Recht und Ökonomie (Law and Economics)

Transcription

1 Prof. Dr. Friedrich Schneider Institut für Volkswirtschaftslehre Recht und Ökonomie (Law and Economics) LVA-Nr.: SS 2017 (2) Introduction into the Economics of Law, Crime and Behavior SS 2017 Law & Economics 1 / 48

2 Content (1-2) (1) Introduction Assumptions and Premises Coase Theorem (2) Economics and Law The Economics of Contract Law / of Tort Law Precaution Costs Economics of Tort Liability: Additional Topics (3) Crime and Punishment (4) Crime in USA Statistics on Crime in USA / Why the Decline in Crime? Donohue & Levitt: Impact of Legalized Abortion on Crime SS 2017 Law & Economics 2 / 48

3 Content (2-2) (5) New Developments in Law & Economics (6) Law and Empirical Economics: R. C. Ellickson & Social Norms (7) Behavioral Law and Economics Basics Endowment Effect & Status Quo Bias The Ultimatum Game: Results / Implications Loss Aversion Difficulties with Probabilistic Reasoning SS 2017 Law & Economics 3 / 48

4 1. Introduction 1.1. Assumptions and Premises People respond to incentives [ Anreize ]. Law is a method of ordering society to further social goals. Law creates incentives for people to behave in certain ways. Law can help people by facilitating their achievement of their legitimate goals. Economics provides theoretical & empirical methods for examining law s likely and actual effects in the world. SS 2017 Law & Economics 4 / 48

5 1. Introduction 1.1. Assumptions and Premises (cont.) To discourage a particular activity law should increase the price for engaging in that activity. By increasing sanction [ Strafmaßnahme ] (imprisonment / fine) for engaging in undesirable behavior. By increasing monitoring and law enforcement [ Gesetzesvollzug, Strafverfolgung ] regarding undesirable activity. If legal sanctions increase or become more likely people will consume less of sanction-triggering activity. SS 2017 Law & Economics 5 / 48

6 1. Introduction 1.2. Coase Theorem Ronald H. Coase, The Problem of Social Cost, Journal of Law and Economics, Vol. 3 (Oct. 1960). Coase Theorem If transaction costs [ Transaktionskosten ] are zero, bargaining will lead to an efficient allocation of resources, regardless of the law. Law is only necessary to induce efficient behavior when transaction costs are positive. Implication: Assign legal entitlement [ Rechtsanspruch ] to the party which would have ended up with the entitlement to the person which values it the most. SS 2017 Law & Economics 6 / 48

7 2. Economics and Law 2.1. The Economics of Contract Law Law should seek to reduce the costs of concluding and enforcing consensual agreements (like contracts). Why do private parties need help in forming, completing and relying upon consensual agreements? Reasons: Time-intensive transactions (= those that take time to complete). Coordination, commitment, and cooperation. Risk allocation [ Risikoverteilung ]. Information exchange. SS 2017 Law & Economics 7 / 48

8 2. Economics and Law 2.2. The Economics of Tort Law Objective of tort law [ Schadenersatzrecht ] = minimize social costs of accidents: Precaution costs [ Vorsorgekosten ]. Accident losses [ Verluste durch Unfälle ] : o loss of life / life quality; medical cost; loss of output due to temporary inability to work; property damage costs; Administrative costs [ Verwaltungskosten ]. Assumption: Potential victims and injurers are rational decision-makers ( pay attention to cost minimization). SS 2017 Law & Economics 8 / 48

9 2. Economics and Law 2.2. The Economics of Tort Law (cont.) Tort law [ Schadenersatzrecht ] holds out the prospect of liability [ Haftung ] for accident losses so as to: create incentives for rational parties to choose levels of precaution [ Schutzmaßnahme, Vorsorge ] and activities (in which to participate), in order to minimize their own liability; and thereby to minimize the social costs of accidents. SS 2017 Law & Economics 9 / 48

10 2. Economics and Law 2.3. Precaution Costs How does a rational potential tortfeasor [ Schädiger, rechtswidrig Handelnder ] decide how much precaution [ Schutzmaßnahme, Vorsorge ] to purchase? Assume: Tortfeasor will be liable for the victim s losses if there is an accident. But: Most parties are acting behind a veil of ignorance [ Schleier des Nichtwissens ] they do not know if they will be victim or tortfeasor (in future) when deciding about precaution. SS 2017 Law & Economics 10 / 48

