The Legal Analyst: A Toolkit for Thinking about the Law

By Ward Farnsworth | Go to book overview

9 Agency
With Eric Posner

Think about situations where one person is supposed to work hard for the benefit of another. The obvious examples involve people hired to do things: the lawyer is supposed to work hard for the client; the real estate agent is supposed to work hard for the seller of the house. But sometimes the same problem arises where the relationship is less direct. A company’s stockholders want the officers running it to work hard, and voters want the politicians they elect to work hard. The general structure of all these situations nevertheless can be considered similar. First there is a person called a principal—a client, a boss, or a citizen; and then there is an agent—a lawyer, an employee, or a politician—who is supposed to be working to advance the principal’s interests. But there is a natural conflict of interest between them. The agent doesn’t feel all the benefits he creates by working hard; the benefits of his work go, at least immediately, to the client, to the boss, or whoever else he is serving. So the agent, having no love of hard work for its own sake, would prefer not to work so hard. He would prefer, in a word, to shirk.

The shirking wouldn’t be a problem if the principal could just pay the agent according to his efforts, so that the harder the agent works, the more money or other benefits he gets. The trouble comes when the principal can’t exactly tell how hard the agent is working. Sometimes all the principal clearly sees are the results of the agent’s labors, and they might be hard to interpret; he might not be sure whether a bad outcome is the result of the agent’s poor efforts or of something else. The owner of the seafood restaurant wonders if he is losing business because nobody likes his waiters or because nobody likes his fish. Shareholders wonder whether the value of a company’s stock has gone down because the CEO is inept or because of competition from overseas. It’s hard to know for sure.

Principals need ways to reassure themselves that their agents will work hard when they aren’t being watched, whether because watching them is impossible as a practical matter or too expensive to be worth the bother. People who would like to be agents will want those mechanisms to exist, too; for if they have no way to reassure their principals, they will have trouble finding work or getting paid as much as they would like. (Agents

-87-

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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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