Archives For Gary Becker

The NCAA: Dr Jekyll or Mr Hyde?

Alden Abbott —  9 February 2021

The U.S. Supreme Court will hear a challenge next month to the 9th U.S. Circuit Court of Appeals’ 2020 decision in NCAA v. Alston. Alston affirmed a district court decision that enjoined the National Collegiate Athletic Association (NCAA) from enforcing rules that restrict the education-related benefits its member institutions may offer students who play Football Bowl Subdivision football and Division I basketball.

This will be the first Supreme Court review of NCAA practices since NCAA v. Board of Regents in 1984, which applied the antitrust rule of reason in striking down the NCAA’s “artificial limit” on the quantity of televised college football games, but also recognized that “this case involves an industry in which horizontal restraints on competition are essential if the product [intercollegiate athletic contests] is to be available at all.” Significantly, in commenting on the nature of appropriate, competition-enhancing NCAA restrictions, the court in Board of Regents stated that:

[I]n order to preserve the character and quality of the [NCAA] ‘product,’ athletes must not be paid, must be required to attend class, and the like. And the integrity of the ‘product’ cannot be preserved except by mutual agreement; if an institution adopted such restrictions unilaterally, its effectiveness as a competitor on the playing field might soon be destroyed. Thus, the NCAA plays a vital role in enabling college football to preserve its character, and as a result enables a product to be marketed which might otherwise be unavailable. In performing this role, its actions widen consumer choice – not only the choices available to sports fans but also those available to athletes – and hence can be viewed as procompetitive. [footnote citation omitted]

One’s view of the Alston case may be shaped by one’s priors regarding the true nature of the NCAA. Is the NCAA a benevolent Dr. Jekyll, which seeks to promote amateurism and fairness in college sports to the benefit of student athletes and the general public?  Or is its benevolent façade a charade?  Although perhaps a force for good in its early years, has the NCAA transformed itself into an evil Mr. Hyde, using restrictive rules to maintain welfare-inimical monopoly power as a seller cartel of athletic events and a monopsony employer cartel that suppresses athletes’ wages? I will return to this question—and its bearing on the appropriate resolution of this legal dispute—after addressing key contentions by both sides in Alston.

Summarizing the Arguments in NCAA v Alston

The Alston class-action case followed in the wake of the 9th Circuit’s decision in O’Bannon v. NCAA (2015). O’Bannon affirmed in large part a district court’s ruling that the NCAA illegally restrained trade, in violation of Section 1 of the Sherman Act, by preventing football and men’s basketball players from receiving compensation for the use of their names, images, and likenesses. It also affirmed the district court’s injunction insofar as it required the NCAA to implement the less restrictive alternative of permitting athletic scholarships for the full cost of attendance. (I commented approvingly on the 9th Circuit’s decision in a previous TOTM post.) 

Subsequent antitrust actions by student-athletes were consolidated in the district court. After a bench trial, the district court entered judgment for the student-athletes, concluding in part that NCAA limits on education-related benefits were unreasonable restraints of trade. It enjoined those limits but declined to hold that other NCAA limits on compensation unrelated to education likewise violated Section 1.

In May 2020, a 9th Circuit panel held that the district court properly applied the three-step Sherman Act Section 1 rule of reason analysis in determining that the enjoined rules were unlawful restraints of trade.

First, the panel concluded that the student-athletes carried their burden at step one by showing that the restraints produced significant anticompetitive effects within the relevant market for student-athletes’ labor.

At step two, the NCAA was required to come forward with evidence of the restraints’ procompetitive effects. The panel endorsed the district court’s conclusion that only some of the challenged NCAA rules served the procompetitive purpose of preserving amateurism and thus improving consumer choice by maintaining a distinction between college and professional sports. Those rules were limits on above-cost-of-attendance payments unrelated to education, the cost-of-attendance cap on athletic scholarships, and certain restrictions on cash academic or graduation awards and incentives. The panel affirmed the district court’s conclusion that the remaining rules—restricting non-cash education-related benefits—did nothing to foster or preserve consumer demand. The panel held that the record amply supported the findings of the district court, which relied on demand analysis, survey evidence, and NCAA testimony.

The panel also affirmed the district court’s conclusion that, at step three, the student-athletes showed that any legitimate objectives could be achieved in a substantially less restrictive manner. The district court identified a less restrictive alternative of prohibiting the NCAA from capping certain education-related benefits and limiting academic or graduation awards or incentives below the maximum amount that an individual athlete may receive in athletic participation awards, while permitting individual conferences to set limits on education-related benefits. The panel held that the district court did not clearly err in determining that this alternative would be virtually as effective in serving the procompetitive purposes of the NCAA’s current rules and could be implemented without significantly increased cost.

Finally, the panel held that the district court’s injunction was not impermissibly vague and did not usurp the NCAA’s role as the superintendent of college sports. The panel also declined to broaden the injunction to include all NCAA compensation limits, including those on payments untethered to education. The panel concluded that the district court struck the right balance in crafting a remedy that both prevented anticompetitive harm to student-athletes while serving the procompetitive purpose of preserving the popularity of college sports.

The NCAA appealed to the Supreme Court, which granted the NCAA’s petition for certiorari Dec. 16, 2020. The NCAA contends that under Board of Regents, the NCAA rules regarding student-athlete compensation are reasonably related to preserving amateurism in college sports, are procompetitive, and should have been upheld after a short deferential review, rather than the full three-step rule of reason. According to the NCAA’s petition for certiorari, even under the detailed rule of reason, the 9th Circuit’s decision was defective. Specifically:

The Ninth Circuit … relieved plaintiffs of their burden to prove that the challenged rules unreasonably restrain trade, instead placing a “heavy burden” on the NCAA … to prove that each category of its rules is procompetitive and that an alternative compensation regime created by the district court could not preserve the procompetitive distinction between college and professional sports. That alternative regime—under which the NCAA must permit student-athletes to receive unlimited “education-related benefits,” including post-eligibility internships that pay unlimited amounts in cash and can be used for recruiting or retention—will vitiate the distinction between college and professional sports. And via the permanent injunction the Ninth Circuit upheld, the alternative regime will also effectively make a single judge in California the superintendent of a significant component of college sports. The Ninth Circuit’s approval of this judicial micromanagement of the NCAA denies the NCAA the latitude this Court has said it needs, and endorses unduly stringent scrutiny of agreements that define the central features of sports leagues’ and other joint ventures’ products. The decision thus twists the rule of reason into a tool to punish (and thereby deter) procompetitive activity.

