Robert D. Cooter

The Coase Theorem

Anyone who has taught the Coase Theorem to fresh minds has experienced first hand the wonder and admiration which it inspires, yet Coase never wrote it down, and, when others try, it probably turns out to be false or a tautology. The proposition, or propositions, called the Coase Theorem was originally developed through a series of examples (Coase, 1960). Like a judge, Coase steadfastly refused to articulate broad generalizations in his original paper. Like a judge’s opinion, for every interpretation of his paper there is a plausible alternative. Instead of trying to arrive at the ultimate answer, I will offer several conventional interpretations of the Coase Theorem and illustrate them with one of his examples. After more than twenty years of debate the conventional interpretations appear to have exhausted its meanings.

Comparative Judicial Discretion: An Empirical Test of Economic Models

Author(s): Cooter, Robert D.; Ginsburg, Tom | Abstract: The legitimacy of the European Union rests in large part on the legitimacy of its courts and their ability to contribute to political development. Judges have their own preferences about the political order, which they can exercise through the interpretation of statutes. Judicial lawmaking is constrained, however, by the countervailing power of other officials. A judicial interpretation of a statute can be overturned by fresh legislation that explicitly stipulates the preferred interpretation of the legislators. The discretionary power of judges increases as the probability decreases that a judicial interpretation of a statute will be repealed by fresh legislation. Fresh legislation is more difficult to enact when the constitution divides power, providing more officials with the power to veto bills. Conversely, fresh legislation is easier to enact when a single, disciplined party governs the state. Therefore, we predict that courts will be more adventurous in interpreting legislation as the number of independent vetoes on fresh legislation increases and as the unity and discipline of political parties decreases. We test this prediction using data from European and other industrial democracies. The data confirms the prediction. Please contact the Program in Law and Economics at Boalt Hall School of Law, UC Berkeley, Berkeley, CA 94720 for a copy of this paper.

Decreasing‐Liability Contracts

Like constructing a building, performance on many contracts occurs in phases. As time passes, the promisor sinks more costs into performance and less expenditure remains. For phased performance, we show that optimal liability for the breaching party decreases as the remaining costs of completing performance decrease. In brief, efficiency requires a decreasing liability contract. To implement such a contract, we recommend deducting past expenditure on incomplete performance from liability. We show that progress payment contracts, which are commonplace in some industries, are materially equivalent to decreasing liability contracts. Our analysis should prove useful for elucidating progress payment conracts and for drafting and litigating phased contracts.

Do Good Laws Make Good Citizens: An Economic Analysis of Internalized Norms

What society wants from its members, in any case, is not an intelligent calculation of the costs and benefits of abiding by its basic norms, but more or less unthinking obedience to them. To the extent people are specifically comparing the costs and benefits of breaking criminal laws, the battle is already lost; many of them must conclude, in particular situations, that the calculus favors law-breaking .... For society to function, most people have to obey the law for reasons of conscience and conviction, and not out of fear of punishment.!

Liability rules, limited information, and the role of precedent

Recent studies of the role of law in distributing accident costs have led to the pessimistic conclusion that because judges lack the information to discover the efficient level of care, efficiency cannot be achieved by common law tort rules. We show that judges have enough information to revise the legal standard via the mechanism of precedent so that the standard adopted tends toward efficiency. This optimistic conclusion results from changing previous models so that the level of care taken by litigants affects the information available to the court, but does not directly influence the legal standard. We model a sequence of court decisions by differential equations and show that the unique, stable equilibrium is efficient.

Personal versus impersonal trade: The size of trading groups and contract law

The economic model of perfect competition depicts exchange as occurring between anonymous partners. Trade is anonymous because buyers and sellers are indifferent as to the identity of their trading partners. This characteristic of competitive exchange, sometimes called Jevons’ (1871) “Law of Indifference,” is implicit in the idea that commodities are homogeneous and traders care only about price.

