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Spring 2007 LAW AND ECONOMICS Econ 209b
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About the course
What is the function of legal rules in the economy? Can there be order without law? Should the government compensate people when regulations reduce the value of their property? What about the lady who got burned by hot coffee at McDonalds and won a couple of million dollars in com-pen¬sation? These and other questions are addressed as we look at property law, contracts, and torts. Prerequisites: ECON 101 and ECON 102.

Organization
Classes: Stokes 14, Tuesday and Thursday 2:30 a.m. - 4:00 p. m.
Instructor: Vladimir Kontorovich, Stokes 203c, tel. 1074; e-mail: vkontoro.
Office Hours: Tuesday and Thursday 1:00 – 2:30 p. m., or by appointment. Home phone: (609) 371-4826. Do not hesitate to call me at home. Tell me the number you are calling from and hang up. I will call you back at once.

Course Requirements
1. Lectures. I present a somewhat different material than that in the textbook. You are responsi¬ble for both the lecture and the textbook material. Regular class attend¬ance is expected.

2. Textbook (available at the Haverford College Book¬store):

Cooter, Robert, and Thomas Ulen, Law and Economics. 4/e Addison-Wesley, 2004. Denoted as (CU) in the Course Outline.

3. Other readings (listed in the Course Outline below) are on the Blackboard unless stated oth-erwise, or will be distributed in class. The Course Outline indicates the dates by which readings are due. Completing readings on time will allow you to gain more from the lecture, and to partici¬pate in class discussion. Additional readings will be assigned in the course of the semester.

Grading

1. Two papers (see next page for details): 25% of the final grade each

2. Class participation: 5% of the final grade. Once I get the class list from the registrar, I will be awarding points for informed and constructive participation.

3. Final exam testing the knowledge of the main concepts: self-scheduled, exam week, 45% of the final grade

Papers

1. Objective: use analytic tools you have learned to deal with a real life property rights, contract, or torts issue. To write about some other area of law, you would need my permission.

2. Format: papers should be typed, with numbered pages and clear references to sources. Appear¬ance matters! The paper should clearly state the issue/problem which you are addressing, and then proceed to analyze it using the tools of economics. The paper should be based on at least three sources, unless we agree to a different number. It does not have to contain the original analysis, but to present the analysis in your sources in the manner demonstrating that you understand the issue and the tools used in the analysis.

3. Organization. I need to know what you are writing about by the date indicated in the schedule below. Please send me an e-mail with the title, references to the sources you will be using, and a 2-sentence summary of each source. You are welcome to meet with me to discuss the possible topics before the deadline. Also, I would be glad to review more than one draft of the paper, and make comments and suggestions. One draft is just the obligatory minimum.

4. Paper preparation schedule:
Choose topic, confirm with me Draft submitted Draft returned with my suggestions Final version submitted
I. Property 2/6 2/22 2/27 3/8
II. Contracts or Torts (dates provisional) 3/29 4/12 4/19 5/4

Failure to meet the deadlines is punishable by taking 1 point off the paper grade (graded on 100 scale) for each day you are being late.

5. Choosing paper topic

A paper has to be based on published research. Some sources are indicated below; other sources I can supply to you; yet others you can find yourself. Some places to search, in addition to Tripod, are Legal Scholarship Network on SSRN.com and EconLit database.

I paper:
a. One, time honored alternative is to start by reading Gary Libecap, “Property Rights in Economic History: Implications for Research”, Explora¬tions in Economic History, vol. 23, 1986. It discusses historical development of property rights in grazing land in the American West, petroleum (US), arable land (England), and many others. Choose the historical property rights issue that appeals to you. Take any three of the sources Libecap gives for this issue and write a paper. This whole proce-dure with using Libecap is designed to supply you with the list of sources. You are free to use the appropriate sources that do not appear in Libecap.

b. You are also free to write about a topic that does not appear in Libecap (governing common pro¬perty, American Indian property rights, patents and economic progress, takings, slavery/serfdom). I will be glad to suggest a topic and supply the references (or at least some of them). If the topic is all your own, you have to take care of finding literature.

c. Here are the topics in which I especially interested this year and would recommend to you if you are adventurous:
- legal system and economic development. It has been found that countries with common law sys-tem are doing better economically than those with civil law. How believable is this result (derived by econometric analysis), how strong it is, and what is the underlying mechanism?
- commons is an ancient legal category. Anti-commons appeared only in the 1990s. What does it mean, how does it work, how important is it?
- advanced topics in property (recent law review articles to read and make sense of).

II paper:
a.Contracts. One big issue in contracts is whether the society should allow people to make binding
promises (or enforce freely made promises). This is the issue of freedom of contract vs. paternal-ism.
Another possible topic concerns alternatives to contract law (informal norms; ethnic ties; self-enforcing market; criminality).
A separate topic, cutting through both property and contracts, is when are informal norms likely to be efficient.

b.Torts. You may take an area of liability other than product liability (which is what we study in class) and write about the developments there. It may be medical malpractice, worker compensa-tion, OSHA, environmental liability, or anything else.

Another possibility is to write on the origins and results of the liability revolution, trying to make sense of the two texts:

Peter Huber, Liability. New York: Basic Books, 1988. Ch. 1.

Priest, George, “The Invention of Enterprise Liability: a Critical History of the Intellectual Founda-tions of Products Liability” Journal of Legal Studies, vol. XIV, December 1985.

Yet another topic is tort reform and its effects.