11 2. Economics and Law 2.3. Precaution Costs (cont.) A rational potential tortfeasor takes all cost-justified precaution precaution for which the costs of the last unit of precaution taken are just equal to the benefit provided by that precaution. The expected benefit [ erwartete Nutzen ] of a unit of precaution equals the probability of an accident s occurring times the anticipated accident losses. SS 2017 Law & Economics 11 / 48

12 2. Economics and Law 2.3. Precaution Costs (cont.) Example: One more unit of care will reduce probability of an accident s occurring by 0.5 %; if an accident occurs given that amount of precaution damage = 100,000. The expected benefit of that unit of precaution is: (0.005) x 100,000 = 500. If that unit of precaution costs less than 500, society would prefer that a potential (rational) injurer purchases the precaution because the costs are less than the expected benefit. SS 2017 Law & Economics 12 / 48

13 2. Economics and Law 2.4. Economics of Tort Liability: Additional Topics Accident with damage / injury [ Schuld ] between parties for compensation? how allocate fault Tort liability [ Delikt-, Verschuldenshaftung ] different standards exist. Negligence [ Nach-, Fahrlässigkeit ] = conduct that creates an unreasonable risk of harm to others. No liability [ Haftung ] vs. strict liability. Contributory negligence vs. comparative negligence. SS 2017 Law & Economics 13 / 48

14 2. Economics and Law 2.4. Economics of Tort Liability: Additional Topics (cont.) Contributory negligence. No compensation for plaintiff [ Kläger ] when found to have contributed to accident even with only one (!) % fault. Modified comparative negligence [ Mitverschulden ] : Each party's negligence is weighed when determining damage; e.g. 25 % fault by plaintiff compensation = 75 % of damage. No compensation for plaintiff when found to be either equally responsible (50 %) or more responsible (> 50 %) for damage. SS 2017 Law & Economics 14 / 48

15 3. Crime and Punishment Gary S. Becker s rational-choice theory of the decision to commit a crime: A criminal compares the expected costs (EC) and expected benefit (EB) of a crime. Expected costs (EC) [ erwartete Kosten ] include the probability of detection, arrest, and conviction times the value of the sanction (prison / fine) imposed. Expected benefit (EB) [ erwarteter Nutzen ] includes the monetary value of the crime plus any non-monetary satisfaction the criminal receives (by crime). SS 2017 Law & Economics 15 / 48

16 3. Crime and Punishment (cont.) A rational potential criminal: commits the crime if EB > EC; and refrains if EB < EC. Society can reduce crime by raising the expected costs of crime options for society: Raise the probability of detection, arrest and conviction; or increase the criminal sanction; or do both. SS 2017 Law & Economics 16 / 48

17 4. Crime in USA 4.1. Statistics on Crime in USA Since mid- & late 1980s a decline in non-violent [ gewaltlos ] crime occurred in the USA. Property crimes [ Eigentumsdelikte ] down by about 29 % in the 1990s. Since 1991 a steep decline in violent crime occurred, with homicides [ Tötungsdelikte ] at lowest level since the 1930s. Homicide rates down by about 43 % in the 1990s. SS 2017 Law & Economics 17 / 48

18 4.1. Statistics on Crime in USA (cont.) Table 4.1. Changes in Crime Rates for Different Population Groups, USA, period (in %). MSAs = Metropolitan Statistical Areas. Source: Levitt, Steven D. (2004), Understanding Why Crime Fell in the 1990s: Four Factors that Explain the Decline and Six that Do Not, Journal of Economic Perspectives, 18(1), p SS 2017 Law & Economics 18 / 48

19 4. Crime in USA 4.2. Why the Decline in Crime? Deterrence works [ Abschreckung funktioniert ] : Increasing incarceration rates [ Inhaftierungsraten ]. More police and improved policing strategies. Decline in crack cocaine [ Crack-Kokain ]. A robust economy. Increased victim precaution (for example through alarms and security procedures). The legalization of abortion [ Schwangerschaftsabbruch ]? ( next sub-chapter) SS 2017 Law & Economics 19 / 48

20 4.3. Donohue & Levitt: Impact of Legalized Abortion on Crime John J. Donohue III and Steven D. Levitt (2000): study regarding impact of legalized abortion on US-crime. They attribute half of the decline in crime since 1991 to the legalization of abortion in January Roe vs. Wade (US Supreme Court, 1973) led to a significant increase in number of abortions (1.6 million per year by 1980; one abortion per two live births) relatively fewer 18 year-olds existed in the population beginning in 1991 (= years). All the other factors together account for the other half of the decline in US-crime. SS 2017 Law & Economics 20 / 48

