicial declaration of his rights, but the defendant can persist in the violation simply by paying damages. In contrast, in the case of property-type (i.e., injunction) protection, a copyright license can be obtained only if the current owner agrees to sell it at the price he demands. Absent such agreement, upon proof of a valid copyright an owner could obtain an injunction to enforce his rights. Under such a regime, strategic pricing of multiple complementary copyrights could lead to substantial dissipation of value.

The case of Tasini v. New York Times Co., which the Supreme Court decided in June 2001, attracted media attention and involved celebrities such as film maker Ken Burns because it appeared to pit the rights of authors to protect their creative works against the nation's need to preserve its historical record. In an amicus brief, the American Library Association argued that the above economic rationale should be used in Tasini. Presumably because electronic databases meet some of the Fair Use criteria (e.g., educational purpose), the appropriate solution would be to attach a price to the use of the material rather than prevent access to it altogether. The majority picked up on the argument, citing Campbell when remanding the case, a hint that it would provide appropriate guidance in crafting the ultimate remedy.

The lesson to be drawn, therefore, is that legal systems should not change the scope of the fair use defense, or the choice of remedy in case of infringement, even with decreasing transaction costs in an increasingly electronic marketplace. Rather, the doctrine of Fair Use should be a bridge between traditional copyright enforcement and protection in the Digital Age. Leaving both the scope of fair use and the arsenal of copyright remedies unchanged could minimize anti-commons losses; conversely, a reduction in the scope of fair use defenses might have the effect of increasing them. In such case, the use of liability-type remedies in the new domains of copyright protection would help contain the deadweight losses from strategic pricing. As Tasini demonstrates, this scenario is far from theoretical.

Viewing property law through the lens of economic analysis highlights the difficulties associated with balancing economic efficiency with the realities of high transaction costs and other situations in which the various actors involved are precluded from reaching an efficient agreement. Understanding the tendency towards entropy and the characteristics of an anti-commons situations sheds light on why the common law has developed certain rules and how these norms, which may be initially puzzling, are in fact effective responses to potentially difficult questions. Courts are beginning to use these concepts as practical tools in resolving cases. As demonstrated by the Tasini case, anti-commons analysis in particular illuminates the way to crafting a judicial remedy that will both be faithful to the letter of the Copyright Act and avoid collateral damage in terms of restricting access to a vast and important store of information. In particular, anti-commons theory demonstrates that the doctrine of Fair Use, far from being close to obsolete, has promise an important bridge between traditional and digital copyright protection.

Abstract:
European lawmakers are undertaking important steps towards the harmonization, unification, and possible codification of some areas of European private law. In doing so they can choose to craft laws with different levels of detail to guide judges in their decision-making process, incorporating rules or standards into the laws they write. The optimal degree of specificity of legal rules under different environmental conditions and the functionality of these rules or standards are the subject of the present study. First, a basic model of optimal specificity of laws is presented, clarifying the relevance of legal obsolescence and volume of litigation in the optimal choice. We further consider the important influence of codification style, judges' specialization, and complexity of reality on the optimal choice of legislative instrument. The results shed some light on the historical patterns of legislation in various areas of the law, and provide some policy recommendations for the ongoing process of codification in the European context.

Rules, Standards, Legislation, Codifications, Optimal Specificity of Laws

Abstract:
In a bilateral contract, should a breaching party be allowed to force the performance of his non-breaching counterpart? Should a breaching party be able to collect damages in contract if his counterpart was also in breach? In this paper we examine these interrelated questions. We consider situations where parties enter into a bilateral contract making reciprocal promises of performance. We extend the standard models of remedies in contracts to consider alternative breach remedies. The paper shows the distortion of incentives created by the application of a defense of non-performance in unilateral breach cases and by the application of preclusion rules in bilateral breach cases.