Two amicus briefs support the NCAA’s position. One, filed on behalf of “antitrust law and business school professors,” stresses that the 9th Circuit’s decision misapplied the third step of the rule of reason by requiring defendants to show that their conduct was the least restrictive means available (instead of requiring plaintiff to prove the existence of an equally effective but less restrictive rule). More broadly:

[This approach] permits antitrust plaintiffs to commandeer the judiciary and use it to regulate and modify routine business conduct, so long as that conduct is not the least restrictive conduct imaginable by a plaintiff’s attorney or district judge. In turn, the risk that procompetitive ventures may be deemed unlawful and subject to treble damages liability simply because they could have operated in a marginally less restrictive manner is likely to chill beneficial business conduct.

A second brief, filed on behalf of “antitrust economists,” emphasizes that the NCAA has adapted the rules governing design of its product (college amateur sports) over time to meet consumer demand and to prevent colleges from pursuing their own interests (such as “pay to  play”) in ways that would conflict with the overall procompetitive aims of the collaboration. While acknowledging that antitrust courts are free to scrutinize collaborations’ rules that go beyond the design of the product itself (such as the NCAA’s broadcast restrictions), the brief cites key Supreme Court decisions (NCAA v. Board of Regents and Texaco Inc. v. Dagher), for the proposition that courts should stay out of restrictions on the core activity of the joint venture itself. It then summarizes the policy justification for such judicial non-interference:

Permitting judges and juries to apply the Sherman Act to such decisions [regarding core joint venture activity] will inevitably create uncertainty that undermines innovation and investment incentives across any number of industries and collaborative ventures. In these circumstances, antitrust courts would be making public policy regarding the desirability of a product with particular features, as opposed to ferreting out agreements or unilateral conduct that restricts output, raises prices, or reduces innovation to the detriment of consumers.

In their brief opposing certiorari, counsel for Alston take the position that, in reality, the NCAA is seeking a special antitrust exemption for its competitively restrictive conduct—an issue that should be determined by Congress, not courts. Their brief notes that the concept of “amateurism” has changed over the years and that some increases in athletes’ compensation have been allowed over time. Thus, in the context of big-time college football and basketball:

[A]mateurism is little more than a pretext. It is certainly not a Sherman Act concept, much less a get-out-of-jail-free card that insulates any particular set of NCAA restraints from scrutiny.

Who Has the Better Case?

The NCAA’s position is a strong one. Association rules touching on compensation for college athletes are part of the core nature of the NCAA’s “amateur sports” product, as the Supreme Court stated (albeit in dictum) in Board of Regents. Furthermore, subsequent Supreme Court jurisprudence (see 2010’s American Needle Inc. v. NFL) has eschewed second-guessing of joint-venture product design decisions—which, in the case of the NCAA, involve formulating the restrictions (such as whether and how to compensate athletes) that are deemed key to defining amateurism.

The Alston amicus curiae briefs ably set forth the strong policy considerations that support this approach, centered on preserving incentives for the development of efficient welfare-generating joint ventures. Requiring joint venturers to provide “least restrictive means” justifications for design decisions discourages innovative activity and generates costly uncertainty for joint-venture planners, to the detriment of producers and consumers (who benefit from joint-venture innovations) alike. Claims by defendant Alston that the NCAA is in effect seeking to obtain a judicial antitrust exemption miss the mark; rather, the NCAA merely appears to be arguing that antitrust should be limited to evaluating restrictions that fall outside the scope of the association’s core mission. Significantly, as discussed in the NCAA’s brief petitioning for certiorari, other federal courts of appeals decisions in the 3rd, 5th, and 7th Circuits have treated NCAA bylaws going to the definition of amateurism in college sports as presumptively procompetitive and not subject to close scrutiny. Thus, based on the arguments set forth by litigants, a Supreme Court victory for the NCAA in Alston would appear sound as a matter of law and economics.

There may, however, be a catch. Some popular commentary has portrayed the NCAA as a malign organization that benefits affluent universities (and their well-compensated coaches) while allowing member colleges to exploit athletes by denying them fair pay—in effect, an institutional Mr. Hyde.

What’s more, consistent with the Mr. Hyde story, a number of major free-market economists (including, among others, Nobel laureate Gary Becker) have portrayed the NCAA as an anticompetitive monopsony employer cartel that has suppressed the labor market demand for student athletes, thereby limiting their wages, fringe benefits, and employment opportunities. (In a similar vein, the NCAA is seen as a monopolist seller cartel in the market for athletic events.) Consistent with this perspective, promoting the public good of amateurism (the Dr. Jekyll story) is merely a pretextual façade (a cover story, if you will) for welfare-inimical naked cartel conduct. If one buys this alternative story, all core product restrictions adopted by the NCAA should be fair game for close antitrust scrutiny—and thus, the 9th Circuit’s decision in Alston merits affirmation as a matter of antitrust policy.

There is, however, a persuasive response to the cartel story, set forth in Richard McKenzie and Dwight Lee’s essay “The NCAA:  A Case Study of the Misuse of the Monopsony and Monopoly Models” (Chapter 8 of their 2008 book “In Defense of Monopoly:  How Market Power Fosters Creative Production”). McKenzie and Lee examine the evidence bearing on economists’ monopsony cartel assertions (and, in particular, the evidence presented in a 1992 study by Arthur Fleischer, Brian Goff, and Richard Tollison) and find it wanting:

Our analysis leads inexorably to the conclusion that the conventional economic wisdom regarding the intent and consequences of NCAA restrictions is hardly as solid, on conceptual grounds, as the NCAA critics assert, often without citing relevant court cases. We have argued that the conventional wisdom is wrong in suggesting that, as a general proposition,

• college athletes are materially “underpaid” and are “exploited”;

• cheating on NCAA rules is prima facie evidence of a cartel intending to restrict employment and suppress athletes’ wages;

• NCAA rules violate conventional antitrust doctrine;          

• barriers to entry ensure the continuance of the NCAA’s monopsony powers over athletes.