21 4.3. Donohue & Levitt: Impact of Legalized Abortion on Crime (cont.) Evidence for the effect of legalized abortions on crime? (1) Broad consistency with prevailing pattern - namely, most crime is committed by year-old males. Because of legalized abortion, there are fewer 18 year-olds exactly 18 years after Roe vs. Wade ( years = 1991), and that s when the downturn in US-crime began. (2) Five states legalized abortion in 1970 (before Roe vs. Wade in 1973), and they experienced a decline in crime before the rest of the country did. SS 2017 Law & Economics 21 / 48

22 4.3. Donohue & Levitt: Impact of Legalized Abortion on Crime (cont.) (3) Higher rates of abortion in a state in the late 1970s and early 1980s are strongly linked to lower crime (in that state) for the period (4) There is no relationship between abortion rates in the mid-1970s and crime rate changes (5) Almost all of the decline in crime in the 1990s can be attributed to reduction in crime among the cohorts [ Kohorten, Personengruppen, Jahrgänge ] legislation; older cohorts. born after abortion there is little change in crime among SS 2017 Law & Economics 22 / 48

23 4.3. Donohue & Levitt: Impact of Legalized Abortion on Crime (cont.) Other hypotheses are unlikely to explain the drop in UScrime in the 1990s: (1) Greater use of imprisonment [ Gefängnisstrafe, Haft ], more police, and changes in police strategies have been going on for a long time. It s unlikely that they could cause a sudden & sharp crime drop just in the 1990s. And the drop occurred in places, such as Los Angeles, where no particular improvement in the police force occurred. SS 2017 Law & Economics 23 / 48

24 4.3. Donohue & Levitt: Impact of Legalized Abortion on Crime (cont.) (2) The decline in crack cocaine trade was largely a phenomenon of major urban areas. But crime drop occurred not just in major urban areas but everywhere. (3) The robust economy prevailed since the early 1980s, not just in the 1990s. Moreover, there is a relatively weak correlation between macro-economic activity and crime levels. Indeed, there is some evidence that much crime is anti-cyclical, increasing when the economy is doing well and declining when it is doing poorly. SS 2017 Law & Economics 24 / 48

25 4.3. Donohue & Levitt: Impact of Legalized Abortion on Crime (cont.) Donohue & Levitt identified two components that make up the total effect that legalized abortion had on crime: (1) The cohort size effect: When the cohort [ Kohorte, Personengruppe, Jahrgang ] reaches the late teens the prime years for committing crimes there are fewer of them and therefore less crime. SS 2017 Law & Economics 25 / 48

26 4.3. Donohue & Levitt: Impact of Legalized Abortion on Crime (cont.) (2) The cohort quality effect: Children born after abortion legalization may on average have lower subsequent rates of criminality. Women who have abortions are those most at risk to give birth to children who would engage in criminal activity. Teenagers, unmarried women, and the economically disadvantaged. Women may use abortion to optimize the timing of childbearing. Through abortion women may delay childbearing until later if their current conditions are suboptimal. Children tend to be born into better environments. SS 2017 Law & Economics 26 / 48

27 4.3. Donohue & Levitt: Impact of Legalized Abortion on Crime (cont.) Summarized: Of the half of the drop in US-crime in the 1990s that Donohue & Levitt attribute to the legalization of abortion: About half of that total effect is attributable to the cohort size effect ( about 1/4 of total drop); and about half of that total effect is attributable to the cohort quality effect ( about 1/4 of total drop). SS 2017 Law & Economics 27 / 48

28 5. New Developments in Law & Economics New developments in law & economics: Empirical Research chapter 6. Behavioral Law and Economics [ Verhaltensökonomie ] chapter 7. SS 2017 Law & Economics 28 / 48

29 6. Law and Empirical Economics: R. C. Ellickson & Social Norms Investigation by Robert C. Ellickson: Damages done to property by unsupervised cattle [ Rinder, Vieh ] how resolve rural landowners disputes in Shasta County, California: In part of the county the owners of cattle were responsible for damage done by their unsupervised cattle (so-called closed range areas ). In the other half of the county, owners were not responsible (so-called open range areas ). SS 2017 Law & Economics 29 / 48