Bilateral Contracts, Contract-Specific Investments, Remedies for Breach, Defense of Non-Performance, Preclusion Rules

Abstract:
A game-theoretic analysis of forum shopping reveals how opportunities for strategic choices can influence the behavior of plaintiffs and defendants. If neither party has the opportunity to make strategic choices about participation or forum choices, we should expect no adverse selection or moral hazard problems. By contrast, if only one of the parties can control both the participation and forum selection choices, then we could expect pervasive adverse selection and moral hazard problems. In this paper we build on this simple game-theoretic framework, to analyze Dreyfuss and Ginsburg's (2001) Draft Convention on Jurisdiction and Recognition of Judgments in Intellectual Property Matters. We suggest that if the parties are faced with a bilateral strategic problem (i.e., if one party has control over one strategic choice and the other party has control over the other strategic choice), the extent of opportunistic behavior by either party, and the resulting deadweight losses, are likely to be minimized. In this respect, the Dreyfuss-Ginsburg proposal sensibly minimizes the strategic problems of forum shopping and creates an enforcement scheme which leaves intact the innovation incentives underlying intellectual property rights.

Abstract:
We consider the impact of different choice-of-law regimes on the evolution of formal law. We follow an evolutionary approach to explain possible patterns of legal harmonization and competition. Some of them predict the universal diffusion of a single rule, even though not necessarily efficient. Permissive choice-of-law may lead countries to keep inefficient legal rules and firms to opt out of domestic law, leading to a dichotomy between the rules existing in the books and those utilized in commercial relationships. The emergence of such lex mercatoria may further undermine the legislative incentives to switch to more efficient rules.

Choice of Law, Transnational Business Law, Legal Harmonization, Legal Competition, Network Effects

Abstract:
The study of the use of reservation in multi-lateral treaties reveals two striking phenomena: 1) the law of reservations, enshrined in Articles 19-21 of the Vienna Convention on the Law of Treaties, favors the reserving state; and 2) the number of reservations attached to international treaties is relatively low in spite of that natural advantage. The article draws on game theory to explain the states' behavior concerning reservations to international treaties and posits that Article 21 (1) of the Vienna Convention is a good place to search for an explanation. This provision establishes the concept that reservations are reciprocal: between a reserving state and a state that objects to the reservation, that provision of the treaty will not be in force. Therefore, if a state wants to exempt itself from a treaty obligation, it must be willing to let other nations escape that same burden as well. By considering different kinds of treaties in light of various game theory models, the article considers why most treaties have relatively few reservations, whereas human rights treaties present a notable, and disappointing, exception to this general rule.

Abstract:
Reciprocity constraints facilitate the achievement of cooperative outcomes in many game-theoretic settings. Yet, in some situations the equilibrium induced by a reciprocity constraint may not be socially optimal. After presenting the case in which reciprocity yields privately and socially optimal levels of cooperation, this paper identifies the conditions under which reciprocity generates inefficient cooperation. Two groups of cases are presented. In one group reciprocity undershoots (i.e., the parties cooperate less than is socially optimal). In the other, more puzzling case, reciprocity constraints overshoot (i.e., the parties are induced to cooperate more than is socially optimal). This paper identifies the conditions for such occurrences. The paper then examines the ability of a reciprocity constraint to induce a reciprocal social optimum, where a social optimum requires equal levels of effort by the two parties, and identifies situations where reciprocity fails to induce such an optimum.

Reciprocity, Cooperation, Conditions for Social Optimum

Abstract:
Due to a variety of circumstances, lawmakers occasionally create laws whose aims are perceived as outright unjust by the majority of the people. In other situations, the law may utilize improper means for the pursuit of a just goal. In all such cases, lawmaking processes generate rules that do not reflect the values of the underlying population. In these cases individuals may face legal commands or prohibitions that conflict with their sense of justice or fairness. Individuals can oppose unjust laws through protest. Social opposition to unjust laws may trigger social norms that can have countervailing effects on legal intervention. The dynamic effects of these phenomena are the object of this paper.

Social Norms, Countervailing Effect, Expressive Function, Law Enforcement, Civil Disobedience

Abstract:
In this article, we suggest that human attitudes of conformity can be understood as a product of adaptation. While existing models of conformity invoke preference falsification in which individuals hide their true preferences, we posit an adaptive mechanism for conformity. Specifically, because non-conformity leads to costs as a dissenting individual is shut out of social networks and majority coalitions in the collective choice context, individuals have an incentive to sublimate their original preferences to a meta-preference for conformity. However, this adaptation is not costless. Resisting original preferences imposes self-denial costs on an individual that may exceed the benefits of conforming. Further, a conforming individual foregoes the small probability that his first-best original preferences will be realized. Thus, this preference modification model of conformity predicts that individuals with high self-denial costs and lower levels of risk aversion will be less likely to conform.