COURSE OUTLINE

I. INTRODUCTION

1. What is Law and Economics? CU, Chapter 1. 1/23
Introductory chapters are very important, but also very general, hence difficult to understand.

2. Economics tools. CU, Chapter 2, -- p. 48. 1/25
This chapter reviews, in a condensed form, the material roughly corresponding to Econ 101.
The only possible exception is the section on game theory (pp. 38-41), which I will introduce
in class. The section on risk and insurance we will not need until later in the course, so skip it
for now.

3. The legal system. CU, Chapter 3 1/30
We need to know what it is we are talking about in this course.

II. PROPERTY RIGHTS

1. Definitions and overview. 2/1
CU, Chapter 4, Sec. I-III and Appendix.
Demsetz, Harold, “Toward a Theory of Property Rights”, American Economic Review
Papers and Proceedings, May 1967.
Alchian, Armen, “Some Economics of Property Rights” in his Economic Forces at Work.
Indianapolis: Liberty Press, 1977. Sections 1-5.

2. Partitioning of property rights.
CU, ch. 4, sec. IV-V; ch. 5, sec. IV. 2/6

Coase, R. H., “The Federal Communications Commission”, Journal of Law and Economics 2/8
2, October 1959, especially pp. 1-6, 12-35.

Harrison and McKee, “Experimental Evaluation of the Coase Theorem”, Journal of Law 2/13
and Economics, vol. XXVIII, October 1985.
Hoffman, Elizabeth and Matthew L. Spitzer, “Experimental Tests of the Coase Theorem
with large Bargaining Groups”, Journal of Legal Studies, vol. V, January, 1986.

Ellickson, Robert C., “Of Coase and Cattle”, Stanford Law Review, 1986. 2/15

3. Sharing of property rights.

a. General 2/20

CU, Chapter 4, Sec. VI-VII.
Please reread Demsetz, “Toward a Theory ...”, pp. 354-359.
Alchian, Armen, “Some Economics of Property Rights”, in his Economic Forces at Work.
Sections 6-8.

b. Public property

Mueller, Dennis C., Public choice II. New York: Cambridge University Press, 1989,
p. 265.
van Zandt, David E., “The Lessons of the Lighthouse: ‘Government’ or ‘Private’ Provision of Goods”, Journal of Legal Studies, vol. 22, Jan. 1993.

c. Common property 2/22
CU, Ch. 5, pp. 140-150.
Anderson, Terry L., and Peter J. Hill, “Privatizing the Commons: An Improvement?”,
Southern Economic Journal, vol. 50, no.2, 1983.

d. Corporations
CU, Ch. 5, pp. 137-140. 2/27
Rosenberg, Nathan and Birdzell, L. E., How the West Grew Rich. NY: Basic Books,
1986, Ch. VI.
Alchian, Armen, “Corporate Management and Property Rights”, in his Economic
Forces at Work. Indianapolis: Liberty Press, 1977
Demsetz, Harold, “The Structure of Ownership and the Theory of the Firm”, in his
Ownership, Control and the Firm. vol. 1. Cambridge, MA: Basil Blackwell, 1988.
“Nature of Knowledge”: Aeppel, Timothy, “On Factory Floors, Top Workers Hide Secrets to Suc-cess”, Wall Street Journal, July 1, 2002/

4. Applications.


a. Intellectual property . CU, Ch. 5, Sec. I.A and I.B. 3/1, 3/6

Kitch, Edmund W., “The Nature and Function of the Patent System”, Journal of Law and Econom-ics vol. 20, no. 2, 1977.

Posner et al., Journal of Economic Prospectives, Spring 2005.

b. Takings. CU, Ch. 5, Sec. IV.D; Ch. 2, Sec. X (Insurance) 3/8, 3/20
Rosenberg, Nathan and Birdzell, L. E., How the West Grew Rich. NY: Basic Books,
1986, pp. 119-123.


c. CU Ch. 5, Sections II. C – E and III. A – D don’t fit into any of the topics, but they are interest-ing, read them!


III. CONTRACTS

1. Classical contract - overview. CU, Chapter 6 to p. 225 3/22, 3/27

2. Enforcement of contracts: excuses. CU, Chapter 7 Part II 3/29

3. The rise and fall of freedom of contract. CU, pp. 290-93. 4/3
4. Enforcement of contracts: Remedies. CU, Chapter 7 Part I 4/5, 4/10

5. Long-term contracts. CU, Chapter 6, Sec. II.G 4/12, 4/17

Williamson, Oliver, The Economic Institutions of Capitalism. New York: Free Press,
1985, Chs. 2, 3.
Macaulay, “Noncontractual Relations in Business”, American Sociological Review, vol.
28, no. 1, 1963. (JSTOR)


IV. TORTS


THERE WILL BE NO CLASS on 4/3; will make up later
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
1. Introduction CU, Ch. 8, Sec. I 4/19

2. Liability Crisis
Peter Huber and Robert Litan, eds., The Liability Maze. Washington, DC: Brookings, 4/24
1992. Ch. 1.

3. Strict Liability vs. Negligence: Deterrence 4/26, 5/1
CU, Ch. 8, Sec. II, Ch. 9, Sec. I.

4. Strict Liability vs. Negligence: Insurance 5/3
CU, Ch. 2. Part X, Decision-making under uncertainty: Risk and Insurance
CU, Ch. 8, Sec. II.K; Ch. 9, Parts I, II
W. Kip Viscusi, “Risk Perceptions”, Regulation
Priest, George, The Journal of Economic Perspectives, Summer 1991.

5. Tort reform. CU, Ch. 9, Part III.