Principles and Methods of Law and Economics: Enhancing Normative Analysis

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ISBN: 9780521534116 | 0521534119
Cover: Paperback
Copyright: 10/3/2005

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This is an introductory book that targets the reader who has the ambition to apply economic analysis but may be missing a technical introduction to its mathematical techniques or seeks a structured elaboration of its philosophical principles. The book juxtaposes economic analysis with moral philosophy, political theory, egalitarianism, and other methodological principles and then passes to the details of methods such as model-building, derivatives, differential equations, statistical tests, and the use of computer programs.

Preface

xiii

INTRODUCTION: INNOVATION IN LEGAL THINKING

(10)

A. Proposals, Consequences, and Ideals

(2)

B. Toward Scientific Analysis of Law

(4)

C. Bibliographical Note

(4)

PART 1: PRINCIPLES

1. FROM FORMAL LOGIC TO NORMATIVE REASONING

(9)

A. Formal Deontic Logic

(1)

B. Formal Logic's Failure in Normative Reasoning

(2)

C. The Informal Normative Syllogism

(2)

Proposals, Consequences, and Ideals in Normative Reasoning

(1)

D. Concluding Exercises

(2)

E. Bibliographical Note

(1)

2. SOCIAL WELFARE VERSUS MORAL PHILOSOPHY

(17)

A. Ideals behind Law and Economics: Welfarism and Pragmatism

(2)

B. Juxtaposition with Other External Derivations of Ideals

(4)

i. Deriving Ideals from Existing Rules (Including Formalism)

(1)

ii. Rawls' Contractarianism

(1)

iii. The Potential Equivalence of Derived Ideals and Preferences

(2)

C. Distinguishing Features of Economic Analysis

(6)

i. Avoidance of Moral Relativity

(1)

ii. Preference for Applications over Refinement of Principles

(1)

iii. Ubiquitous Importance of Incentives

(1)

iv. Treatment of Preferences as Objective

(3)

v. Lack Bias for Rule Proliferation

(1)

vi. Orientation Toward the Future

(1)

D. Concluding Exercises

(1)

E. Bibliographical Note

(1)

3. FROM POLITICAL PHILOSOPHY TO GAME THEORY

(35)

A. Political Theory

(6)

i. Inefficiencies of Majority Rule

(1)

ii. Legal Process: Explaining the Administrative State

(2)

iii. Civic Republicanism

(1)

iv. Perfectionism

(1)

B. Voting System Design

(6)

C. Game Theory

(7)

i. Cooperation Games: Prisoner's Dilemma

(3)

ii. Coordination Games: Driving Side

(1)

iii. Game Theory in Legal Scholarship

(2)

D. Social Norms

(2)

E. Bounded Rationality

(7)

F. Concluding Exercises

(4)

G. Bibliographical Note

(2)

4. THE IMPORTANCE OF DISTRIBUTION OF WEALTH

(23)

A. Redistribute!

(4)

B. Do Not Redistribute!

(5)

C. Delegating Redistribution to Tax Policy

(5)

D. Concluding Exercises

(5)

E. Bibliographical Note

(1)

5. COASE AND LAW'S IRRELEVANCE

(17)

A. Coasean Irrelevance

(2)

B. Normative Use

(1)

i. Revealing Imperfections

(1)

ii. An Example

(1)

C. Transaction Costs: The Usual Suspect

(10)

i. Vantage Point Makes Transaction Costs

103

(1)

ii. Innovations Transform Transaction Costs

104

(1)

iii. Litigation Costs: Transaction Cost or Not?

105

(1)

iv. Example: Increasing Social Gain from Private Litigation

105

(2)

v. Normative Implications for Litigation of the Analysis of Transaction Costs

107

(2)

D. Concluding Exercises

109

(2)

E. Bibliographical Note

111

(1)

6. MORE FAILURES OF COASEAN IRRELEVANCE

112

(17)

A. Negotiation Holdouts

112

(3)

B. Systematic Errors

115

(1)

C. Risk Aversion

115

(5)

i. Imposing a Transaction Cost

118

(1)

ii. Substantive Solutions of Risk Aversion

118

(2)

D. Distribution

120

(1)

E. Concluding Exercises

121

(5)

F. Bibliographical Note

126

(3)

PART 2: METHODS

7. MATHEMATICAL MODELING

129

(25)

A. Symbols, Functions, and Idioms

131

(9)

B. Simplification and the Model as a Premise

140

(2)

C. Modeling Applications

142

(6)

i. Modeling Negligence Law: Optimization

143

(3)

ii. Modeling the End of Affirmative Action: Differential Equations

146

(2)

D. Concluding Exercises

148

(4)

E. Bibliographical Note

152

(2)

8. CONFRONTING UNCERTAINTY: BASIC PROBABILITY THEORY

154

(21)

A. Describing Randomness: Probability and Expectation

155

(4)

B. Mathematical Models of Expectation

159

(2)

C. Uncertain Uncertainty: Conditional Probability

161

(5)

D. Concluding Exercises

166

(8)

E. Bibliographical Note

174

(1)