Conformism, Endogenous Preferences, Social Networks, Preference Falsification

Abstract:
In spite of its stability as a fundamental institution of human society, the concept of property and the privileges, obligations, and restrictions that govern ownership have undergone substantial change throughout history. In this essay, I consider the main stages in the evolution of property and discuss some of the important structural variations of the legal and social conceptions of property. The comparative and historical study of the institution of property reveals a close relationship between the structure of an economic system and the structure and content of property rights.

structure of property, origins of property, functional property, spatial property

Abstract:
The optimal scope of legal harmonization and the desirable patterns of lawmaking vary according to current legal, social and economic conditions. In this paper we specify a positive and testable hypothesis according to which legal systems respond to exogenous changes in the external environment by adopting varying patterns of lawmaking, thus maximizing the value of legal intervention. The anecdotal historical evidence discussed in this paper is consistent with this hypothesis. Modern codifications are a good piece of evidence to consider, since they were written and enacted in a unitary fashion.

Legal Harmonization, Optimal Design of Codes, Legal Change

Abstract:
Institutions often utilize matching rules to facilitate the achievement of cooperative outcomes. Yet, in some situations the equilibrium induced by a matching rule may not be socially optimal. After presenting the case in which matching rules yield privately and socially optimal levels of cooperation, this paper identifies the conditions under which they would instead generate inefficient cooperation. Two groups of cases are presented. In one group matching rules undershoot (i.e., the parties cooperate less than is socially optimal). In the other, more puzzling case, matching rules overshoot (i.e., the parties that interact under a matching constraint are induced to cooperate more than is socially optimal). This paper identifies the conditions for such occurrences. The paper then examines the ability of a matching rule to induce a socially optimal level of cooperation, where a social optimum requires equal levels of effort by the two parties, and identifies situations where matching rules fail to induce such an optimum.

Conditions for social optimum, Cooperation, Matching rules

Abstract:
Existing treatments of the choice of an optimal voting rule ignore the effects of the rule on political bargaining.
Specifically, more stringent majority requirements reduce intra-coalitional free riding in political compromise, leading to greater gains from political trade. Once this benefit of increasing the vote share necessary to enact a proposal is recognized, we suggest that the optimal voting rule in the presence of transactions costs will actually be closer to unanimity than the optimal majority derived by Buchanan and Tullock (1962).

analysis of collective decisions, welfare economics

Abstract:
In this paper, we study a two-stage rent-seeking game. In the first stage, contestants compete a-la-Tullock; in the second stage, the winner can resell the rent a-la-Coase. We consider a complete information Tullock game in which the contestants have different valuations for the rent. The analysis focuses on the ex ante effects of a secondary market on efforts, payoffs, rent-dissipation and rent-misallocation. We show that the secondary market, while correcting possible misallocations, may exacerbate rent dissipation. In some situations, the increase in rent dissipation more than offsets the allocative advantage, so that a secondary market might reduce welfare. We further show how the effect of ex post tradeability on welfare depends on the parties' bargaining power and valuations of the rent, also considering the case of endogenous bargaining power.

Rent-seeking, asymmetric rent valuations, rent-dissipation, rent-misallocation

Abstract:
This paper develops a stylized model of international treaty formation and analyzes the different modalities with which states can become part of an international treaty according to the procedures set forth by the Vienna Convention on the Law of Treaties. We consider the rules governing accession to international treaties, distinguishing between three situations: (i) Treaties for which acceptance of a new member requires unanimous approval of the signatory states with an amendment of the original treaty agreement (closed treaties); (ii) Treaties where acceptance of a new member is made possible through the approval by a majority of the existing member states (semi-open treaties); and (iii) Treaties where the original member states have agreed to leave the treaty open for accession by other states (open treaties). Our analysis reveals the effect of the choice of accession regimes on the evolution of the treaty membership and content.

Treaty Formation, Accession, Vienna Convention

Abstract:
In a world with multiple, overlapping jurisdictions, any given litigation could be pursued in more than one forum. Different laws can yield different outcomes. This leads to parties selecting a forum perceived as favorable to file suit. This practice, also known as forum shopping, has been much criticized, and various reforms to the law of conflicts of law have been proposed as a way to reduce this practice. The article examines the inefficiencies associated with forum selection, and the alleged shortcomings in conflicts law as it currently exists. We argue that forum selection cannot be eliminated in a world with multiple jurisdictions. Further, we argue that conflicts law has evolved, and continues to evolve, so that it tends toward correcting inefficiencies associated with the system. We draw an analogy between the system of conflicts of law and a market, where, despite the fact that the actors lack perfect information, the outcome is largely efficient. Therefore, conflicts of law might be considered to be an example of spontaneous order.

