The Legal Analyst: A Toolkit for Thinking about the Law

By Ward Farnsworth | Go to book overview

7 Rents

Suppose the wreck of a galleon is found on the ocean’s floor. Four teams of salvors race to lay hands on a treasure chest the ship is known to have on board; it contains historical artifacts worth ten million dollars. Each team spends about three million dollars trying to get there first. Eventually one of them succeeds, and the others are out of luck. The result is perverse, is it not? A total of twelve million dollars was spent to recover something worth less than that. As a group, the salvors would have been wealthier if the treasure hadn’t been found in the first place. The result still would have been unfortunate, if a little less perverse, if there had been only two teams instead of four, and six million dollars had been spent to raise twelve. That sounds like a better deal, but it’s still a waste. Really, spending anything more than the bare cost of raising the treasure is a waste; all the other money just goes into efforts by the teams to beat each other out, and there is nothing to show for it once the treasure is raised.69 Needless to say, it’s not how a single owner would have handled the situation.

This is a simple example of a problem known to economists as rent seeking. The phrase may be unfortunate: “rent” brings to mind images of landlords, and the difficulty we mean to talk about here has only a remote connection to them. Rent seeking means wasteful efforts to gain a prize; it might also be described as competition over the way some good thing ought to be distributed. (There are other, more technical definitions, but these are enough for our purposes.) The trouble with it can be seen by reflecting that there are, in general, two kinds of ways to increase one’s pile of wealth. You can do it by producing some good or service that other people find valuable. Or you can do it by fighting over a prize of some sort. The difference between these methods—between, say, competing to run a better restaurant and competing to get to the treasure first—is that the first one creates wealth, or better-offness, on the whole: the customers are made happy, and restaurants gradually improve. Fighting over who gets the treasure isn’t like that. The treasure doesn’t get any bigger as a result. In a sense it gets smaller because so much of the wealth it represents is eaten up in the effort to lay hold of it. Those outlays can be described as sterile, meaning that they don’t produce anything; their only effect is to move the

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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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