No such entry barriers (other than normal organizational costs, which need to be covered to meet any known efficiency test for new entrants) exist. In addition, the Supreme Court’s decision in NCAA indicates that the NCAA would be unable to prevent through the courts the emergence of competing athletic associations. The actual existence of other athletic associations indicates that entry would be not only possible but also practical if athletes’ wages were materially suppressed.

Conventional economic analysis of NCAA rules that we have challenged also is misleading in suggesting that collegiate sports would necessarily be improved if the NCAA were denied the authority to regulate the payment of athletes. Given the absence of legal barriers to entry into the athletic association market, it appears that if athletes’ wages were materially suppressed (or as grossly suppressed as the critics claim), alternative sports associations would form or expand, and the NCAA would be unable to maintain its presumed monopsony market position. The incentive for colleges and universities to break with the NCAA would be overwhelming.

From our interpretation of NCAA rules, it does not follow necessarily that athletes should not receive any more compensation than they do currently. Clearly, market conditions change, and NCAA rules often must be adjusted to accommodate those changes. In the absence of entry barriers, we can expect the NCAA to adjust, as it has adjusted, in a competitive manner its rules of play, recruitment, and retention of athletes. Our central point is that contrary to the proponents of the monopsony thesis, the collegiate athletic market is subject to the self-correcting mechanism of market pressures. We have reason to believe that the proposed extension of the antitrust enforcement to the NCAA rules or proposed changes in sports law explicitly or implicitly recommended by the proponents of the cartel thesis would be not only unnecessary but also counterproductive.

Although a closer examination of the McKenzie and Lee’s critique of the economists’ cartel story is beyond the scope of this comment, I find it compelling.

Conclusion

In sum, the claim that antitrust may properly be applied to combat the alleged “exploitation” of college athletes by NCAA compensation regulations does not stand up to scrutiny. The NCAA’s rules that define the scope of amateurism may be imperfect, but there is no reason to think that empowering federal judges to second guess and reformulate NCAA athletic compensation rules would yield a more socially beneficial (let alone optimal) outcome. (Believing that the federal judiciary can optimally reengineer core NCAA amateurism rules is a prime example of the Nirvana fallacy at work.)  Furthermore, a Supreme Court decision affirming the 9th Circuit could do broad mischief by undermining case law that has accorded joint venturers substantial latitude to design the core features of their collective enterprise without judicial second-guessing. It is to be hoped that the Supreme Court will do the right thing and strongly reaffirm the NCAA’s authority to design and reformulate its core athletic amateurism product as it sees fit.

In Amazon, Antitrust & Competition, Barriers to Entry, Exemptions, Monopolization, Platforms, Supreme Court, Truth on the Market , , , , , , , , , , , ,
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Amateurism and Antitrust: The 9th Circuit Gets It Right

Alden Abbott —  6 October 2015

On September 30, in O’Bannon v. NCAA, the U.S. Court of Appeals for the 9th Circuit held that the National Collegiate Athletic Association’s (NCAA) rules that prohibited student athletes from being paid for the use of their names, images, and likenesses are subject to the antitrust laws and constitute an unlawful restraint of trade, under the antitrust rule of reason. This landmark holding represents the first federal appellate condemnation of NCAA limitations on compensating student athletes. (In two previous Truth on the Market posts I discussed this lawsuit and later explained that I agreed with the federal district court’s decision striking down these NCAA rules.) The gist of the 9th Circuit’s opinion is summarized by the Court’s staff:

The [9th Circuit] panel held that it was not precluded from reaching the merits of plaintiffs’ Sherman Act claim because: (1) the Supreme Court did not hold in NCAA v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85 (1984), that the NCAA’s amateurism rules are valid as a matter of law; (2) the rules are subject to the Sherman Act because they regulate commercial activity; and (3) the plaintiffs established that they suffered injury in fact, and therefore had standing, by showing that, absent the NCAA’s rules, video game makers would likely pay them for the right to use their names, images, and likenesses in college sports video games.

The panel held that even though many of the NCAA’s rules were likely to be procompetitive, they were not exempt from antitrust scrutiny and must be analyzed under the Rule of Reason. Applying the Rule of Reason, the panel held that the NCAA’s rules had significant anticompetitive effects within the college education market, in that they fixed an aspect of the “price” that recruits pay to attend college. The record supported the district court’s finding that the rules served the procompetitive purposes of integrating academics with athletics and preserving the popularity of the NCAA’s product by promoting its current understanding of amateurism. The panel concluded that the district court identified one proper less restrictive alternative to the current NCAA rules – i.e., allowing NCAA members to give scholarships up to the full cost of attendance – but the district court’s other remedy, allowing students to be paid cash compensation of up to $5,000 per year, was erroneous. The panel vacated the district court’s judgment and permanent injunction insofar as they required the NCAA to allow its member schools to pay student-athletes up to $5,000 per year in deferred compensation.

Chief Judge Thomas concurred in part and dissented in part. He disagreed with the [two judge panel] majority’s conclusion that the district court clearly erred in ordering the NCAA to permit up to $5,000 in deferred compensation above student-athletes’ full cost of attendance.