Abstract:
While much is known about what types of norms are sustainable as rules of behavior, a lot remains to be done to understand the conditions that foster the emergence of efficient norms. This paper provides a contribution to this field, revisiting the conventional wisdom concerning the effect of role reversibility and stochastic ignorance on the emergence of norms. We develop a model of norms formation to study the differences and limits of role reversibility and stochastic ignorance. Role reversibility and stochastic ignorance are environmental conditions that minimize the strategic bias of individual choice. Under role reversibility, individual agents engage in actions knowing that in future time periods there may be a reversal of roles with other players. Each agent maximizes his or her expected payoff, knowing the status quo at the time of the action as well as the ex ante probabilities about his or her future roles. With role reversibility, a party's choice is influenced by the immediate cost of compliance with a norm. In contrast, under stochastic ignorance, players make their choices under a Harsanyi-type veil of uncertainty. Norms that are chosen under conditions of stochastic ignorance can be separated from those chosen under a role-specific context that clouds and biases the formation of norms. Consequently, norms that emerge under stochastic ignorance are more likely to be closer to first-best and to satisfy parties' participation constraints at any given time than are norms chosen under conditions of role reversibility.

social norms, role-reversibility, stochastic ignorance, veil of uncertainty, custom

Abstract:
In this paper we analyze the factors that should be considered when allocating a given policy function at a particular level of government and how these factors affect the growth and evolution of multi-level governments. After discussing the interplay of economies of scale, economies of scope, and heterogeneity of preferences in determining the optimal level of legal intervention, we show that the subsidiarity principle can have mixed effects as a firewall against progressive centralization. Our economic model of subsidiarity reveals that once some functions become centralized, further centralization becomes easier and often unavoidable. Contrary to its intended function, a piecemeal application of the subsidiarity principle can trigger a path-dependent avalanche of centralization, turning subsidiarity into a self-defeating statement of principle.

Subsidiarity, Rule Competition, Centralization, Economies of Scope

Abstract:
In this paper we consider the role of governments in designing their policy for tax planning strategies. We consider two distinct types of social costs: the cost associated with lost tax revenue, and the cost that arises from taxpayers' search for new methods to reduce their tax burden. Inevitably, reducing one of these costs comes at the expense of increasing the other; the government faces a tradeoff. By recognizing these costs and the tradeoff the government faces, we can better understand current tax policy. Moreover, a wider recognition of the tradeoff described above, and a systematic consideration of how to disrupt markets in tax planning activities, should lead to better tax policy.

tax planning, tax enforcement policy, dissipation

Abstract:
While much has been written about inter-jurisdictional competition for tax revenues, especially concerning the choice between harmonization and competition, the literature has largely ignored intra-jurisdiction issues. The few articles examining this issue focus on how lower level governmental entities react to the tax decisions of a national government. However, in some instances, multiple co-equal taxing authorities might share the same base. These bodies face a dilemma over whether to harmonize their policies or to compete. We present a simple model of revenue maximizing tax authorities and derive the conditions under which harmonization dominates competition.

Tax, Federalism, Harmonization, Rent-Seeking, Commons

Abstract:
In the original position meta-bargain among political agents, each can achieve higher expected utility by binding himself to a unanimity rule, rather than risk the chance of being an excluded party in later period-by-period bargains. This argument is illustrated for a three-agent, constant-sum game where there are three reasonable voting rule options: 1) dictatorship rule; 2) majority rule; or 3) unanimity rule. Given concave utility functions, by Jensen's Inequality, each player would prefer the coalition inclusion guaranteed by the unanimity rule as opposed to the possible exclusion inherent in the other two options. However, once transactions costs are considered, a unanimity rule will create situations where all voters might agree in principle to a policy proposition, yet they will fail to reach a unanimous consensus.

