Public Law and Economics

Front matter

ROBERT D. COOTER University of California, Berkeley

MICHAEL D. GILBERT University of Virginia

OXFORD

Contents

List of Figures xvii List of Tables xxi List of Boxes by Chapter xxiii Acknowledgments xxvii 1. Introduction to Public Law and Economics 1 2. Theory of Bargaining 11 3. Bargaining Applications 53 4. Theory of Voting 91 5. Voting Applications 127 6. Theory of Entrenchment 177 7. Entrenchment Applications 213 8. Theory of Delegation 265 9. Delegation Applications 305 10. Theory of Adjudication 357 11. Adjudication Applications 415 12. Theory of Enforcement 461 13. Enforcement Applications 503

Detailed Contents

List of Figures

Index

Figure 2.1.

Figure 3.1.

Figure 3.2.

Figure 3.3.

Figure 4.1.

Figure 4.2.

Figure 4.3.

Figure 4.4.

Figure 4.5, Figure 4.6.

Figure 4.7.

Figure 5.1.

Figure 5.2.

Figure 5.3.

Figure 5.4.

Figure 5.5.

Figure 5.6.

Figure 5.7.

Figure 6.1.

Figure 6.2.

Figure 6.3.

Figure 6.4.

Figure 6.5.

Figure 6.6.

Figure 6.7.

Figure 6.8.

Figure 6.9.

Figure 6.10.

Figure 7.1.

Figure 7.2.

List of Figures

The Prisoner’s Dilemma

Bargaining among Branches

Bargaining with More Players

Separation of Powers and Stability

The Winning Platform

Intransitivity

Chaos

Setting the Agenda

Low Wins

High Wins

Intensity and the Median Rule

Suffrage and the Median Rule

Voter Information with and without Disclosure Election without Voter ID

Election with Voter ID

Optimal Size of Legislature

Unicameralism and Bicameralism Gerrymandering

Entrenchment and Bargaining

Equilibrium with Entrenchment Incrementalism Principle

Entrenchment and the Separation of Powers Constitutional Instability

Social Welfare and the Median Asymmetrical Preferences

Transition Costs and Social Welfare Optimal Legal Change

Stare Decisis

The Effect of Judicial Updating on Amendments Updating by Legislators and Judges

Figure 7.3.

Figure 8.1.

Figure 8.2.

Figure 8.3.

Figure 8.4.

Figure 8.5.

Figure 8.6.

Figure 8.7.

Figure 9.1.

Figure 9.2.

Figure 9.3.

Figure 10.1.

Figure 10.2.

Figure 10.3.

Figure 10.4.

Figure 10.5.

Figure 10.6.

Figure 10.7.

Figure 10.8.

Figure 10.9.

Figure 11.1.

Figure 11.2.

Figure 11.3.

Figure 11.4.

Figure 11.5.

Figure 11.6.

Figure 11.7.

Figure 12.1.

Figure 12.2.

Figure 12.3.

Figure 12.4.

Figure 13.1.

Figure 13.2.

Figure 13.3.

Figure 13.4.

Figure 13.5.

Legal Change and Transition Costs The Delegation Game Administrative and Diversion Costs

Optimal Delegation

Unilateral Oversight with Tolerance Intervals

Unilateral and Cooperative Oversight

The Rule Game Optimal Precision

Agencies and Social Benefits

Supermajorities on the Supreme Court

Costs of Nondelegation

Expected Value of the Plaintiff’s Claim

Variables in the Decision Tree The Conjunction Rule

Graphing Judicial Review Precedent and Certainty

Legal Discretion

Interpretations of Title VII Interpretations of RLUIPA Strategy in the Judicial Hierarchy Coordinating on Meaning

Text or Intent?

Under- and Overinclusiveness Precedential Dilemma

Repeated Precedential Dilemma Acquiescence

Applying Marks to Apodaca Costs and Benefits of Lawbreaking Rational Lawbreaking

The Law of Deterrence

The Enforcement Gap Precautions in a Perfect World Precautions in the Real World Proof and Enforcement Insincere Rules and Enforcement

Coordination on Driving

LIST OF FIGURES Xix

Figure 13.6. Coordination on Stopping 536 Figure 13.7. Corruption: Interior Equilibrium 541 Figure 13.8. Deterring Corruption 542 Figure 13.9. Corruption: Corner Equilibria 543

Figure 13.10.Cases and Compliance 552

Table 3.1.

Table 3.2.

Table 3.3.

Table 4.1.

Table 4.2.

Table 4.3.

Table 5.1.

Table 9.1.

Table 9.2.

Table 11.1.

