Web Notes – Sixth Edition Cooter & Ulen
Web Notes
Sixth Edition
The following are the web notes for the sixth edition of Law and Economics by Robert D. Cooter and Thomas S. Ulen. Our intent in these notes is to extend the material in the text by describing some additional issues, articles, cases, and books. Because the fields of law, economics, and law and economics are not standing still – because, that is, scholars are adding interesting new material all the time, we may supplement, alter, and add to these notes from time to time.
Each note begins with a copy of the material from the text about the content of the web note and the page on which that web note can be found. We will from time to time insert new material, update some of the entries, and add some additional material. You should be able to download pdf versions of each chapter’s web notes and of the entire set of web notes for all 13 chapters.
We have found that the very best students and their instructors from all over the world pay close attention to these web notes. They often have good ideas about how to add to the entries already here and suggestions about articles, cases, books, and topics that would be instructive to add. We would be grateful for any comments or suggestions about any of the notes.
Chapter 7
Web Note 7.1 (p. 235)
We have previously mentioned the burgeoning literature in behavioral law and economics. Much of that literature relates to the examination of the economics of tort liability. See our website for much more on the connections between behavioral law and economics and tort law.
The literature on behavioral law and economics is large and growing. Its relevance to the economic analysis of tort liability is clear – the analysis assumes that decisionmakers involved in the tort liability system (individuals, groups, corporations, judges, lawyers, administrative agencies, and others) are rational. As a result, they will make decisions that clearly serve their interests, subject to their own preferences and constraints. To the extent that one can imagine those preferences and constraints, one can make predictions about how these rational people will behave.
But the thrust of behavioral analysis, as we have seen, is that people, groups, and organizations make predictable, systematic mistakes in their calculations. For instance, fixed costs tend to loom large in people’s decisions (“I paid for the annual membership; so, I’d better go work out.”), even though economics teaches that “bygones are bygones” and should not figure in current decisions (and assume that rational people do not pay attention to those fixed costs). And rational people understand the probability calculus – that is, that they can form reasonable estimates of probabilities and use those to compute, roughly, expected utilities so that they can maximize subjective expected utility.
The two articles summarized here extend some of these behavioral insights to tort law. We commend both articles for a full and careful reading. In addition, we also recommend Russell B. Korobkin & Thomas S. Ulen, “Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics,” 88 Cal. L. Rev. 1051 (2000). We hope to put a copy of that article on this website for you to read.
Christine Jolls, Cass R. Sunstein, and Richard Thaler, “A Behavioral Approach to Law and Economics,” 50 Stan. L. Rev. 1471 (1998).
In this article, Jolls, Sunstein and Thaler present a broad vision of how law and economics analysis may be improved by increased attention to insights about actual human behavior. Jolls, Sunstein and Thaler main goal is to advance an approach to the economic analysis of law that is informed by a more accurate conception of choice, one that reflects a better understanding of human behavior and its wellsprings. They propose a systematic framework for a behavioral approach to economic analysis of law, and use behavioral insights to develop specific models and approaches addressing topics of abiding interest in law and economics. Then, Jolls, Sunstein, and Thaler suggest an approach based on behavioral economics that will help with the three categories of approach to law: positive, prescriptive, and normative. Positive analysis of law considers how agents behave in response to legal rules and how legal rules are shaped. Prescriptive analysis considers what rules should be adopted to advance specified ends. Normative analysis attempts to assess more broadly the ends of the legal system.
In the first part of the article, Jolls, Sunstein, and Thaler show a general framework and an overview of the arguments for enriching the traditional economic framework. Then, they examine how a behaviorally informed law and economics analysis can help to explain the behavior of human agents insofar as that behavior is relevant to law. And also they explain about the existing legal rules and institutions. Moreover, Jolls, Sunstein and Thaler analyze prescriptive issues, with emphasis on how people respond to information and how this point bears on the role of law. In addition, they outline the main problems with idea that the legal system ought always to respect informed choice, and with the idea that government decisionmakers (as behavioral actors) can be relied upon to make better choices than citizens. Finally, Jolls, Sunstein and Thaler attempt to encourage others to continue the inquiry and research, both theoretical and empirical in order to flesh out the behavioral approach for which they have argued in the present study, and also transform economics into behavioral economics, and economic analysis of law into one of its most important branches.
Ehud Guttel & Alon Harel, “Matching Probabilities: The Behavioral Law and Economics of Repeated Behavior,” 72 U. Chi. L. Rev. 1197 (2005).
Individuals often repeatedly face a choice of whether to obey a particular legal rule. Conventional legal scholarship assumes that whether such a choice is made repeatedly or is one-time event has no effect on individuals’ decisions. In either case, individuals are expected to maximize their payoffs.
However, experimental studies suggest that individuals face a recurring choice, in contrast to individuals making the choice only once, do not behave as maximizers. Instead, individuals facing the choice repeatedly apply the strategy of “probability matching.” For example: individuals failed to maximize when presented with a die with four red faces and two white faces, and asked to predict the colors of a series of rolls. Although maximization demands consistently betting on the red, individuals preferred a “mixed” approach; red was chosen in 2/3 of the rolls and white in 1/3 of the rolls.
Guttel and Harel show normative and descriptive applications that probability matching has in the legal context. Normatively, they present how probability matching affects optimal investment in law enforcement. Descriptively, they consider that probability matching provides a new rationale for existing legal doctrines, such as the imposition of punitive damages on repeated wrongdoers, the imposition of harsher sanctions on recidivists, and rules attributing liability for the mere infliction of risks. Then, Guttel and Harel present that experimental findings corroborate the intuition that law ought to, and in fact does, differentiate sharply between repeated and single-instance behavior.