Abstract:
Punitive damages and class actions can be viewed as sharing a common economic function - creating optimal deterrence. This is a function that these remedies can best pursue in different domains. When a tortfeasor causes harm that affects many victims, the preferred remedy is a class action. This is especially so when the amount of compensatory damages are high. There are scenarios, however, in which imposing punitive damages represents the best solution. We identify some of these scenarios to suggest the proper domains of these two remedies. Finally, we identify situations where a combined use of these two remedies is desirable. We suggest that when the amount of losses suffered by victims is so small as to preclude a class action due to transaction costs and inactivity, it may nevertheless be useful to combine punitive damages with a class action. Punitive damages should be awarded within a class action if and only if there are frictions that could prevent the injured party from taking legal action.

punitive damages, class actions

Abstract:
In this paper we analyze the factors that should be considered when allocating a given policy function at a particular level of government and how these factors affect the growth and evolution of multi-level governments. After discussing the interplay of economies of scale, economies of scope, and heterogeneity of preferences in determining the optimal level of legal intervention, we show that the subsidiarity principle can have mixed effects as a firewall against progressive centralization. Our economic model of subsidiarity reveals that once some functions become centralized, further centralization becomes easier and often unavoidable. Contrary to its intended function, a piecemeal application of the subsidiarity principle can trigger a path-dependent avalanche of centralization, turning subsidiarity into a self-defeating statement of principle.

Subsidiarity, Rule Competition, Centralization, Economies of Scope

Abstract:
In this paper we study the strengths and weaknesses of the matching-reservations mechanism introduced by Article 21 of the Vienna Convention. When states face asymmetric incentives, the rules introduced by the Vienna Convention may not discourage all reservations. We also analyze the welfare properties of the matching-reservations outcomes generated by Article 21 when such asymmetric incentives are at work. We show that Article 21 provides quite an effective solution to the prisoner's dilemma problem, but does not always induce socially optimal levels of ratification. A social optimum will be achieved under Article 21 only in the limited subset of cases where signatory states have homogeneous payoff functions, or when all states prefer full ratification, despite the differences in the incentives that they face.

Reservations, Treaty ratification, Vienna Convention

Abstract:
In this article we study the related doctrines of frustration of purpose and practical and economic impossibility. Frustration of purpose is a defense to the enforcement of a contractual obligation that becomes available when an unforeseen event undermines the purpose for entering into a contract. The rules governing frustration of purpose share a common logic with the related doctrines of practical impossibility and economic impossibility. In this paper we consider the solutions adopted by European legal systems in a comparative law and economics perspective. From an economic point of view the issues that acquire relevance in the face of impossibility of performance can be grouped in three main categories, namely: (a) risk-allocation function, (b) information harvesting function, (c) incentive function. We examine the ability of alternative legal rules to fulfill one or more of these economic functions. We further observe that the choice of rules in this area of the law should be particularly attentive to the impact of transaction costs. Frustration and impossibility in contracts are rare occurrences. It is inefficient and often impractical to allocate the risk of unexpected contingency at the time the contract is made, and the remedy of discharge seems to be a desirable default allocation of the risk between the parties, where renegotiation of the contract remains a viable ex post option to capture the benefits of the original contract.

frustration of purpose, practical impossibility, economic impossibility, risk-allocation

Abstract:
In a recent article, Gersen and Posner (2007) examined the role of timing rules in promoting the optimal timing of legislative action. In this brief essay, we address the issue of optimal timing of lawmaking through the lens of option theory. We provide a formalization of seven alternative timing rules and evaluate the option value of those legislative strategies. This formalization allows us to evaluate the desirability of alternative timing rules in different regulatory environments.

Legislation, timing, option value, rules, standards

Abstract:
The polluter-pays principle stipulates that the person who damages the environment must bear the cost of such damage. A number of developing countries have recently extended this principle to create an obligation on the state to compensate the victims of environmental harm. This variation of the polluter-pays principle is aimed at ensuring victims' compensation when polluters cannot be identified or are insolvent. These regimes hold state and local governments primarily or jointly-and-severally liable for environmental damage and allow the government to act in subrogation against the polluters. In this paper we study the effect of this form of governmental liability, which we describe as the polluter-does-not-pay regime, on the polluters' incentives and on aggregate levels of environmental harm. We develop an economic model to study the polluter-does-not-pay principle, identifying the conditions under which this regime may be a more effective instrument for environmental protection. We conclude by suggesting that this regime may be desirable in environments characterized by widespread poverty, high interest rates, judicial delays and uncertainty in adjudication.