30 6. Law and Empirical Economics: R. C. Ellickson & Social Norms (cont.) Should there be a difference between the two halves of the county in terms of the number of cattle and other indicators of efficiency [ Effizienz ]? Not necessarily, if the Coase Theorem is true: If transaction costs are (almost) zero a change in the rule of liability will have no effect on allocation of resources (cattle, crop, ). BUT: There was NO difference in behavior between the two halves, even though the liability rules [ Haftungsnormen, -regeln ] were different! Why NO difference? SS 2017 Law & Economics 30 / 48

31 6. Law and Empirical Economics: R. C. Ellickson & Social Norms (cont.) Not because neighbors were bargaining to the most efficient result, regardless of the law. Instead, people were not paying attention to the law. Ranchers paid neighbors for the loss of crops [ Ernten ] although the ranchers were not legally liable. Victims of stray cattle ignored some trespasses [ Besitzstörungen ] altogether and used others to offset outstanding informal debts. Victims tended to avoid monetary settlements and instead preferred in-kind benefits [ Sachleistungen ]. SS 2017 Law & Economics 31 / 48

32 6. Law and Empirical Economics: R. C. Ellickson & Social Norms (cont.) Neighbors tried to conform their behavior to the prevailing social norms (= informal rules), not to the law: Live-and-let-live ; Solve conflicts without court. Rural residents deal with one another on a large number of fronts most people expect those interactions to continue far into the future. A farmer (crop) and a rancher (cattle) own adjoining areas continuing relationship. SS 2017 Law & Economics 32 / 48

33 7. Behavioral Law and Economics 7.1. Basics Recall close connection between rational choice theory (abbreviated RCT) and traditional law & economics. Social and cognitive psychologists have found some systematic deviations [ Abweichungen ] from predictions of RCT. Taking these deviations into account when analyzing law leads to changes in economic analysis of results. SS 2017 Law & Economics 33 / 48

34 Four examples: 7. Behavioral Law and Economics 7.1. Basics (cont.) (1) Endowment effect [ Ausstattungs-Effekt ] / status quo bias [ Status Quo-Verzerrung ]. (2) The Ultimatum game [ Ultimatumspiel ] experiments (results, implications). (3) Loss aversion [ Verlustabneigung ]. (4) Difficulties with probabilistic reasoning [ wahrscheinlichkeits-theoretischer Argumentation ]. SS 2017 Law & Economics 34 / 48

35 7. Behavioral Law and Economics 7.2. Endowment Effect & Status Quo Bias People seem to place a very high value on the things they have and the way things are. A systematic difference exists between: Willingness-to-pay (WTP) [ Zahlungsbereitschaft ]: price to acquire something one doesn t have; and Willingness-to-accept (WTA) [ Akzeptanzbereitschaft ]: price to give up that same thing if one already possesses it. SS 2017 Law & Economics 35 / 48

36 7. Behavioral Law and Economics 7.2. Endowment effect & Status Quo Bias (cont.) WTA 2 * WTP. Applies to pens, coffee cups, and other trivially valuable items. Implications: It is far more difficult to change the way things are than one might anticipate. Change may not just be a matter of transaction costs. SS 2017 Law & Economics 36 / 48

37 7. Behavioral Law and Economics 7.3. The Ultimatum Game Ultimatum game [ Ultimatumspiel ]: Two parties (player 1 & player 2) have to split a sum of money (e.g. 20 ). Players are not allowed to talk or to meet. Player 1 (proposer) makes an offer for division of sum. Player 2 (responder) can accept offer, in which case both player get the proposed division; or player 2 can reject offer, in which case no player receives anything. Payment to player 1 & 2 is therefore a pure cooperative surplus [ kooperativer Gewinn ]. SS 2017 Law & Economics 37 / 48

38 7.3. The Ultimatum Game Results of Ultimatum Game Game has been played in over 100 countries with thousands of players of all ages and socio-economic circumstances. The most common (modal) offer is a 50:50 split (e.g for player 1 and 10 for player 2). Rationality assumed player 2 (responder) would be better off even with smallest offer: 1 is more than nothing! player 1 (proposer) should be able to claim almost entire sum (19 ) is a 50:50 split rational? SS 2017 Law & Economics 38 / 48

39 7.3. The Ultimatum Game Results of Ultimatum Game (cont.) Unexpected findings (although not necessarily inconsistent with rational choice theory ): If player 1 proposes a split that gives him or her more than 70 percent of the surplus, player 2 almost always rejects the offer no player receives money! If player 1 (proposer) is selected on some seemingly meritorious [ verdienstvoll ] criterion, player 2 (responder) will tolerate that player 1 receives more of the surplus than if player 1 is selected randomly. SS 2017 Law & Economics 39 / 48