Web Note 7.2 (p. 236)
The remarkable story of the attempts to regulate the harms from tobacco use and to hold the tobacco companies liable for those harms constitutes an instructive case study of the relationships between liability and regulation. See our website for a discussion of the tobacco cases and the settlement reached in the U.S. litigation.
In late 1998 the four largest U.S. tobacco companies and the attorneys-general of 46 U.S. states entered into the Tobacco Master Settlement Agreement. (That Master Settlement Agreement or MSA is available on-line in pdf format. The four other states – Florida, Minnesota, Texas, and Mississippi – had already reached a settlement agreement with the tobacco companies.) Those attorneys-general had brought their actions against the tobacco companies for compensation to their state Medicaid plans for the costs of treating Medicaid recipients in those states who had diseases caused or exacerbated by tobacco use. The MSA provided for monetary settlement for those states (a minimum of $206 billion over the first 25 years of the agreement) and protection for the tobacco companies from private tort liability actions seeking compensation for harms from tobacco use. The companies also agreed to cease some marketing practices (such as advertising directed at minors), to dissolve some research and advocacy groups that they had established, and to finance an anti-smoking advocacy groups called the American Legacy Foundation.
The MSA ended a period of almost 50 years of litigation and agitation regarding the tort liability of tobacco manufacturers. Private individuals who had sued the tobacco companies for, among other things, negligent manufacture, negligent advertising, and fraud had been almost completely unsuccessful in establishing liability. The companies were able to defend themselves by noting, among other things, that the smokers had been warned of the dangers of smoking (even before the famous Surgeon General’s warning of 1964, cigarettes were known as “cancer sticks”) and that smokers were contributorily negligent in their harms. The state actions for reimbursement of public health expenses had more traction in establishing liability because they did require a showing of individual smoker responsibility.
There have been interesting developments in the agreement since 1998. Tobacco farmers reached an agreement with the tobacco companies to receive compensation ($12 billion between 2004 and 2014) for their lost revenues because of the anticipated decline in their sales because of the MSA. Second, Congress authorized the Food and Drug Administration to regulate tobacco. Third, many of the states “securitized” their entitlements to receive periodic payments under the MSA. That is, the states issued “tobacco bonds” for which they received lump-sum payments today equal, roughly, to the present discounted value (see Chapter 2) of the stream of settlement payments anticipated over the following 25 or so years.
We highly recommend Jonathan Gruber, “Tobacco at the Crossroads: The Past and Future of Smoking Regulation in the United States,” 15 J. Econ. Persp. 193 (2001). See also W. Kip Viscusi, Smoke-Filled Rooms: A Post-Mortem on the Tobacco Deal (2002). We have also learned much from Jeremy Bulow, “The Tobacco Settlement,” The Milken Institute Review (Fourth Quarter, 2006), 41, and Mark Curriden, “Up in Smoke,” ABA Journal (March, 2007)., pp. 27 – 32.
Web Note 7.3 (p. 247)
When there are multiple defendants, it sometimes happens that one or more of the defendants make an agreement to settle their claims with the plaintiff and then keep the existence of that agreement secret from the other defendants. Such agreements are called “Mary Carter agreements” after the case in which they first arose. See our website for a history and economic analysis of Mary Carter agreements.
First, we present the history and background of Mary Carter agreement, including origin of the term, basics elements of these agreements, and also some jurisdictions that held Mary Carter agreement void, and some jurisdictions that accepted the use of these agreements. Our comments are based on Pat Shockley, “Comment – The Use of Mary Agreements in Illinois,” 18 S. Ill. U.L.J. 223 (1993); and Ray J. Black Jr., “Mary Carter Agreements are Void in Texas as Contrary to Public Policy: Elboar v. Smith, 845 S. W.2d 240 (Tex. 1992),” 35 Tex. L. Rev. 183 (1994). Then, we present some important studies about Mary Carter agreements.
The term “Mary Carter Agreement” is derived from the case of Booth v. Mary Carter Paint Co., 202 So.2d 8 (Fla. Dist. Ct. App. 1967). In Booth, plaintiff’s wife was killed in an automobile collision, and he filed suit initially against four defendants alleging that the defendants negligently operated their motor vehicles. Subsequently, the plaintiff executed a settlement agreement with two of the defendants. The agreement guaranteed a maximum liability of $12,500 to the two settling defendants. The agreement also provided that if the verdict against the non-settling defendant exceed $37,500, then the plaintiff would satisfy the entire judgment against non-settling defendants and demand no contribution from the settling defendants. In addition, the agreement provided that the settling defendants would continue as active defendants in the litigation, and it was “agreed that the contents of this agreement would be furnished to no one, unless so ordered by the court.” In upholding the agreement, the Florida District Court of Appeals stated that the settlement was not a release, but more akin to “an agreement that would limit the liability” of the settling defendants, which would “guarantee” the plaintiff a minimum recovery.
Despite some variations, there are four basic elements of a Mary Carter agreement: First, the defendants entering into the agreement guarantee that the plaintiff will receive a given sum. Second, the plaintiff agrees that this guarantee will be enforced only if the plaintiff fails after appropriate attempts to recover the guaranteed sum from the other defendants. Third, the defendants entering into the agreement agree to remain parties in the litigation. Fourth, all the parties agree to keep the agreement confidential and to disclose it only when required by the rules of Court.
Mary Carter agreements are known by many different names, such as “Gallagher agreements” in Arizona, and “loan receipt agreements” in Illinois. There are some variations in these agreements.