The key point of the 9th Circuit’s decision, that competitively restrictive rules are not exempt from antitrust scrutiny because they promote the perception of “amateurism,” is clearly correct, and in line with modern antitrust jurisprudence. The Supreme Court has taught that anticompetitive restrictions aimed at furthering the reputation of the learned professions (see Goldfarb v. Virginia State Bar (1975), striking down a minimum legal fee schedule for title searches), and their ability to advance social goals effectively (see FTC v. Superior Court Trial Lawyers Association (1990), condemning a joint effort to raise government-paid legal aid fees and thereby “enhance” the quality of legal aid representation), are fully subject to antitrust review. Even the alleged desire to ensure that quality medical services are not sacrificed (see FTC v. Indiana Federation of Dentists (1986), rejecting a dental association’s agreement to deny insurers’ request for procedure-specific dental x-rays), and that safety is maintained in major construction projects (see National Society of Professional Engineers v. United States (1978), striking down an ethical canon barring competitive bids for engineering services), do not shield agreements from antitrust evaluation and potential condemnation. In light of those teachings, the NCAA’s claim (based on a clear misreading of the Supreme Court’s NCAA v. Board of Regents (1984) decision) that its highly restrictive “amateurism” rules should be exempt from antitrust review is patently absurd.

Moreover, as a matter of substance, the NCAA is precisely the sort of institution whose rules merit close evaluation by antitrust enforcers. The NCAA is a monopsony cartel, representing the institutions (America’s colleges) which effectively are the sole buyers of the services of high school football and basketball players who hope to pursue professional sports careers. Moreover, the NCAA’s rules regarding student athletes greatly limit competition, artificially limit athletes’ compensation, and are in severe tension with the “scholar-athlete” ideal that the NCAA claims it promotes. In 2011, the late University of Chicago Professor Gary Becker, a Nobel Laureate in Economics, put it starkly:

[T]he NCAA sharply limits the number of athletic scholarships, and even more importantly, limits the size of the scholarships that schools can offer the best players. NCAA rules also severely restricts the gifts and housing players are allowed to receive from alumni and others, do not allow college players to receive pay for playing for professional teams during summers or even before they attended college, and limits what they can be paid for non-playing summer work. The rules are extremely complicated, and they constitute hundreds of pages that lay out what is permitted in recruiting prospective students, when students have to make binding commitments to attend schools, the need to renew athletic scholarships, the assistance that can be provided to players’ parents, and of course the size of scholarships.

It is impossible for an outsider to look at these rules without concluding that their main aim is to make the NCAA an effective cartel that severely constrains competition among schools for players. The NCAA defends these rules by claiming that their main purpose is to prevent exploitation of student-athletes, to provide a more equitable system of recruitment that enables many colleges to maintain football and basketball programs and actively search for athletes, and to insure that the athletes become students as well as athletes. Unfortunately for the NCAA, the facts are blatantly inconsistent with these defenses. . . .
A large fraction of the Division I players in basketball and football, the two big money sports, are recruited from poor families; many of them are African-Americans from inner cities and rural areas. Every restriction on the size of scholarships that can be given to athletes in these sports usually takes money away from poor athletes and their families, and in effect transfers these resources to richer students in the form of lower tuition and cheaper tickets for games. . . .

[T]he graduation rates for these minority students-athletes are depressingly low. For example, the average graduation rate of Division I African American basketball and football players appears to be less than 50%.

Some of the top players quit school to play in the NBA or NFL, but that is a tiny fraction of all athletes who dropout. The vast majority dropout either because they use up their sports eligibility before they completed the required number of classes, or they failed to continue to make the teams. Schools usually forget about athletes when they stop competing. An important further difference between athletes and non-athletes who drop out of school is that athletes would have been able to get much better financial support for themselves and their families but for the NCAA restrictions on compensation to athletes. They could have used these additional assets to help them finish school, or to get a better start if they dropped out.

Also in 2011, Judge Richard Posner of the 7th Circuit echoed Professor Becker’s views regarding NCAA student competition rules and noted the NCAA’s history of avoiding antitrust problems:

The National Collegiate Athletic Association behaves monopsonistically in forbidding its member colleges and universities to pay its athletes. Although cartels, including monopsonistic ones, are generally deemed to be illegal per se under American antitrust law, the NCAA’s monopsonistic behavior has thus far not been successfully challenged. The justification that the NCAA offers – that collegiate athletes are students and would be corrupted by being salaried – coupled with the fact that the members of the NCAA, and the NCAA itself, are formally not-for-profit institutions, have had sufficient appeal to enable the association to continue to impose and enforce its rule against paying student athletes, and a number of subsidiary rules designed to prevent the cheating by cartel members that plagues most cartels.

As Becker points out, were it not for the monopsonistic rule against paying student athletes, these athletes would be paid; the monopsony transfers wealth from them to their “employers,” the colleges. A further consequence is that college teams are smaller and, more important, of lower quality than they would be if the student athletes were paid.

In sum, the 9th Circuit O’Bannon Court merits praise for deciding clearly and unequivocally that antitrust applies to the NCAA’s student athlete rules, irrespective of whether one agrees with the specific holding in the case. The antitrust laws are a “consumer welfare prescription” that applies generally to activities that have an impact on interstate commerce, and short shrift should be given to any institution that claims it should be antitrust-exempt based on the alleged “virtue” or “public-spiritedness” of its actions. (This reasoning also supports the lifting of baseball’s antitrust exemption, which stems from a 1922 Supreme Court decision that is out of step with modern antitrust jurisprudence. But that is a matter for another day.)

In Antitrust & Competition, Cartels, Intellectual Property, Law & Economics, Patent , , ,
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Gary Becker, the Economic Approach to Crime, and Guerilla Grafters

Josh Wright —  8 April 2012

Fruit trees in a number of cities, including San Francisco, are prevented from bearing fruit in the name of “protecting” pedestrians from slip and falls and keeping away insects and vermin.  In response to these regulations, a group of Guerilla Grafters has emerged to — you guessed it — graft fruit bearing branches onto the non-fruit bearing city trees.

But grafting trees to bear the occasional pear is not all fun and games, apparently.  San Francisco officials consider the renegade arborists to be engaged in a serious offense (San Francisco Examiner):

While the grafters’ activities might seem harmless, Public Works Director Mohammed Nuru said the renegade gardeners are running afoul of the law.

“The trees that are in the right of way, they’re not for grafting,” he said. “The City considers such vandalism a serious offense. There would be fines for damage to city property.”

Nuru had not heard of Guerrilla Grafters, but said he would ask his staff to investigate. Meanwhile, he added, if the grafters have ideas about urban agriculture, they should discuss them with city officials.

