P1: JZP 0521826810agg.xml CB861/Georgakapoulos 521 82681 This page intentionally left blank June 7, 2005 15:54 P1: JZP 0521826810agg.xml CB861/Georgakapoulos 521 82681 June 7, 2005 PRINCIPLES AND METHODS OF LAW AND ECONOMICS This is an introductory book that targets the reader who aspires to apply economic analysis but seeks a technical introduction to its mathematical techniques or a structured elaboration of its philosophical principles It juxtaposes economic analysis with moral philosophy, political theory, egalitarianism, and other methodological principles It then presents the details of methods, such as model building, derivatives, differential equations, statistical tests, and the use of computer programs Nicholas Georgakopoulos is Professor of Law at Indiana University School of Law He received his master’s degree and doctorate from Harvard Law School, where he specialized in finance and the regulation of financial markets His publications are cited prominently, including citations by the U.S Supreme Court and the Securities Exchange Commission i 15:54 P1: JZP 0521826810agg.xml CB861/Georgakapoulos 521 82681 ii June 7, 2005 15:54 P1: JZP 0521826810agg.xml CB861/Georgakapoulos 521 82681 June 7, 2005 Principles and Methods of Law and Economics Basic Tools for Normative Reasoning Nicholas L Georgakopoulos Indiana University iii 15:54 CAMBRIDGE UNIVERSITY PRESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521826815 © Nicholas L Georgakopoulos 2005 This publication is in copyright Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press First published in print format 2005 eBook (EBL) ISBN-13 978-0-511-34449-7 ISBN-10 0-511-34449-X eBook (EBL) ISBN-13 ISBN-10 hardback 978-0-521-82681-5 hardback 0-521-82681-0 ISBN-13 ISBN-10 paperback 978-0-521-53411-6 paperback 0-521-53411-9 Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate P1: JZP 0521826810agg.xml CB861/Georgakapoulos 521 82681 In memory of my mother May justice and welfare end random violence v June 7, 2005 15:54 P1: JZP 0521826810agg.xml CB861/Georgakapoulos 521 82681 vi June 7, 2005 15:54 P1: JZP 0521826810agg.xml CB861/Georgakapoulos 521 82681 June 7, 2005 Contents Preface xiii Introduction: Innovation in Legal Thinking A Proposals, Consequences, and Ideals r B Toward Scientific Analysis of Law r C Bibliographical Note r Part 1: Principles From Formal Logic to Normative Reasoning 11 A Formal Deontic Logic r 12 B Formal Logic’s Failure in Normative Reasoning r 13 C The Informal Normative Syllogism r 15 Proposals, Consequences, and Ideals in Normative Reasoning r 16 D Concluding Exercises r 17 E Bibliographical Note r 19 Social Welfare versus Moral Philosophy 20 A Ideals behind Law and Economics: Welfarism and Pragmatism r 23 B Juxtaposition with Other External Derivations of Ideals r 25 i Deriving Ideals from Existing Rules (Including Formalism) r 25 ii Rawls’ Contractarianism r 26 iii The Potential Equivalence of Derived Ideals and Preferences r 27 C Distinguishing Features of Economic Analysis r 29 i Avoidance of Moral Relativity r 30 vii 15:54 P1: JZP 0521826810agg.xml CB861/Georgakapoulos viii 521 82681 June 7, 2005 Contents ii Preference for Applications over Refinement of Principles r 30 iii Ubiquitous Importance of Incentives r 30 iv Treatment of Preferences as Objective r 31 v Lack Bias for Rule Proliferation r 34 vi Orientation Toward the Future r 34 D Concluding Exercises r 35 E Bibliographical Note r 36 From Political Philosophy to Game Theory 37 A Political Theory r 38 i Inefficiencies of Majority Rule r 39 ii Legal Process: Explaining the Administrative State r 40 iii Civic Republicanism r 42 iv Perfectionism r 43 B Voting System Design r 44 C Game Theory r 50 i Cooperation Games: Prisoner’s Dilemma r 51 ii Coordination Games: Driving Side r 54 iii Game Theory in Legal Scholarship r 55 D Social Norms r 57 E Bounded Rationality r 59 F Concluding Exercises r 66 G Bibliographical Note r 70 The Importance of Distribution of Wealth 72 A Redistribute! r 75 B Do Not Redistribute! r 79 C Delegating Redistribution to Tax Policy r 84 D Concluding Exercises r 89 E Bibliographical Note r 94 Coase and Law’s Irrelevance 95 A Coasean Irrelevance r 96 B Normative Use r 98 i Revealing Imperfections r 98 ii An Example r 99 C Transaction Costs: The Usual Suspect r 99 i Vantage Point Makes Transaction Costs r 103 ii Innovations Transform Transaction Costs r 104 iii Litigation Costs: Transaction Cost or Not? r 105 iv Example: Increasing Social Gain from Private Litigation r 105 15:54 ... schools, the law and economics seminar of Harvard Law School, the finance seminar of Harvard Business School, the faculty seminar of the University of Connecticut School of Law, the law and economics. .. exploring law and economics is the change in the mode of reasoning Law and economics has a normative focus that leads to a change in the level of certainty and the burden of proof of the argumentation... The value of economic analysis of law is that it produces normative conclusions of vastly greater certainty than other methods The methodological rigor of law and economics produces normative