Economics

HLS Private Law Workshop: Eric Claeys, Harms, Benefits, and Rights in Property and Private Law

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Post by Patrick Goold

In the most recent HLS Private Law Workshop, Professor Eric Claeys presented a chapter of his forthcoming monograph, Natural Law, Natural Rights, and the Foundations of American Property Law. This monograph presents a natural law theory of American property law. The monograph argues that individuals have pre-political rights to use tangible resources in ways that promote human flourishing. Contemporary property doctrine embodies this logic and, in form and substance, upholds those rights.

The chapter Claeys presented discussed and responded to criticisms of common law property doctrine frequently made by law and economics scholars. Economists, starting with Ronald Coase, tend to view property law as an instrument for settling disputes about incompatible uses of resources (what Claeys labels the “incompatible use framework” of property).  When a rancher’s cattle strays onto a farmer’s wheat fields, or a railroad emits sparks onto a farmer’s hay bales, a Coasian treats the respective parties’ “rights” as the conclusion of, rather than a component of, its analysis.

As Coase acknowledged, this is not how courts have historically resolved such disputes. Rather than resolving the case before them based on transaction-cost analysis, courts tend to ask a series of conceptual questions, including: did the plaintiff have a right to prevent the defendant’s behavior? did the defendant’s actions cause the plaintiffs loss? and, did the plaintiff suffer cognizable harm? Coase and his progeny have viewed such reasoning with skepticism. At the root of this skepticism is the belief that the core concepts, such as “right”, “harm” and “causation,” lack substance and therefore, on their own, cannot tell a judge how to resolve disputes. To use a well-worn example, Coase argued that “causation” is reciprocal; that is, when a railroad’s sparks burn down a nearby farmer’s hay bales, both the railroad and the farmer are “causes” of the loss because both could have taken measures to prevent it.  Accordingly asking whether the defendant’s actions “caused” the plaintiff’s harm is not a cogent way to decide who ought to win in property litigation.

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New Private Law and the Future of Law & Economics — Patrick Goold

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Post by Patrick Goold

I recently had the pleasure of attending the “Future of Law & Economics and the Legacy of Guido Calabresi” conference held at Boston University School of Law. It examined the methodological, institutional, and conceptual issues raised by Judge Calabresi’s new book, The Future of Law and Economics. After two fun days, packed with delightful anecdotes about Calabresi and the early days of the Law and Economics movement, the question I found myself asking was: How do the ideas in this new book relate to the New Private Law project? My sense, which I will explain in this short post, is that there is a strong synergy between that project and Calabresi’s vision for Law and Economics.

At the core of Calabresi’s book is a distinction between “Economic Analysis of Law” (EAL) and “Law and Economics” (L&E). EAL uses economic theory to “analyze the legal world.”  EAL scholars explain and justify legal reality through the prism of efficiency. Where that reality does not fit economic theory, the EAL scholar proclaims the law to be “irrational” and in need of reform. The classical precursor to this approach is that of Jeremy Bentham, who tested moral beliefs against a theory of utilitarianism, and dismissed what did not fit the theory as vague generalities and “nonsense upon stilts.” The prominence of EAL scholarship today is due, in part, to the influential writings of Richard Posner.

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Harvard Law School’s Private Law Workshop: Oren Bar-Gill & Ariel Porat, Disclosure Rules in Contract Law

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Post by Patrick Goold

Caveat emptor, or buyer beware, was the traditional principle of Anglo-American contract law. Today, however, many common law jurisdictions require the seller to disclose material information to the buyer prior to sale. Nevertheless, the duty to disclose is still subject to debate. Should the law obligate the seller to disclose pertinent information (a mandatory disclosure rule)? Or should disclosure be at the discretion of the seller (a voluntary disclosure rule)? In Disclosure Rules in Contract Law, Oren Bar-Gill and Ariel Porat study how mandatory and voluntary disclosure rules affect sellers’ incentives to invest in pre-sale investigation of goods. Speaking at the final installment of this year’s Private Law Workshop, Oren Bar-Gill explained their conclusion: that mandatory disclosure rules typically, but not always, provide sellers with efficient incentives to acquire socially valuable information regarding the asset.  

Imagine the following example. Having lived in a house for 10 years, the owner suspects there is water beneath the house that might damage its foundations. Before selling the property, the owner could hire a surveyor to investigate whether underground water exists. Whether hiring a surveyor is efficient depends on the value of the information investigation reveals relative to the cost of acquiring it, i.e. hiring the surveyor.

In 1994, Steven Shavell studied how mandatory (MD) and voluntary disclosure (VD) rules affected the incentives of sellers to undertake such investigations. Shavell found that MD rules create efficient incentives, while VD rules do not. If the owner knows that any information the investigation reveals must be disclosed, then he will only invest in the investigation if the expected increase in value to the asset outweighs the cost of the investigation. Conversely, voluntary disclosure rules cause owners to invest too heavily in information-acquisition, on the grounds that any favorable information can be used to demand a higher price, while unfavorable information is simply ignored.

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