NPR embeds one reporter with grafter Tara Hui on a covert grafting operation.  The first thought that crossed my mind as I read the story was skepticism that the costs associated with fallen fruit on city trees could be significant.  The second was hope the story had overestimated the prevalence of this type of regulation.  There is also some interesting law and economics.  The cops and robbers angle in the NPR story with Hui attempting to avoid detection for fear of sanction by the city authorities in the way of fines for vandalism was also interesting.  From the standard Beckerian model of rational criminal behavior we see Hui’s sensitivity to changes in the “price” of engaging in guerilla grafting (that is, the probability of detection weighted by the sanction she will pay if caught) and investments to avoid detection.

But what about the economic benefits?  Here’s Hui’s account:

“If we say where it is, they could come after me,” says Tara Hui, a fruit tree grafter. She’s talking about city officials, who manage the trees and say it’s illegal to have fruit trees on sidewalks.  So let’s just say we’re in some Bay Area city in a working-class neighborhood, at a line of pear trees that bear no pears.

Hui and two assistants pull out a knife, reach into a plastic bag filled with twigs no bigger than your pinkie, and cut from a fruit bearing pear tree. She says it’s an Asian pear, and that she’s grafting it onto a flowering pear tree.  They whittle a wedge into one end of their twig, then cut a groove into a similar-sized twig on the city tree. They join the two, like tongue and groove carpenters. And when their grafted twig eventually grows into a branch.

“There will be a much better looking tree that actually will provide fruit for people that come by,” Hui says.

Hui’s motives to break the law are straightforward.

“We don’t have a supermarket and we have very few produce stores [here],” she says. “What better to alleviate scarcity of healthy produce in an impoverished area than to grow them yourself and to have it available for free.”

For a recent and illuminating paper on the law and economics of criminal behavior which attempts to incorporate conventional critiques of the economic approach — for example, that criminals lack self-control, have non-standard preferences or do not act in their own self-interest — into the standard model, see Murat Mungan’s Law and Economics of Fluctuating Criminal Tendencies.  Mungan’s main goal is to show that the standard economic approach is capable of modification so as to absorb more realistic assumptions and that it gains explanatory power by doing so.

HT goes to Steve Salop for pointing me to the Guerilla Grafter story.

In Regulation , ,
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Chicago’s View on the Future of Law and Economics

Josh Wright —  20 October 2011

A very interesting group of essays on the future of law and economics by ten University of Chicago professors.  It is especially interesting in light of the attempt to revitalize law and economics in Chicago.  The essays exhibit a great diversity in views of what lies in store for the future of law and economics — a topic I’ve written about frequently at TOTM (and along with Henry Manne available here on SSRN).  Its an interesting discussion.  Here’s my quick, rough and ready guide to the 10 essays — which comes with a recommendation to check them all out in their entirety of course — followed by a few comments and reactions at the end of this  post.

  • Douglas Baird: Law and economics will return to its Chicago-born empirical roots, though the return is complicated by the reduced cost of empirical tools and access to data which give rise to the possibility of an “empirical bubble” (as Larry Ribstein has described it) and a tendency to settle into reliance upon those tools as a substitute for finding new and interesting questions to answer.
  • Omri Ben-Sharar: The view that law and economics will follow “technical” trend in economics is wrong.  One need not worry about law and economics losing its “retail value” — a concern I’ve raised on the blog a number of times — Omri argues, because law and economics has “maintained a stronghold on American legal academia for over 30 years by being relevant, accessible, and relentless in luring new audiences.”  I’m a bit confused by this essay; Ben-Shahar argues that the view that the trend towards the technical trend in economics and law and economics scholarship is no concern, but cites considerable evidence that the trend is real and be explained by the reduction in the return from traditional L&E scholarship.  However, Ben-Sharar is optimistic that higher return opportunities present themselves in exporting law and economic analysis across international boundaries and into new subject matter domestically.
  • Anu Bradford: international law and economics analysis, and public choice, have become incredibly complex in the modern world and are a growth area for future scholarship.
  • Eric Posner: This is my favorite of the essays.  Posner contemplates a strong form of the divergence between economists doing law and economics (ELE) and lawyers doing law and economics (LLE); he goes on to discuss an area in which there is indeed a significant gap between economic theorists and law and economics scholars: contracts.  Posner  discusses a variety of reasons for why this specialization is troubling for both fields.
  • Saul Levmore: The current empirical “bubble” will burst and increase the turns to greater theoretical work — primarily using economic insights to explain cases and doctrine (rather than modeling).  Empirical work is less valuable in law than other disciplines, argues Levmore, and while law and economics’ influence will increase in law schools, a question remains as to whether the work will shift away from technical empirics and toward scholarship more “useful” to the practice of law.
  • Anup Malani: Malani’s first line sums his position up nicely: “The future of law and economics is no different than the future of other applied microeconomics fields such as labor, health, and public economics: better identified empirical work with a solid connection to economic theory.”   Its an odd comparison for me; after all, law and economics is quite different in that it is the only of those applied microeconomic fields in which the producers of scholarship are in law schools and not economics departments.  Malani goes on to make some really interesting points about empirical methods in law and economics compared to labor economics and other applied fields, and some suggestions for improving those methods.  But why should law schools have the comparative advantage in this sort of scholarship?
  • Thomas J. Miles: More on the shift from law and economic theory to empirical work in the last decade.  Miles argues, consistent with others, that the returns to empirical work in law and economics (and the reduced cost of producing it) increased as the  theoretical space became saturated.   empirical scholarship in law and economics has surged.  Miles predicts that empirical work is likely “compose a greater share of law and economics scholarship in the future,” and holds out hope that the increase in the supply of JD/PhD’s along with reduced cost of coordinating between JD’s and PhD’s will reduce the trends towards specialization.
  • David A. Weisbach: “We will see more integration with economics departments, more professionalization of the field, better econometric techniques, and expansion into new  areas and new legal problems. But things will pretty much continue as they are.”  Weisbach’s essay complements Miles in that it emphasizes the key of coordinating between disciplines (for Weisbach, perhaps broader than just law and economics) to solve increasingly complex problems.
  • Richard Posner: Posner points to a strong trend towards increased specialization sacrificing the practical application of law and economics scholarship and is skeptical of the notion that the costs of coordination between disciplines has fallen.  “The increased formalization of economics makes it difficult for lawyers who do not have training in economics to collaborate with economists or lawyer-economists. Increasingly, economic analysts of law write for each other, in specialized journals, rather than for the larger profession. Increasingly, indeed, they write  not for economic analysts of law as a whole but for economic analysts of the writer’s subspecialty. The expansion of a field leads to the multiplication of its subspecialties.”    Like Ben-Sharar and Bradford, Posner describes law and economics as a mature discipline whose future lies in exporting its insights across boundaries and to new problems.  Posner largely subscribes to the view that the future of law and economics may continue to lose its “retail” and practical value as it becomes less connected to legal institutions.  He also uses a rather odd and, in my view, misplaced example about macroeconomics and the financial crisis as evidence of the gap between law and economic theory and practice.
  • Gary Becker: Becker continues the theme of arguing that the future lies in coordination between specialist theorists and econometricians,  Becker also argues that a robust area for future law and economics research lies at the “macro” level, i.e. how legal institutions and rules impact economic growth and how macroeconomic developments influence legal institutions.  No doubt these are interesting questions.  But why, again, is there an argument that law schools have a comparative advantage in producing this scholarship rather than remaining the province of economists?  Or teaching law students?

