Although the intended readers are students, the book is challenging. The issues relate to “the big four” areas of law and economics: “property, contracts, torts, and crime.” There is also a bonus chapter on behavioral economics and the law.
Poletown and property rights / To begin, Winter shares his methodology:
- Identify the theoretical tradeoffs of the issue in question.
- If possible, empirically measure the tradeoffs found in step 1.
- Advise social policy based on steps 1 and 2.
He introduces issues with a question and an actual court case. Take this question on property law: “Should eminent domain power be available to private companies?” To answer it, he cites the 1981 case Poletown Neighborhood Council v. City of Detroit, in which the Supreme Court of Michigan ruled the city could take residents’ property and give it to General Motors for industrial development. (See “Before Kelo” Winter 2005–2006.) “The power of eminent domain is to be used in this instance,” Winter quotes from the majority opinion, “primarily to accomplish the essential public purposes of alleviating unemployment and revitalizing the economic base of the community.” Given the influence of General Motors, the author of a minority opinion observed, “One is left to wonder who the sovereign is.”
Various reasons support the use of eminent domain. The first is that transactions costs may preclude a wealth-enhancing transfer of property from private citizens to government officials. “When this occurs,” writes Winter, “a nonmarket solution, such as eminent domain, may be necessary to facilitate the transfer.” He expresses caution: “Eminent domain power is not magically invoked—its use requires potentially substantial administrative costs.” Imagine, for example, the costs that would occur if private citizens resist eminent domain proceedings.
Government might also wield eminent domain in order to acquire property at lower cost. This justification is objectionable because if a court sets just compensation below what property owners are willing to accept, that’s a good deal for government officials (and taxpayers) but a bad deal for property owners. The author does not expect a private corporation to refrain from goading government officials into using eminent domain on its behalf in order to acquire property at lower cost. If a government abuses its power of eminent domain on behalf of a private corporation, “this may very well lead to moving a resource to a lower-valued use.” That’s wealth destruction and bad policy.
Breaching contracts / To introduce contract law, Winter asks, “Should the courts encourage contractual breach?” To answer it he cites the 1911 case Acme Mills and Elevator Co. v. J.C. Johnson. Acme Mills agreed to buy wheat from Johnson for $1.03 per bushel, and also provided him bags for transporting the crop. After receiving the bags, Johnson breached and sold the wheat to another buyer for $1.16 per bushel. Acme took Johnson to court, seeking compensation.
The court declared, “The measure of damages is the difference between the contract price and the market price.” Given that the market price was no more than $1 per bushel, there were no damages, aside from the $80 the court ordered Johnson to reimburse Acme for the bags.
Why, if the market price was no more than $1 per bushel, was Acme paying $1.03 and supplying bags? Why did the other buyer pay $1.16? Winter doesn’t address those questions; instead, he posits a “simple example” to think about damage remedies. He supposes that you want to buy a collector’s edition of a book, and you are willing to pay $500 for it. You put $50 down and plan to return with the balance. Between now and then, you pay $75 for a bookstand to display the book. But when you return to the bookstore, “the seller informs you he no longer has the book” and repays your $50.
Given that the seller breached, does he owe you anything? Winter considers three remedies:
Expectations remedy—compensates the breached-against party so that he is in the same position that he would have been in had the contract been performed.
Reliance remedy—compensates the breached-against party so that he is in the same position that he would have been in had he never entered into the contract in the first place.
Restitution remedy—returns to the breached-against party any benefits he conferred on the breaching party.
In order to calculate damages according to the expectations remedy, Winter assumes that you value the book and the stand at $800. By buying the book and stand, you would have increased your wealth by $225 on net. The author states, “The expectations remedy sets a monetary damages amount of $300,” which would cover the cost of the stand and the $225 increase in wealth that you didn’t achieve. If a court uses the reliance remedy, damages would be just $75, covering the cost of the stand (ignoring the $50 the book seller already returned). According to the restitution remedy, there would be no damages because the seller returned the $50 deposit. Winter adds that in the Acme Mills case, the court used the restitution remedy.
Initially, one senses that breaching is wrong and the law should curb breaching by penalizing those who do so. But it’s straightforward to conceive of situations in which breach is acceptable. Is there any way the seller of the book you wanted could sell it to the second buyer with your approval? Yes. Had you bought the book, your net gain would have been $225. Plus, you’d want $75 for the stand. So if the seller gives you more than $300, you’d allow him to sell to the second buyer. Breaching in this situation is both efficient and moral because the seller procured your consent.
