The Legal Analyst: A Toolkit for Thinking about the Law

By Ward Farnsworth | Go to book overview

2 The Idea of Efficiency

We have seen how the decisions that courts make can affect people’s incentives afterwards. Now we need to talk about what sorts of incentives we want people to have. Sometimes it’s just obvious: incentives not to take hostages presumably are a good thing, and the judge in the case of the finback whale we just considered was understandably worried about destroying a major industry (though whale lovers may find even this a hard case). But many cases lend themselves to a deeper analysis.

The law uses different rules to deal with attacks by dogs and by lions. A dog’s owner pays only if the dog was known to be a biter; if a lion bites someone, the owner pays every time regardless of the excellence of the animal’s reputation. (Some states now have stricter rules for dogs, but the rules just sketched were in place in every jurisdiction for a long time and still serve as a good basis for illustration.) Suppose you are sued by your neighbor over a dog bite and the trial judge screws up the instructions to the jurors: they are told that you are obliged to pay, regardless of whether the dog had a bad record, so long as the animal was yours. The jury brings in a verdict requiring you to pay $10,000 to cover the plaintiff’s medical expenses. You go to a court of appeals to complain about the mistaken jury instructions. Unfortunately there is a problem: you didn’t point out the error at the time it was made; you weren’t paying careful attention to it because you thought the legal rule was too obvious for the trial judge to misstate. Since the appellate court is the first place you have raised the issue, your adversary says it’s too late. What’s the best way to think about this?

You might be able to make a strong argument based on notions of fairness. You have, we may assume, been ordered to pay a bunch of money to the plaintiff that the law says you shouldn’t owe; no jury would have made such a decision if it had been instructed correctly. But on the other side there is a powerful argument about incentives—an ex ante point. If you are allowed to complain about the jury instructions now despite not complaining earlier, then in the future there might not be much incentive for others to object early, either. It may seem obvious that everyone is best off objecting promptly, so the incentives created by the courts aren’t

-13-

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The Legal Analyst: A Toolkit for Thinking about the Law
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Preface vii
  • Acknowledgments xi
  • Part I - Incentives 1
  • 1 - Ex Ante and Ex Post 3
  • 2 - The Idea of Efficiency 13
  • 3 - Thinking at the Margin 24
  • 4 - The Single Owner 37
  • 5 - The Least Cost Avoider 47
  • 6 - Administrative Cost 57
  • 7 - Rents 66
  • 8 - The Coase Theorem 75
  • Part II - Trust, Cooperation, and Other Problems for Multiple Players 85
  • 9 - Agency with Eric Posner 87
  • 10 - The Prisoner's Dilemma 100
  • 11 - Public Goods 109
  • 12 - The Stag Hunt 117
  • 13 - Chicken 126
  • 14 - Cascades 136
  • 15 - Voting Paradoxes 144
  • 16 - Suppressed Markets with Saul Levmore 152
  • Part III - Jurisprudence 161
  • 17 - Rules and Standards 163
  • 18 - Slippery Slopes with Eugene Volokh 172
  • 19 - Acoustic Separation 182
  • 20 - Property Rules and Liability Rules 188
  • 21 - Baselines 198
  • Part IV - Psychology 207
  • 22 - Willingness to Pay and Willingness to Accept- The Endowment Effect and Kindred Ideas 209
  • 23 - Hindsight Bias 218
  • 24 - Framing Effects 224
  • 25 - Anchoring 230
  • 26 - Self-Serving Bias, with a Note on Attribution Error 237
  • Part V - Problems of Proof 247
  • 27 - Acoustic Separation 249
  • 28 - Standards of Proof 257
  • 29 - The Product Rule 273
  • 30 - The Base Rate 281
  • 31 - Value and Markets 294
  • Notes 305
  • Author Index 329
  • Subject Index 335
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