All interesting reads.  There is a good amount of discussion about coordinating theoretical and empirical work, and overcoming the problem of scholarship that is too formal and too technical for “retail application,” which are no doubt a key to ensuring a bright future for law and economic work.  There are some obvious omissions in the discussion.  Judicial education is one obvious role for law and economics scholars in harnessing the insights of economics for practical application in the law.  There is little discussion about the future of law and economics in the classroom, or the relationship between the role of economics in the law school classroom and the challenging facing law and economic scholarship discussed by the authors.

In Economic Theory, Law & Economics, Truth on the Market , ,
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The Return of Chicago Law and Economics?

Josh Wright —  12 October 2011

A few years ago, spurred on by Justice Scalia’s observation that the school had lost “the niche it once had as a rigorous and conservative law school,” there was some blog discussion about the apparent decline of Law and Economics at the University of Chicago.  Professor Bainbridge observed that it was certainly the case that “the place has lost its law and economics distinctiveness.”   I wrote then that:

Chicago is obviously still among the top law schools for L&E.  The citation rankings say so, and to be sure, some of the L&E legends are still there along with some superstar juniors.  But I don’t think many L&E folks still view U of C as dominating L&E the way it once did.  This strikes me largely as a case of the rise of the rest relative to U of C with top L&E talent spreading out in smaller clusters across the top law schools as the discipline matured and gained influence and acceptance within the broader legal academy.

See also Brian Leiter’s interesting comments to the post.

Whether the real story is the demise of U of C Law and Economics or the rise of the rest with top L&E talent spreading out in smaller clusters across the top law schools as the discipline matured and gained influence and acceptance within the broader legal academy, there is an interesting and hopeful development for Law and Economics.  University of Chicago has unveiled a large-scale plan to build out its Law and Economics capacity, including more joint appointments (including Gary Becker, James Heckman, Steven Levitt, John List and Kevin Murphy), new hires, an Institute for Law and Economics, and legal education for judges.  From the National Journal:

After about 18 months of discussion, administrators settled on a plan that includes the formation of a formal Institute for Law and Economics; a joint J.D./Ph.D. program intended to produce faculty well-versed in the law and economics; a number of joint faculty appointments in the university’s economics department and law school; and a series of internationally focused conferences and collaborations with legal educators and judges outside the United States.

The initiative is large in scope — it includes 34 faculty members from the law school, business school and economics departments with the law school planning to hire more professors  — and comes at a price, Schill said. It¹s being funded with money from the law school, the university, as well as private money from a fundraising campaign that is likely to launch next year. He said the investment would substantial, but declined to provide a dollar figure.

The investment will come at no cost to students, Schill said. The school simultaneously plans to add three clinics while expanding its research mission. “We can walk and chew gum at the same time,” he said.

Perhaps the highest-profile aspect of the push is the Law and Economics Institute, launched on Oct. 10. Until now, the school lacked a formal center to coordinate the law-and-economics work produced by its faculty.

Should be very interesting to watch.  But this is a wonderful development for those who care about law and economics and its influence.

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Pioneers of Law and Economics Available in Paperback

Josh Wright —  7 April 2011

Pioneers of Law and Economics (with Lloyd Cohen) is now available in paperback. 

You can get it for 20% off the cover price at the link above (discounted price = $36).

There are essays focusing on: Ronald Coase, Aaron Director, George Stigler, Armen Alchian, Harold Demsetz, Benjamin Klein, James Buchanan, Gordon Tullock, Henry Manne, Richard Posner, Gary Becker, William Landes, Richard Epstein, Guido Calabresi, Frank Easterbrook, Daniel Fischel, Steven Shavell and A. Mitchell Polinsky.

Contributors are: Harold Demsetz, Nuno Garoupa, Fernando Gómez-Pomar, Mark Grady, Tom Hazlett, Keith Hylton, Kate Litvak, Andrew Morriss, Sam Peltzman, John Pfaff, Larry Ribstein, Stephen Stigler, Robert Tollison, Tom Ulen, Susan Woodward, and Joshua Wright.

In Law & Economics, Truth on the Market , , ,
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Henry Manne on Behavioral Overreach

Henry G. Manne —  6 December 2010

Henry G. Manne is Dean Emeritus at George Mason University School of Law

Behavioral Economics, like so many efforts previously to upend the hegemony of the neo-classical market model, will leave some footprints on the intellectual sands of time.  However, there is no way that it can accomplish what many of its disciples seem, subliminally at least, to believe:  that we should abandon the traditional model with (because of?) all its implications about private property, competitive markets and individual freedom.  That dream is, of course, ridiculous for one obvious and frequently mentioned reason: Behavioral Economics does not even attempt to offer an integrated theory of resource allocation, the ultimate and necessary mission of any economic theory.  All it does is putter around some select edges of the traditional theory (mainly the very weakly held – and, as we shall see, unnecessary – rationality assumption) and, again like its predecessors in the intellectual history of economics, it claims far more damage to the received model than it actually delivers.

