Pathbreaking Work in Modern Law and Economics?

Josh Wright —  21 December 2006

A project I am working on, and will blog about in the near future, has got me thinking about the following question which I would like to pass along to our readers and my co-bloggers for their thoughts:

What, if any, are the truly pathbreaking contributions to economic analysis of law in the last twenty years?

To be clear, I do not mean good or even important contributions to L&E. Rather, I mean contributions that have or are likely to transform the field or the application of economic thought to a particular subject area (think: Coase and The Problem of Social Cost, Becker on economic analysis of crime, Calabresi on the Cost of Accidents, Manne on Insider Trading, etc.). Is it too early to identify these? Are the L&E trails already blazed such that only marginal contributions (which can be very important but are less likely to be pathbreaking in the sense meant here) are left? Are any post-1986 contributions already “pathbreaking”? Which ones? Be specific! Include the author(s), title(s), and the spirit of the contribution. I’ll return to this topic later on and share my own thoughts then.

12 responses to Pathbreaking Work in Modern Law and Economics?

  1. 

    Keith: thanks, I didn’t know there was a follow-up from Ayres. I recall the ALEA session when Posner presented his critique (Ayres wasn’t there), and the audience reaction was, “There are no penalty defaults? Old news. We’ve all known it forever, and not even Ayres himself advocates that.”

  2. 

    I agree with you on the major point here: game theory has been important for law and economics, maybe even very important, and perhaps pathbreaking depending upon who you ask.

    That said, I’m a little less optimistic about the problem of multiple equilibria. The problem is not only the impact upon the models predictions and ability to generate insights, which is as you point out, a problem which can be reduced but not eliminated in some cases. But there is also the issue of subjecting the models to meaningful empirical testing. This is difficult to do in the context of multiple equilibria, folk theorems, etc. While simple price theoretic models also do not solve everything, they inherently offer some important advantages in L&E.

    Again, none of this is to say that game theory is not a useful tool to shed some light on strategic interactions or clarify analysis where those effects have gone overlooked. Indeed, it is beyond reasonable dispute that game theory has done exactly that in many instances.

  3. 

    Yes, an important weakness of many game theory models is that multiple equilibria are often possible and thus the results are indeterminate. At the same time, game theory can often clarify analysis by identifying possible equilibria while excluding others.

    Take predation models. Game theory shows that predation is a credible threat in only a narrow range of circumstances. (See John Lott, Are Predatory Commitments Credible?) This analysis has put the predation doctrine under some pressure and perhaps has contributed to judicial reluctance to find predation defendants liable in many situations. Sure the models don’t answer everything. (Neither do other L&E models, by the way.) But still they’re awfully helpful. Same goes for other applications.

    In the end, I suppose that “pathbreaking” is in the eye of the beholder. Perhaps “important” is a less subjective term, and perhaps all would agree that game theory’s contributions to law have at least been that.

  4. 

    Agreed that actual legal reform would be a tough standard, which is why I opened the criteria to changing the field or legal reform. Of course this criteria begs the definition of “changing the field.” But the possibility of strategic effects cannot be a sufficient condition for game theory to have a pathbreaking impact on an area.

    Back to my antitrust example. The strategic agency literature has produced hundreds of models where by focusing on the possibility of strategic interaction between say, suppliers and retailers, we’ve learned that just about any outcome is possible in equilibrium depending on the assumptions of the model, the type of competition (e.g. Bertrand v. Cournot), the parties’ information sets, and the magnitude of the strategic effects. So we’ve learned, for instance, that all sorts of vertical restraints can possibly be anticompetitive in some of the many equilibria.

    So what are we to make of this? Is this contribution pathbreaking in antitrust? Or in your example, the game theoretic literature tells us that all sorts of settlement equilibria are possible. That’s fine. But did folks think about strategic behavior in the context of settlements and negotiations prior to game theory? What is the contribution of game theory here, precisely? Note: I’m not saying there is none, just trying to pin it down. In the antitrust example, there is certainly a contribution. But there is little evidence that these strategic effects are important in the real world in that particular setting. Perhaps they are empirically more important in the settlement setting.

    In any event, I guess my point is that being able to model a problem game – theoretically is different than contributing to our understanding of the problem. I am sure that in each of these applications, game theory contributed something to our understanding. But what? This is certain to vary across fields and across problems where strategic effects will have varying impacts. Which is why I want to focus on specific contributions rather than broad methodological ones.