Inventing Market Property: The Land Courts of Papua New Guinea

This article reports field research on Papua New Guineas land courts, which decide property disputes in customary law. Customary law did not contemplate exchange of real property outside the kin group. Changing conditions have created an irresistible pressure for markets in land, which require extending law to encompass exchange with outsiders. The freehold solution is to give absolute, unitary ownership over land to individuals and end the kin groups role in resource allocation. Alternatively, the kin group can be reconstituted as a cooperative with ownership rights. If imposed by legislative fiat, either of these solutions will disrupt the customary economy by displacing its incentive system. A better solution allows custom to evolve and modernize itself through the common law process.

Damages for Breach of Contract

I. THE MEANING OF INJURY AND COMPENSATION ........... 1435 II. BASIC DAMAGE FORMULAS ............................... 1438 A. Substitute-Price ....................................... 1439 B. Lost-Surplus .......................................... 1439 C. Opportunity-Cost ...................................... 1440 D. Out-of-Pocket-Cost .................................... 1442 E. Diminished-Value ..................................... 1442 F Add-Ons and Offsets .................................. 1442 III. COMPENSATORY DAMAGES AND MARKET STRUCTURE .... 1444 A. Perfectly Competitive Markets ......................... 1445 L The Traditional Model of Business Conduct in Perfectly Competitive Markets ..................... 1445 2. The Statistical-Planning Model of Business Conduct in Perfectly Competitive Markets ................... 1449 B. Imperfectly Competitive Markets ....................... 1451 1. The Traditional Model of Business Conduct in Imperfectly Competitive Markets ................... 1451 2. The Fishing Model of Business Conduct in Imperfectly Competitive Markets ................... 1455 IV. WHAT MEASURE OF DAMAGES SHOULD THE LAW PREFER? ..... .................................... .. 1459 A. The General Case ..................................... 1459 1. Performance ...................................... 1462 2. Precaution ........................................ 1464 3. Reliance .......................................... 1465

The logic of power in the emerging European constitution: Game theory and the division of powers

The major institutions of government in the European Community are the Council of Ministers, the Parliament, the Court of Justice, and the Commission. The initial treaties prescribed a legislative process in which the Commission proposed, the Council enacted, and the Court interpreted. The Council enjoyed the exclusive power of legislation, and most of its enactments required unanimity. In contrast, the Parliament had, at most, a right to be consulted about legislation. In effect, the institutions of European government originally provided a framework for cooperation among ministers of the sovereign states. From this beginning, the European Community has evolved gradudly towards a democratic government. Specifically, majority rule is replacing unanimity in the Council, and the role of Parliament is increasing towards full partnership in the legislative process. Legislation now must follow majoritarian, bicameral procedures on some issues, and the scope of these issues will presumably widen. The obvious consequence of these changes is a decrease in the power of the Council and an increase in the power of Parliament. We use game theory to prove the not-so-obvious fact that majoritarianism in the Council increases the power of the Commission and, in the long run, decreases the power of the Court, whereas bicameralism has the opposite effect. Our analysis suggests a revaluation of the implementation of democracy in Europe. To be more precise, there are four procedures for European legislation that differ according to the extent that the Council must involve Parliament in making law. The procedures, arranged in order of increasing involvement of Parliament, are called unilateral, consultation, cooperation, and co-decision. A change from consultation to cooperation on an issue, and a change from cooperation to co-decision, obviously

Should Courts Deduct Nonlegal Sanctions from Damages

When legal and social norms regulate the same behavior, an act can trigger both legal and nonlegal sanctions. Should courts deduct the nonlegal sanction suffered by the wrongdoer from damages owed to the victim? We provide the answer for a legal system that seeks to minimize social costs. Nonlegal sanctions typically harm the wrongdoer and benefit other people. In principle, courts should avoid overdeterring wrongdoers by deducting the benefit of the nonlegal sanction from compensatory damages. In practice, instead of deducting the benefit of the nonlegal sanction to other people, courts should deduct the burden on the wrongdoer. Deducting the burden of the nonlegal sanction from compensatory damages typically improves the incentives of wrongdoers and victims. We make practical suggestions for courts to implement our proposal that would significantly reduce damages in torts and contracts.