A “fully specified contract” eliminates breaching. By anticipating “every possible contingency that can occur” and negotiating a mutually advantageous solution, a fully specified contract cannot be breached. Returning to the scenario with the book, you and the seller could agree to an amount you’d require in the event that a second buyer comes along and is willing to pay a higher price. But it is highly doubtful that the parties to a contract would foresee all circumstances and negotiate solutions to them, which is why, according to Winter, fully specified contracts “rarely exist in the real world.” Contract specification provides benefits and costs; the marginal benefits of additional specification might be less than the marginal costs.
Torts / Much of the book reviews empirical studies. Consider this question from tort law: “Do doctors perform more C‑sections when faced with increased medical malpractice liability pressure?” Winter cites six studies in order to answer that question. Four answer in the affirmative. One concludes the opposite: doctors faced with less risk of liability delivered more babies by C‑section. The sixth shows that liability risk does not influence the decision to perform C‑sections.
One reason these studies produce different results is that they measure medical malpractice risk in different ways: insurance premiums versus the presence of various tort reforms. Although contradictory empirical results can be frustrating, we should expect them. “It is not uncommon to find a substantial body of evidence that supports a particular hypothesis,” Winter warns us, “only to discover an alternative substantial body of evidence that refutes the same hypothesis.” The author appears to welcome divergent empirical findings for what we can learn from them.
Crimes and punishment / Turning to the last of the big four areas, criminal law, economists assume that potential criminals compare the expected benefits to the expected costs of a prospective crime and then decide whether to commit it. Winter articulates the economist’s perspective:
The idea behind rational crime analysis is not that the criminals sit with pen and paper and explicitly calculate the costs and benefits of their actions. There may even be a large number of criminals who barely pay any attention to the future ramifications of their current behavior. All that is needed to motivate rational crime analysis is that some criminals respond to changes in crime enforcement strategies.
Therefore, raising the cost of committing a crime should induce potential criminals to commit fewer crimes. This is the “deterrent effect.” Researchers who investigate the deterrent effect encounter the stumbling block of “reverse causation.” When a police force expands, the probability of arrest increases and crime declines. That is a deterrent effect. But a researcher might observe positive correlation between the number of police officers and crime because rampant crime causes the authorities to increase the ranks of a police force. Isolating the two effects requires a crafty researcher.
An early research strategy used to investigate this issue made use of the fact that politicians often expand police departments before elections. If crime subsequently decreases, that shows a deterrent effect. Although this technique uncovered a deterrent effect, Winter calls it “small” and considers it possibly dubious according to another study.
A subsequent research strategy observed changes surrounding an “extreme event.” In the wake of a terrorist strike in Buenos Aires, government officials increased the police presence. The research shows that “car thefts fell by nearly 75 percent, a substantial impact.” These researchers admit the possibility of a “displacement effect,” whereby greater police protection around terrorist targets causes crime to increase elsewhere. A second study detected a weak displacement effect. Most of the studies Winter summarizes confirm that a greater police presence causes crime to decrease.
Property rights / Winter does not discuss the infamous 2004 case of Kelo v. City of New London in the chapter on eminent domain, but he does discuss it in the chapter on behavioral economics and the law. Both Kelo and Poletown involved a government seizing private property and conveying it to another private party. The difference is that Kelo provoked more public “outrage” than Poletown.
Winter summarizes a study that explains why eminent domain draws the public’s ire. One source of resentment is that government offers of “just compensation,” as required by law, are usually below the lowest price that property owners are willing to accept because the latter amount reflects sentimental value. A second source of resentment relates to the reason why the government is taking property, to whom it is giving the property, and the type of property it is. For example, taking idle land to remove a dangerous curve on a highway might be popular, but taking an elderly couple’s residence and giving it to a large, profit-seeking corporation would be unpopular. (Note that the latter example is similar to Kelo and Poletown, and does not explain why Kelo caused more anger than Poletown.)
The authors of Winter’s cited study designed experiments to understand people’s resistance to eminent domain. According to Winter, they found that the number of years someone has owned a property has more to do with the owner’s propensity to sell than whatever the buyer intends to do with it. “Once it becomes known that the government will step in to aid the private developer through the use of eminent domain power,” they also found, “subjects typically vehemently oppose the taking (but this effect is not found to affect willingness-to-sell values).” This surprised me because I expected property owners who “vehemently oppose the taking” to be less inclined to sell. Another problem is that it is unclear whether the “subjects” in these experiments actually owned property; if not, the decisions they made had nothing at stake. Actual property owners might make decisions differently.
Conclusion / Faced with a tradeoff between covering more of the author’s analyses in brief and fewer in depth, I chose the latter when writing this review. Cases related to the Coase theorem and empirical studies of racial discrimination in criminal law are among the other issues readers will encounter.
Readers of Issues in Law and Economics will learn that hard cases illuminate economics, and that Winter’s analysis is good economics.