    All of this re-framing the question of mine, I think, does not change your answer that settlement is an area where game theory has had a pathbreaking impact — and so I am writing this more to clarify my line of thought than to take issue with any of your helpful comments.

  5. 

    Josh–I guess I would be hard-pressed to provide an example of how the law has been changed in a major way as a consequence of game theory. Of course, if that were the standard, it’s hard to see how Coase changed the law either–yet no one would say that his work wasn’t pathbreaking for L&E, not because it changed the law but because it enhanced our understanding of its effects.

    Valuation is one area of the law where I’m holding out hope for “legal reform in light of game theory.” But it hasn’t happened yet. As I see it, game theory’s contribution, like Coase’s, is an enrichment of the analysis in a wide range of applications. There’s no question that game theory is the most academically advanced way to analyze strategic negotiation, and law is filled with situations requiring strategic negotiation. Just about any litigation or transaction situation is amenable to a game theoretic analysis of each side’s “best response.” And what is law if not litigation and transactions. I don’t think it’s a stretch to say that no L&E analysis of a strategic situation is complete without consideration of the game theory dimension.

  6. 

    Keith — I think my question is unclear. My apologies. Clearly, game theoretic insights can be applied to all sorts of situations outside of antitrust, i.e. strategic interactions between litigants, parties to a contract, just about anywhere including all sorts of settings relevant to the law. I understand you to be saying that game theory has had a pathbreaking influence on L&E. Fair enough.

    I guess what I am trying to get at is whether any specific game – theoretic contribution, i.e. a particular article, has changed that field or changed the law in a particular way to reflect those insights? Maybe I’m asking the wrong question. I dont know. Posner’s 6th edition discusses game theory and lists a few specific applications: predatory pricing, contempt, privilege against self-incrimination, court-agency and court-legislature games, blackmail, and law-clerk hiring. Has game theory produced a pathbreaking understanding in any of these areas? The most hopeful candidate, I would guess, is the public choice literature.

    Again, using predatory pricing analysis as an example, I dont think that game theoretic insights have been pathbreaking in this area but that is open to some reasonable dispute I would gather.

    I’m very interested in your thoughts on this and thanks for your patience while I try to pin down exactly what I am asking!

    And Happy New Year!

  7. 

    Kate–Eric Posner indeed takes this position. But Ian Ayres has done a piece in the FSU Law Review responding to Posner that extensively documents some of the many instances that penalty default rules have been used in the history of American law.

    Josh: Game theory has a wide range of legal applications beyond predation models in antitrust(such as the strategic interactions between litigants or parties to a contract). Posner’s intro to the ’98 edition discusses the broad range of contributions that game theory as of then had made to the law.

    The application with which I am most familiar (because of my own contributions in the area) is the recent literature on strategic interaction among valuation litigants, which relies heavily on game theory. But there are many others.

  8. 

    Thanks for the comments. Kate: LLSV is certainly a leading candidate.

    Keith, I wonder what the next revision of Posner, or the one after that, will say about the legacy of game theory in law and economics? In antitrust, for example, the best one might say is that game theory has had a marginal impact on the field. But that does not mean its introduction to other areas of the law would not qualify as pathbreaking. Do you have any specific game theoretic contributions in mind in addition to Baird, Gertner, Picker?

  9. 

    Keith: The “penalty default” stuff is cute, but has little support in reality and is pretty much abandoned by the academy, and, I suspect, by the authors themselves. See Eric Posner’s paper on the subject (ALEA of 2005, I think).

  10. 

    To me, the most important development in L&E in recent years has been the application of game theory to legal problems pioneered by Baird, Gertner & Picker (1993). Other extremely important developments include the economic analysis of contractual default rules and in particular the development of the “penalty default” concept by Ayres & Gertner.

    A good way to detect pathbreaking developments in L&E is to look at the key changes Posner makes to his treatise in each new edition. For example, when the fifth edition came out in 1998, Posner emphasized in his introduction that the major change since the last edition was to incorporate the new literature on game theory.

  11. 

    Professor Anthony D’Amato (Northwestern) on the failure of interdisciplinary scholarship in the legal academy

  12. 

    The original LLSV paper, “Law and Finance”, in Journal of Finance, 1998.