environmental protection, polluter-pays principle, state laibility

Abstract:
We consider the role of status quo bias and Bayesian learning on the creation of new legal rights utilizing a model of legal evolution in which judges have limited discretion to create new precedent based on personal values, but, in the long run, are constrained by efficiency criteria. Our model demonstrates that status quo bias may effectively transform an ex ante inefficient rule into an ex post efficient rule. Because these legal rights are internalized over time through a process of Bayesian learning, new precedent is vulnerable to reversal until the new right has been sufficiently recognized and accepted.

Status quo bias, Bayesian Learning, Legal Evolution, Legal Rights

Abstract:
Although most individuals recognize the necessity of taxation, few like to pay taxes. Governments face costs to collect taxes; people expend resources to legally avoid taxation. Such expenditure represents social waste, as it is a form of rent-seeking. This gives rise to a modified Samuelson Rule which considers this additional cost of taxation. Since there is a market for tax planning methods, the magnitude of these costs depends on the market structure. We consider how a government might reduce tax planning by creating market inefficiencies or failures. We set forth a formal economic model to identify the optimal amount of tax planning the government should permit, and consider how governmentally-created market failures could be implemented.

optimal taxation, tax avoidance, public goods, patents, market failure

Abstract:
The process of implementing new laws in an environment of social change shares many characteristics with the process of making investment decisions under uncertainty. In any society that is not totally static, the law maker faces uncertainty about its evolution. Thus, the lawmaker cannot know with certainty what the appropriate law will be in the future, and therefore cannot know with certainty what the future stream of benefits from the law will be. In addition, implementing a new law necessitates the outlay of resources in formulating and enforcing the law, just as investment in a new project does. The costs of implementing a new law are largely sunk, and irreversible. That is, the costs of implementing the law cannot be recovered if the law turns out to be inappropriate in any way. Thus, the lawmaker faces a decision akin to an irreversible investment under uncertainty. Timing of the investment is therefore a critical issue for irreversible investments. When the lawmaker chooses to invest in the new law, he gives up the option to wait to implement the law at some future time. This option is the opportunity cost of investing today. At the same time, there is a cost in delaying the implementation of new laws, due to the decreasing effectiveness of the old laws in the changing social environment. That is, there is an "opportunity benefit" in investing today. In determining the optimal timing of adoption of new laws, the value of the option of waiting must be taken into account. We present a formal model drawn from the investment literature to demonstrate the value of waiting, and discuss its implications in the context of two real world legislative problems, environmental laws and privacy regulation. In both cases, there might be a cost in delaying investment in new laws, in that the damage to the environment or privacy could be irreversible. On the other hand, the benefits of the laws are hard to estimate. In addition, compliance costs might be very large, and the value of waiting correspondingly important in the decision to invest in lawmaking.

Abstract:
The different role played by case law and the historical and conceptual differences between the doctrines of precedent in common law and civil law traditions are important determinants of judicial creativity. In this article we consider a hybrid version of stare decisis, called with the French name of jurisprudence constante, adopted by mixed jurisdictions. Unlike stare decisis which allows a single precedent to establish case law, the doctrine of jurisprudence constante links the recognition of a judge-made rule to the existence of a consecutive line of decisions affirming the same legal principle. We develop a model to consider the effects of this doctrine on the social costs arising from judicial error and uncertainty in case law. We further consider the effects of these alternative doctrines of precedent on judicial creativity and ideological bias in judge-made law.

judicial errors, stare decisis, jurisprudence constante

Abstract:
In this paper we study price competition, equilibrium market configurations and entry when firms compete in vertically-di¤erentiated markets producing complementary goods. We consider two complements and start from a configuration where the market for one complement is a duopoly, whereas the other is a monopoly. In such framework, when products are highly di¤erentiated, the low-quality duopolist is always pushed out. We then allow for competition between complements on both sides of the market: one of the duopolists starts to produce also the other complement and decides whether to offer its two products as a bundle or to allow consumers to combine them with complements from other producers. We prove that this strategy always allows the low-quality duopolist to stay in the market, no matter if the duopolist producing both complements is the high or the low-quality one. Moreover, this strategy always increases consumer surplus, even when the duopolist sells the two complements only as a bundle.

