Riassunto esame Legal argumentation and economic analysis of law, Prof. Tuzet Giovanni, libro consigliato The Economic Approach to Law, T.J. Miceli

HINDSIGHT BIAS: Problem of the Nepalese War

Between 1814 and 1816, a war was fought in Nepal between the British and the Nepalese Gurkhas. The British had better military organization and greater availability of weapons, while the Gurkhas had better knowledge of the territory and stronger motivation.

Who won the war? What were the probabilities?

Scenario 1: British victory

What was the ex ante probability of a British victory?

Scenario 2: Victory of the Gurkhas

What was the ex ante probability of a victory of the Gurkhas?

Typically, after getting the information about the victory, there is a systematic overevaluation based on a "IN HINDSIGHT" JUDGMENT: i.e., once people know how things went, they tend to estimate the relevant event as more predictable than it really was.

The judgment in hindsight can have legal effects:

• There can be an effect on the assessment of liability (especially for negligence)
• Because of this, some legal systems try to lower the impact

of the hindsight bias (even if it can't be eliminated completely) US: RULE 407 FRE "When measures are taken that would have made an earlier injury or harm less likely to occur, evidence of the subsequent measures is not admissible to prove: ▪ negligence; ▪ culpable conduct; ▪ a defect in a product or its design; or ▪ a need for a warning or instruction. But the court may admit this evidence for another purpose, such as impeachment or – if disputed – proving ownership, control, or the feasibility of precautionary measures" ANCHORING EFFECT Calculate: 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 = median estimate 512 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = median estimate 2,250 Correct answer: 40,320 ❖ This happens because the given figures act as anchors (aka point of reference) for the calculations, that are then adjusted for estimating the closest number to the actual answer ➢ If the figures are reliable indicators, anchoring works as a good heuristics ➢ If the figures

are not, it leads to error

This also has legal effects:

• E.g., if you are the first to give an estimation for damages, the judge will probably use it as a point of reference from which to establish the actual amount it's a very important implication in criminal law and it can generate bias against the defendant

PROPERTY FUNCTION OF PROPERTY LAW

THOMAS HOBBES: property law is integrated with the social contract (to exit the state of nature) and has the function to reduce the costs of protection of goods and encourage production

• This is because in the state of nature most resources were spent to protect yourselves: the costs of activity and protection were high

JOHN LOCKE: the recognition of property right encourages production and incentives investments in production and trade + he supports property as the right to use yourself to produce something that will become yours

JEAN-JACQUES ROUSSEAU: sustains that property rights are the origin of all problems, which is

clear<br>because people in the state of nature were happy (≠ Locke and Hobbes)<br><br>THE TRAGEDY OF THE COMMONS<br><br>It’s an example which explains the problem of group rights and is based on a community of herdsmen and<br>group ownership of grazing land (“commons”).<br><br>❖ What is the utility to me of adding one more animal to my herd?<br>➢ Positive component: there is an increment of one animal, since the herdsman receives all the<span style="text-decoration: overline;">proceeds from the sale of one additional animal nearly +1</span><br>➢ Negative component: there is an additional overgrazing created by one more animal BUT it is shared<span style="text-decoration: overline;">by all herdsmen negative utility of a fraction of -1</span><br><br>❖ If everyone behaves this way and adds other animals to his herd, inevitably brings to a tragedy: resource<br>overuse and depletion<br>➢ However, it should also be considered that group ownership has the advantages of exploiting scale<br>economies and risk sharing, on condition of strong commitment and social control<br><br>❖ It’s important to use the

law to put a limit on the number of animals or to divide the commons

In the case of division of commons, every rational herdsman would understand that they should not get other animals because it's his own land now and it would perish if there are too many animals

PROPERTY LAW ACCORDING TO MICELI

Property law has an economic function: it protects investments in property and enforces contracts (→incentives and encourages trade) = stable background against which economic activity can take place

→Property right as incentives internalizing externalities: they give incentives to internalize benefits and costs

Ownership of an asset as a bundle of rights (right to exclude, to use and to dispose of the asset)

WAYS OF LEGALLY ACQUIRING PROPERTY

Creation (of ideas, because some have an economic value that must be protected), production (of →material goods right to own what you produce), contracts and wills

For fugitive property (e.g., natural gas, wild

animals):

➢ PRINCIPLE OF FIRST POSSESSION: ownership is acquired by first possession

➢ PRINCIPLE OF TIED OWNERSHIP: owner of surface has exclusive right on fugitive property on it or under it