40 7.3. The Ultimatum Game Implications Negotiating parties seem to divide up cooperative surpluses fair. But: Overreaching [ Übervorteilung ] can cause mutually beneficial transactions to fail. Normative Hobbes Theorem: Structure the law so as to minimize the harm caused by failures in private agreements. SS 2017 Law & Economics 40 / 48

41 7. Behavioral Law and Economics 7.4. Loss Aversion The standard social science theory of decision-making under uncertainty [ Entscheidungsfindung unter Unsicherheit ] is that of Subjective Expected Utility (SEU): Individuals are thought to maximize expected utility [ erwarteten Nutzen ] rather than expected value [ erw. Wert ]. This difference arises from attitudes toward risk: risk-neutrality [ Risikoneutralität ], risk-preferring [ Risikofreudigkeit ], and risk-aversion [ Risikoscheu ]. SS 2017 Law & Economics 41 / 48

42 7. Behavioral Law and Economics 7.4. Loss Aversion (cont.) Daniel Kahneman and Amos Tversky found that most people are risk-averse with respect to gains but riskseeking with respect to losses. Example: Option A: 50 with certainty. Option B: 100 with probability 0.5 or 0 with probability 0.5. Same expected value (B = 100 * 0.5 = 50 = A). Gains most people prefer Option A! SS 2017 Law & Economics 42 / 48

43 7. Behavioral Law and Economics 7.4. Loss Aversion (cont.) Extension of last example (option A & B): Option C: - 50 with certainty (= loss). Option D: with probability 0.5 or 0 with probability 0.5. Same expected value (D = * 0.5 = - 50 = C). Losses most people prefer Option D! SS 2017 Law & Economics 43 / 48

44 7. Behavioral Law and Economics 7.4. Loss Aversion (cont.) Implication gains / losses: In civil actions [ Zivilprozesse ], defendants [ Angeklagte, Beklagte ] may be less likely to settle than plaintiffs [ Kläger ]. Situation of plaintiffs can be seen as option A & B. Situation of defendants can be seen as option C & D. Option with certainty can be seen as settlement without trial (e.g. a compensation payment). Probabilities can be seen as probability for winning / losing trial [ Prozess, Gerichtsverhandlung, -verfahren ]. SS 2017 Law & Economics 44 / 48

45 7. Behavioral Law and Economics 7.4. Loss Aversion (cont.) The standard law-and-economics theory of litigation versus settlement is that a trial almost always results from mistaken and inconsistent estimates of the prevailing likelihood at a trial. SS 2017 Law & Economics 45 / 48

46 7. Behavioral Law and Economics 7.5. Difficulties with Probabilistic Reasoning Many legal situations imply that decision-makers make probabilistic calculations [ wahrscheinlichkeits-theoretische Berechnungen ]. Rational criminals are thought to compare expected costs and expected benefits of crime. Tortfeasors [ Schädiger ] and victims are imagined to compare precaution costs [ Vorsorgekosten ] with expected liability [ Haftung ]. BUT individuals always make rational decisions? SS 2017 Law & Economics 46 / 48

47 References (1-2) Reference: Ulen, Thomas S. (2008), An Introduction to Law and Economics: The Coase Theorem and Behavioral Economics, presentation (at University of Colorado Law School), University of Illinois College of Law. Mentioned references: Becker, Gary S. (1968), Crime and Punishment: An Economic Approach, Journal of Political Economy, Vol. 76, No. 2 (Mar. - Apr., 1968), pp , Chicago: The University of Chicago Press. Coase, Ronald H. (1960), The problem of social cost, Journal of Law and Economics, Vol. 3 (Oct., 1960), pp. 1-44, Chicago: The University of Chicago Press. SS 2017 Law & Economics 47 / 48

48 References (2-2) Mentioned references (cont.): Donohue, John J., and Steven D. Levitt (2000), The Impact of Legalized Abortion on Crime, Quarterly Journal of Economics, Vol. CXVI, Issue 2 (May 2001), pp Ellickson, Robert C. (1986), Of Coase and Cattle: Dispute Resolution Among Neighbors in Shasta County, Faculty Scholarship Series, Yale Law School Faculty Scholarship, Paper 466. Tversky, Amos, and Daniel Kahneman (1981), The Framing of Decisions and the Psychology of Choice, Science, New Series, Vol. 211, No. 4481, pp , American Association for the Advancement of Science. SS 2017 Law & Economics 48 / 48