complements, bundling, anticommons, antitrust, integration, vertical differentiation

Abstract:
Comparative causation is the only tort regime that allows parties to share an accident loss in equilibrium. The sharing of an accident loss between a nonnegligent injurer and his nonnegligent victim spreads activity level and R&D incentives between prospective tortfeasors and their victims. This is an effect that is never observed under the other negligence and strict liability based regimes. In spite of these interesting attributes, the existing literature left open the question as to whether loss sharing was able to maintain optimal care incentives for both parties. In this paper, we address this unresolved issue in the literature, considering the effciency of loss-sharing under comparative causation.

torts, loss-sharing, negligence, strict liability, comparative causation

Abstract:
The law and economics literature on the tragedy of the anticommons suggests that producers of complementary goods should integrate themselves. Recent decisions by the antitrust authorities seem to indicate that there is tradeoff between the “tragedy” and the lack of competition which might exist in an integrated market structure. In this paper we analyze such tradeoff in oligopolistic complementary markets when products are vertically differentiated. We show that quality leadership plays a crucial role. When there is a quality leader, forcing divestitures or prohibiting mergers, thus increasing competition, lowers prices and enhances consumer surplus. However, when quality leadership is shared, “disintegrating” firms may lead to higher prices. Therefore, concerns about the tragedy of the anticommons are well posed in antitrust policies.

, anticommons, competition, mergers, vertical differentiation

Abstract:
This paper presents a general rent-seeking model in which participants decide on entry before choosing their levels of efforts. The conventional wisdom in the rent-seeking literature suggests that the rent dissipation increases with the number of potential participants and with their productivity of effort. In this paper, we show that this result of the rent-seeking literature is far from general and applies only when participants are relatively weak and enter the game with certainty. In the presence of strong competitors, the expected total dissipation actually decreases, since participation in the game is less frequent. We further consider the impact of competitors' exit option, distinguishing between "redistributive rent-seeking" and "productive rent-seeking" situations. In redistributive rent-seeking, no social loss results from the fact that all competitors exit the race. In productive rent-seeking, instead, lack of participation creates a social loss (the "lost treasure" effect), since valuable rents are left unexploited. We show that the lost-treasure effect perfectly counterbalances the reduction in rent dissipation due to competitors' exit. Hence, unlike redistributive rent-seeking, in productive rent-seeking the total social loss remains equal to the entire rent even when parties grow stronger or the number of players increases.

Rent-seeking, rent dissipation, Tullock's paradox

Abstract:
Democracy gives equal weight to all votes regardless of how strongly voters feel about an issue. Consequently, numerically equal groups have an equal political say in the process. However, if the distribution of sentiments on an issue is asymmetrical, and the minority holds strong preferences, the outcome would be inefficient. By introducing the possibility of bargaining and vote-trading in the process, the intensity of preferences will be eflected in the decision-making process. With bargaining and side-payments, the "one man, one vote" rule would provide the initial entitlement for each voter-trader. The exchange mechanism would then reveal the relative strength of individual preferences. Political bargaining may provide a solution to the intensity problem, while at the same time correcting the cyclicality problem. Logrolling and political bargaining in many ways increase the internal predictability of the outcome for those who are involved in the process and are fully informed of it.

Logrolling allows for bargaining and political exchange to foster stable political arrangements. To the extent to which political exchange is supported by enforcement mechanisms (e.g., reputation of political players, etc.) legislators sharing similar information on their respective prospects will have an opportunity to bargain under conditions of symmetric information, trading votes for issues on which they hold weak preferences in exchange for votes on issues which they more highly value. Economic theory teaches us that bargaining between politicians will continue until the marginal utility of gaining one vote on a certain issue equals the marginal cost of giving up one vote for another issue. The outcome selected by majorities in such an environment of costless and enforceable political bargaining improves the combined welfare of the platforms.

These considerations will hopefully facilitate the assessment of the normative implications of the "commodification" of political consensus. While certainly corroding some of the aspirational and expressive qualities of the political system, logrolling would ensure a greater opportunity for cardinal preferences to be captured in political decisions-making.