9. ADVANCED PROBABILITY: DISTRIBUTIONS AS THE SHAPE OF RANDOMNESS

175

(22)

A. The Shape of Randomness: Distribution Functions

176

(10)

i. Visual Comparison of Discrete and Continuous Distributions

177

(1)

ii. CDF and PDF: Features and Relations

178

(3)

iii. Truncated and Censored Distributions

181

(5)

B. The Normal Distribution

186

(2)

C. Concluding Exercise: Imperfect Enforcement

188

(8)

D. Bibliographical Note

196

(1)

10. HOW TO PRICE UNCERTAINTY: FINANCE

197

(28)

A. Valuation in Perfect Markets

199

(12)

i. Known Rates: Discounting

199

(4)

ii. Risky Assets

203

(8)

B. Normative Implications of the CAPM

211

(2)

i. Financial Information

211

(1)

ii. Forecasts

212

(1)

C. Financial Market Microstructure: The Game-Theoretical Foundation of the CAPM

213

(1)

D. Normative Application of Microstructure: Insider Trading

214

(6)

E. Concluding Exercises

220

(4)

F. Bibliographical Note

224

(1)

11. FINANCE AND PROBABILITY: OPTIONS AND DERIVATIVES

225

(24)

A. Option Pricing

227

(7)

B. Normative Implications of Option Pricing

234

(10)

i. Recipients of Fiduciary Obligation

235

(1)

ii. Automated Reorganizations via Options

236

(4)

iii. The Options Understanding of the New Value Exception

240

(4)

C. Concluding Exercises

244

(4)

D. Bibliographical Note

248

(1)

12. USING SPREADSHEETS

249

(34)

A. The Basics

249

(12)

i. Obtaining Built-in Help about Functions

251

(2)

ii. Using the Function Wizard

253

(2)

iii. Categories of Built-in Functions

255

(3)

iv. Relative and Absolute References in Copying

258

(3)

B. Graphics

261

(8)

i. Chart Types

262

(3)

ii. Completing the Chart Wizard

265

(2)

iii. Manipulating Charts

267

(2)

C. Solving Equations

269

(2)

i. The Solver

269

(1)

ii. Goal Seek

270

(1)

D. Macros and User-Defined Functions

271

(3)

i. Recording a Macro

271

(2)

ii. Editing a Macro

273

(1)

iii. Assigning a Macro to a Graphic

274

(1)

iv. Entering a Function

274

(1)

E. Downloading and Combining Data

274

(6)

i. Data Files Separating Columns with Commas or Tabs

275

(2)

ii. Specifying the Type of Data

277

(1)

iii. Fixed-Width Data

278

(1)

iv. Combining Data

279

(1)

F. Concluding Exercises

280

(1)

G. Bibliographical Note

281

(2)

13. STATISTICS

283

(32)

A. The Use of Statistics in Legal Thinking

284

(3)

B. Fundamentals: Descriptive Statistics and Distributions

287

(1)

C. Empirical Research

288

(23)

i. Basics: Comparing Data That Take Values and Data That Fall into Categories

289

(9)

ii. Determining Influences: Multiple Outcomes

298

(10)

iii. Determining Influences: Yes/No Outcomes

308

(2)

iv. Observations That Are Filtered by a Threshold

310

(1)

D. Concluding Exercises

311

(2)

E. Bibliographical Note

313

(2)

14. CONCLUSION: IMPORTING METHODOLOGICAL INNOVATIONS

315

(54)

A. Cellular Automata

315

(2)

B. Fractals

317

(3)

C. Evolutionary Theory

320

(1)

D. To End

320

(1)

E. Bibliographical Note

321

(2)

APPENDIX A: MEINHARD V. SALMON 249 N.Y. 458 (1928)

323

(9)

APPENDIX B: GLOSSARY

332

(7)

APPENDIX C: MATHEMATICA NOTEBOOKS

339

(30)

A. Differential Equations in Law: The Effect of Terminating Affirmative Action

342

(5)

i. Determine the Participation in the Workforce

342

(1)

ii. Add the Initial Condition

343

(1)

iii. Manipulate the Exponent to See It Disappear

343

(1)

iv. The Long-Run Participation

344

(1)

v. The Composition of the Candidates

344

(1)

vi. Graphics

345

(2)

B. Derivation of the Normal Distribution

347

(8)

i. Derive the Normal Distribution as Gauss Did

347

(2)

ii. The Standard Normal Distribution

349

(1)

iii. Restating with Standard Deviation

349

(1)

iv. Restating with Average Deviation

350

(1)

v. The Triangular Distribution

351

(4)

C. Application of Triangular Distribution: The Uncertain Apprehension of Speed Limit Violations

355

(5)

D. A Comparison of Insider Trading Regimes

360

(9)

i. Foundation

360

(1)

ii. Problem

361

(1)

iii. Solution: Statement

361

(1)

iv. Solution: Proof

362

(3)

v. Illustration of Price Path

365

(4)

Index

369

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Principles and Methods of Law and Economics: Enhancing Normative Analysis

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