❖ There is also to consider the issue of public property (that some legal systems recognize)

HAMMONDS V. CENTRAL KENTUCKY NATURAL GAS CO. (1934)

The Central Kentucky Natural Gas Company leased tracts of land above large deposits of natural gas. Some of the leased tracts were separated from one another by land that the company did not own or lease. The geological dome of natural gas from which the company drew its supply lay partially under the leased land and partially under unleased land. Hammonds owned 54 acres of land that lay above the geological dome tapped by the company, but she had not let the subsurface rights in her land to the company. When it extracted natural gas and oil from the dome, she sued the company on the theory that some of the natural gas that was under her land had been

Wrongfully appropriated by the defendant.

Application of tied ownership: because the oil was under Hammonds' land, it's her right to compensation.

Application of first possession: the company was the first to possess the gas, so it's the company's no right to compensation.

How the case is decided is a matter of positive law.

Which one is more efficient?

Both have litigation costs BUT:

If we apply the principle of tied ownership and compensate Hammonds, you should know the amount of gas taken from her land it's difficult and problematic: it would mean high litigation costs.

If we apply the principle of first possession, there are lower litigation costs.

Social cost

There is also a social cost to take into consideration:

The company values the gas more and for the society it would be better if they owned it.

If that's it, the company should buy the right from Hammonds, which would be difficult since Hammonds refused and would.

otherwise be opportunistic and ask for a high price

If we apply the Coase theorem, the gas would go to the company:

• Compensating Hammonds would led to high transactions costs
• Hammonds would ask too much and the company would at the end take some of the gas
• The value for Hammonds is greater than the value for the company, which explains why they could not find an agreement

The first possession principle can be applied also to non-fugitive property, like land

In the US, it was done with the Homestead Act (1862) for the public land in the West of the US (which was underdeveloped): they decided to award property rights to the land on a "first come, first served" basis, with a $10 entry fee and the promise to reside there for 5 years

COST-BENEFIT ANALYSIS OF THE FIRST POSSESSION APPROACH

COSTS: there would be a wasteful race to acquire exclusive use of resources or an excessive depletion of open-access resource (see the tragedy of the commons) because it encourages

people to get the morethey can, even if they do not need it➢ There would be the risk of fights and violence given the rush for acquiring resources and an over-investment for getting the first possession (those who invest but don’t get the right will suffer a loss)❖ BENEFITS:➢ Less administrative costs➢ Mix of private and public enforcement methods: since land ownership on the frontier was a risky proposition, some protection was provided by the military presence and the settlers invested in forms of self-enforcement (almost everyone carried a gun)ENFORCEMENT AND PROTECTION OF THE POSSESSOR V. CLAIMANTSituation: A possess the land and claims to be the owner, whereas B doesn’t possess it but still claims to be the owner too.There are two systems for protecting a title to land:❖ RECORDING: prospective buyers can consult a public record for evidence that possessor has title, but the record itself does not establish title (but it’s only an evidence) it awards the

1. claimant and compensatethe possessor

➢ There is the risk of spending a lot in litigation costs

❖ REGISTRATION: buyer register property with government at the time of purchase, followed by judicial inquiry into the status of the title; if no claim is found, government issues a certificate that is good against future claims it awards the possessor and compensate the claimant

➢ It has costs (for the inquiry and for the issuing of the certificate) but grants legal certainty and therefore less litigation costs: more efficient

ENDOWMENT EFFECT

❖ Possession and subjective value are inextricably linked, and subjective value likely grows over time as the possessor, for example, occupies the land

❖ Registration has the benefit of protecting the possessor, who usually prefers a system that allows to retain title than receiving market compensation (which is usually lower than the subjective value), whereas the claimant is most likely indifferent

➢ In the case in which the value for the

CLAIMANT: is higher, they can settle and the claimant can buy the land: it overcomes the problem of the registration system

ENDOWMENT EFFECT: is based on the fact that possessing a resource makes its value increase (which is economically bizarre)

A possible explanation is related to loss aversion: people want to avoid loss more than they want against

REGULATION AND LIMITATION OF PROPERTY RIGHTS:

It deals with the problem of intellectual property and the trade-offs of protecting ideas:

A too high protection: would benefit the inventors (and incentivize them) but cost to the society, which would be deprived of the benefits of the inventions

A too little protection: would benefit the society with the availability of ideas but cost to the inventors (who would also be discouraged from creating new ideas)

PUBLIC AND PRIVATE GOODS (ECONOMIC SENSE):