Abstract:
According to the general wisdom in the finance literature, the bid-ask spread on a security is viewed as a form of transaction cost faced by security traders. In both floor and screen markets, traders are willing to pay this transaction cost in order to obtain immediacy in the execution of their transaction. The dealer sets his ask and bid prices on the basis of the expected conditions of the market and the marketability of the specific security, thus providing immediate liquidity to potential buyers and sellers. Dealers generally set the ask and bid prices around the actual price, expecting profits from the random orders of buyers and sellers.

Given the specific function of the dealers, the theoretical finance literature has identified three main determinants of the bid-ask spread in a competitive market. Namely, the spread represents a measure of the price of the dealer's services given (a) the operational efficiency of the trading system (operational efficiency formulation); (b) the degree of a security's marketability (inventory hypothesis); and (c) the presence of private information of the traders (adverse information hypothesis).

This comment considers the impact of different methods of trading (and different levels of anonymity in trading) on the operating costs and adverse selection costs. The paper presents an interesting case of bilateral adverse selection, analyzing it from a theoretical perspective.

(A) Traders' Adverse Selection. The first form of adverse selection depends on the traders' use of superior private information. The effects of this form of adverse selection are not different from those of the lemons problem, a well-known asymmetric information problem considered by Akerlof (1970). Costs are imposed on dealers who react by adjusting the bid-ask spreads in the trading of the stock. This asymmetric information problem is related to the level of private information which is likely to be present. Likewise, the adverse selection problem increases with the percentage of traders that operate on the basis of superior private information.

By assumption, dealers have greater ability to identify and discriminate between different types of traders in the floor market. Anonymity enhances the ability of traders to take advantage of private information that they possess, since dealers cannot differentiate between the two types of traders and cannot penalize information-driven traders in subsequent dealings. Floor trading attenuates these problems and thus dealers can afford to keep lower spreads to the benefit of the mass of liquidity-motivated traders.

(B) Dealers' Adverse Selection. The presence of parallel screen and floor markets creates an opportunity for dealers to react to the traders' adverse information problem in ways that are different from the usual edging of potential losses with larger spreads.

Dealers can engage in adverse selection on their part by choosing different spread levels in the two markets and consequently changing the relative market share of each stock in the two trading systems. Dealers thus respond to the traders' adverse selection by engaging in selective fixing of spread levels and, as a result, induce different choices of trading systems.

In first analysis, the presence of bilateral adverse selection strategies would suggest the emergence of a separating equilibrium: information-motivated traders would generally prefer to trade in anonymous screen markets at higher spread costs, while liquidity-motivated traders would be less willing to pay the spread premium, since they draw no immediate financial benefit from the anonymous form of trading. This separating equilibrium, however, would likely encounter further adjustments. As a result of the initial matching of trader-type and market form, the density of information-driven traders in the two markets would change, rendering further increases of the bid-ask spread necessary. This will induce some of the information-driven traders to drop out of the screen market, since the higher spread costs are no longer justified by the limited private information that they possess. Only high private information traders would thus be willing to pay the increased spread costs in order to ensure anonymity. In a frictionless world, this bilateral adverse selection problem would unravel until all private information traders would drop out of the screen market entirely to avoid the yet higher spread costs imposed by dealers on anonymous traders.

In a nutshell, the static adjustments would yield a selection of traders on the basis of their "information level" (or trading motivation). The result is a separating equilibrium where different types of traders will choose different markets according to whether the expected profit from the use of private information justifies the higher premium (i.e., higher bid-ask spread). Alternatively, dynamic adjustments would yield an unraveling such that, in equilibrium, only one market would be utilized for each type of stock.

In a world of perfect mobility, however, the bilateral adverse selection dynamic described above would naturally lead to corner solutions where each market would ultimately dominate for the trade of a specific category of stock. Interestingly, the presence of bilateral adverse selection problems has partially offsetting effects, so as to minimize the total social cost of trading.

Abstract:
This paper shows how Arrow's (1951) possibility theorem is modified by allowing bargaining and side-payments across members of majority and minority coalitions. Under fairly plausible conditions, the outcome will be stable and unique. If voters have similar utility functions centered around different ideal policy points, then the bargaining will be conducive to the "center of mass" of the policy triangle. Such an outcome will satisfy both the Benthamite and the Nash criteria of social welfare. If voters have differently- shaped utility functions, the Benthamite and Nash optimal points will not coincide, and the bargaining outcome will only satisfy the Benthamite criterion.