My first observation about the present state of affairs in Behavioral Economic theory is that it builds too ambitiously on the findings of psychology and does not pay enough attention to what economists already well understand.  I don’t know of any respectable economist of the last 80 years or more who has pushed a fundamentalist notion of the rationality assumption in descriptive or analytical economics.  To the extent that some of the more dedicated Behavioralists do accuse devotees of the market model of something like this, they are clearly misunderstanding the heuristic nature of the perfect competition model.  I won’t take the opportunity to try to reeducate them in what economics is all about and what economists do.  Suffice it to say that the model is valuable enough if it does nothing more than paint an idealistic picture of a perfect market – else what’s a heaven for?

What I would like to point out, however, is the irrelevance of much of the substance of Behavioral Economics for “doing” economics.  My principal (as a matter of fact my sole) authority for this proposition (though some of Gary Becker’s work also comes to mind) is the magnificent classic article by Armen Alchian, Uncertainty, Evolution, and Economic Theory, 58 JPE 211 (1950). Continue Reading…

In Economic Theory, Free to Choose Symposium , ,
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Decision Trees

Josh Wright —  26 November 2010

Nobel Laureate economist Gary Becker’s decision tree (HT: Freakonomics, from the new illustrated SuperFreakonomics):

In Amazon, Platforms, Truth on the Market
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A Plug and Some Links

Josh Wright —  29 September 2010

I’ll be talking about the Intel Settlement in an ABA program, The Intel Settlement: A Perspective From the Trenches, today at lunchtime along with a great group of panelists with a wide variety of perspectives on the issue, Kyle Andeer (FTC Counsel), Ken Glazer (KL Gates), and Henry Thumann (O’Melveney & Myers).   If you’re interested, you can register and get call-in numbers at the link above.

And now, some links:

In Antitrust & Competition, China, Federal Trade Commission, International, Law & Economics, Monopolization, Net Neutrality, Telecommunications , , ,
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Nudging Antitrust? Commissioner Rosch’s Weak Case for “Behavioral Antitrust” (Part 1)

Josh Wright —  12 July 2010

Increasingly, the notion that updating antitrust policy with the insights of behavioral economics would significantly improve matters for consumers.   Others have called for more major surgery, favoring an outright rejection of the current economic foundation of antitrust policy — and especially the portions of the foundation “Made in Chicago” — in favor of a new regime based on behavioral economics.  There are plenty of antitrust scholars who’ve begun to make this case, with perhaps Professor Stucke having been the most prolific on this score.  And behavioral economics has provided the intellectual support, or perhaps cover depending on who you ask, for the recent regulatory expansion involving consumer credit.  The issue is also getting more and more attention.  Competition Policy International recently published a symposium issue dedicated to the topic.

One might argue that the intellectual banter about the back and forth of “what school” reigns in antitrust is a waste of time.  But that strikes me as inconsistent with the history of the development of antitrust doctrine, which has largely lagged the dominant economic paradigm a few decades.  To the extent that the dominant economic paradigm changes, it is certainly quite plausible that we start to see changes in the doctrine.   Though, for example, the Supreme Court has largely but not entirely resisted adopting Post-Chicago economics despite the fact that it has certainly established itself as the dominant economic paradigm in economics departments.   Nonetheless, I think questions of competing economic models in antitrust and elsewhere can have real consequences — as can questions about how those battles should be resolved (e.g., I make the case here that that the Chicago School has defended its territory largely because the empirical evidence warrants that result).

All of that said, when the chatter about the appropriate intellectual foundation for antitrust shifts from the ivory tower to the regulatory agencies who can do something about it, the issue deserves more attention.  Indeed, Commissioner Rosch has been making policy speeches about the value of incorporating behavioral economics into antitrust.  The latest, this June 9th speech, gives the most detailed account of “the case” for antitrust law displacing conventional economic theory with the insights of the behavioral economic literature.   It is not the first time Commissioner Rosch has sung the virtues of behavioral economics and antitrust.   Nor, I suspect, will it be the last.  But it is the most detailed intellectual case in support of “nudging” antitrust the Commissioner has offered thus far, and given both the source and level of detail, I think the claims are worthy of serious consideration.

In a series of posts beginning today, I am going to use Commissioner Rosch’s speech to analyze some of the issues involved, while reserving others for an article I am currently working on detailing the uses and abuses (especially the latter) of behavioral economics in antitrust.  I’ve written quite skeptically about the incorporation of behavioral economics into antitrust previously.    Some of this skepticism derives from documenting abuses of the behavioral economics literature in order to provide intellectual support for policy preferences; some from theoretical or empirical features of the behavioral theories that deserve more serious economic attention than can be supplied in a blog post.  With respect to the former, please note that this criticism is one that I do not necessarily level at behavioral economists themselves, but instead those who would incorporate that literature into the law in a haphazard fashion.

In this blog series, I intend to highlight just some of the fundamental theoretical and empirical faultlines in the intellectual foundation of the behavioral antitrust enterprise, at least as it has been articulated thus far by Commissioner Rosch and others.  I’ll save many of new arguments for that paper, which I hope will have some influence over the emerging debate over behavioral economics in antitrust and other consumer protection settings. 

[Note to law review editors: look for the paper in the fall submission season!  Feel free to contact me if you are interested]

But with the case being made strongly by influential antitrust policy makers at the Commission — there is no time like the present to point out some — but not all — of the existing logical and economic flaws in the hopes of starting a serious dialogue about what behavioral economics adds, if anything, to antitrust.  And new arguments are not required to expose many of the flaws in Commissioner Rosch’s case for behavioral antitrust.  Indeed, his claims fail largely on their own terms.  Commissioner Rosch’s speech organizes the case in a reasonable three-part manner: starting with discussing insights from behavioral economics and their antitrust relevance as well as the so-called failure of conventional economics, then turning to and rejecting criticisms of behavioral antitrust, and finally concluding with some views on where all of the aforementioned takes antitrust.

I believe this issue deserves more serious attention than it appears to be getting.  I will address Commissioner Rosch’s argument in a three-part series of posts responding to Commissioner’s Rosch’s case for “behavioral antitrust.”  By this I mean an antitrust and competition policy regime that incorporates the insights of behavioral economics rather than mainstream economic theory, including neoclassical price theory and to some extent Post-Chicago models as well.

In Part I, below the fold, I’m going to focus on the Commissioner’s description of behavioral economics and what is has to offer antitrust.

Continue Reading…

In Antitrust & Competition, Economic Theory, Federal Trade Commission, Financial Regulation, Google, Platforms, Regulation , , , , ,
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Pioneers of Law and Economics — Available Now

Josh Wright —  1 September 2009

EE_0312_Cohen_v2

Pioneers of Law and Economics, a volume I edited alongside my colleague Lloyd Cohen, is now available at the Elgar Website.   I’m very happy with how the book came out in large part because of the fantastic group of contributors who agreed to take on chapters, including:  Harold Demsetz, Nuno Garoupa and Fernando Gomez-Pomar, Mark Grady, Tom Hazlett, Keith Hylton, Kate Litvak, Andrew Morriss, Sam Peltzman, John Pfaff, Larry Ribstein, Stephen Stigler, Robert Tollison, Tom Ulen, Susan Woodward, and Josh Wright.

Here’s a description of the book:

The law and economics movement came of age in the second half of the 20th century and had a profound effect on both the scholarship and practice of law. The specially commissioned essays in this book honor the pioneering contributions of those who created the foundation of the modern law and economics enterprise.

The editors of the volume embrace a view of the field that is inclusive not only of a broad range of issues, but also of economic methods. Celebrated here are the founders of law and economics as well as economic theorists, public choice scholars, lawyers and judges who applied economic insights to the law and legal institutions. They include: Ronald Coase, Aaron Director, George Stigler, Armen Alchian, Harold Demsetz, Benjamin Klein, James Buchanan, Gordon Tullock, Henry Manne, Richard Posner, Gary Becker, William Landes, Richard Epstein, Guido Calabresi, Frank Easterbrook, Daniel Fischel, Steven Shavell and A. Mitchell Polinsky. Contributors to the volume include other pioneers, former students and clerks, colleagues, and influential scholars in the field.

Scholars and students working in the tradition of law and economics, as well as those in the fields of economics, law and public policy will find the book an essential reference for this important area of scholarship.

I will also admit that the proud UCLA Bruin in me is also very excited that the Pioneers volume includes as subjects my picks for the Nobel Prize — Alchian, Demsetz and Klein — as well as Mark Grady, Tom Hazlett, Susan Woodward and myself.

The volume includes almost entirely new material (with the exceptions of the Peltzman and Stigler essays on Aaron Director — which we thought were not likely to be outdone) by high level law and economics scholars with close intellectual familiarity with their subject matter covering  some very familiar and other less familiar characters in the law and economics movement.

Whether a student or scholar in the field,  I think you will learn something reading this book.

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Available Now: Pioneers of Law and Economics

Josh Wright —  24 June 2009

I’m very pleased to announce that my first book editing project (along with my colleague Lloyd Cohen), Pioneers of Law and Economics, is available on-line from Edward Elgar Publishing.  The book includes a series of specially commissioned essays designed to honor the founders of the law and economics enterprise.  From the book:

The editors of the volume embrace a view of the field that is inclusive not only of a broad range of issues, but also of economic methods. Celebrated here are the founders of law and economics as well as economic theorists, public choice scholars, lawyers and judges who applied economic insights to the law and legal institutions. They include: Ronald Coase, Aaron Director, George Stigler, Armen Alchian, Harold Demsetz, Benjamin Klein, James Buchanan, Gordon Tullock, Henry Manne, Richard Posner, Gary Becker, William Landes, Richard Epstein, Guido Calabresi, Frank Easterbrook, Daniel Fischel, Steven Shavell and A. Mitchell Polinsky. Contributors to the volume include other pioneers, former students and clerks, colleagues, and influential scholars in the field.

Scholars and students working in the tradition of law and economics, as well as those in the fields of economics, law and public policy will find the book an essential reference for this important area of scholarship.

Many thanks to the excellent list of contributors who devoted their time and energy into this project!

1. Ronald H. Coase
Thomas W. Hazlett

2. Aaron Director Remembered
Stephen M. Stigler

3. Aaron Director’s Influence on Antitrust Policy
Sam Peltzman

4. George J. Stigler and his Contributions to Law and Economics
Harold Demsetz

5. The Enduring Contributions of Armen Alchian
Susan Woodward

6. Harold Demsetz
Mark F. Grady

7. Benjamin Klein’s Contributions to Law and Economics
Joshua D. Wright

8. Buchanan and Tullock on Law and Economics
Robert D. Tollison

9. Henry Manne
Larry E. Ribstein

10. Gary Becker’s Contributions to Law and Economics
John F. Pfaff

11. Pioneers of Law and Economics: William M. Landes and Richard A. Posner
Thomas S. Ulen

12. Putting Law First: Richard Epstein’s Contribution to Law and Economics
Andrew P. Morriss

13. Calabresi’s Influence of Law and Economics
Keith N. Hylton

14. Easterbrook and Fischel
Katherine V. Litvak

15. The Path Breaking Contributions of A. Mitchell Polinsky and Steven Shavell to Law and Economics
Nuno Garoupa and Fernando Gomez-Pomar

If you are a student, teacher, producer or consumer of law and economics scholarship this is a great volume for you.  With the exceptions of the Peltzman and Stigler essays on Aaron Director from the recent Journal of Law and Economics tribute Buy the book, these are all original essays written for the purposes of this collection.  You can buy the book here.

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