Table 11.2.

Table 11.3.

Table 11.4.

Table 12.1.

List of Tables

Tragedy of the Commons

Collective Action in Article I

Separation of Powers

Voters and Candidates

Preferences on Schools and Police Combinations of School and Police Spending Errors under Three Districting Plans Diffusion-Concentration Matrix

Bribery and Bargaining

Does the Second Amendment Apply to States?

Reasons and Outcomes for One Judge

Doctrinal Paradox

National Mutual Insurance v. Tidewater Transfer Co.

Expected Punishment

List of Boxes by Chapter

Why Punish? 466 Agency Costs in Enforcement 474 Enforcement and the Rule of Law 480 The Excessive Fines Clause 486 Economics and Animus 489 A License for Crime? 499

Chapter 13: Enforcement Applications

“Shoot First and Think Later” 507 Proxy Crimes 524 Enforcement as Information 530 Enforcing International Law 533 Coordinating against the State 538

Active Virtues 554

Acknowledgments

This project germinated during a walk in Berkeley, California. Cooter expressed disappointment that The Strategic Constitution, a book he published in 2000, had not penetrated mainstream legal scholarship. Gilbert, a student of Cooter’s and devotee of that book, suggested a follow-up focused less on economic theory and more on legal doctrine. Many years later, we are proud to present this work, which attempts to provide a comprehensive picture of public law and economics. We hope that readers will experience some of the delight (and none of the frustration) that we had in writing the book.

We have presented materials from the book to our students and colleagues at the University of California, Berkeley, and the University of Virginia. We have discussed ideas from the book at many conferences, including meetings of the American Law & Economics Association, Latin American and Caribbean Law and Economics Association, Law and Society Association, Midwest Law & Economics Association, and Midwest Political Science Association. We have presented some of this material at Duke Law School, Florida State University, Georgetown Law Center, the ICON-S Conference, the Maryland Carey Law Constitutional Law and Economics Workshop, the Political Economy and Public Law Conference, Pontificia Universidad Católica del Ecuador, Tel Aviv University School of Law, Universidad Cientifica del Sur, Universidad Espiritu Santo, Universidad San Francisco, Universidad Torcuato di Tella, the University of Chicago Law School, the University of Illinois at Champaign-Urbana, the University of Michigan Law School, and the University of San Diego Law School. In every setting we have received valuable feedback.

We owe special thanks to many scholars and friends who have improved our ideas by listening, discussing, and commenting on drafts of the manuscript: Charles Barzun, Josh Bowers, Alvaro Bustos, Kevin Cope, Quinn Curtis, Josh Fischman, Ivo Gico, Tom Ginsburg, John Harrison, Andrew Hayashi, Rich Hynes, Leslie Kendrick, Doug Laycock, Mike Livermore, Paul Mahoney, Richard McAdams, Greg Mitchell, Caleb Nelson, Dan Ortiz, Fred Schauer, Rich Schragger, Micah Schwartzman, Doug Spencer, Paul Stephan, Matthew Stephenson, Eduardo Stordeur, Pierre Verdier, and Mila Versteeg.

We could not have completed this project without exceptional research assistance from Jameil Brown, Alexandra Butler, Daniel Graulich, Connor James, Maya Kammourieh, Kevin Krotz, Lauren Lipsyc, Wilson Parker, and Yehonatan Shiman. Mauricio Guim did triple duty as research assistant, scholarly critic, and cheerleader. The librarians at the University of Virginia School of Law went above and beyond the call of duty to help with countless queries and requests. Gilbert gratefully acknowledges support from two research chairs at UVA Law, the Sullivan and Cromwell Professorship and the Martha Lubin Karsh and Bruce A. Karsh Bicentennial Professorship.

Our book builds on foundations laid by others. We draw on the pioneering work of Kenneth Arrow, Duncan Black, James Buchanan, Ronald Coase, Anthony Downs, Mathew McCubbins, Roger Noll, Mancur Olson, William Riker, Amartya Sen, Ken xxviii ACKNOWLEDGMENTS

Shepsle, Gordon Tullock, and Barry Weingast, among many others. We have learned much from the following works and are delighted to join them on the library shelf: Law and Public Choice: A Critical Introduction (1991) by Daniel Farber and Philip Frickey; Constitutional Democracy (1996) by Dennis Mueller; Greed, Chaos, and Governance (1997) by Jerry Mashaw; Law and Economics: Private and Public (2018) by Maxwell Stearns, Thomas Miceli, and Todd Zywicki; Constitutional Economics: A Primer (2020) by Stefan Voigt; and An Economic Analysis of Public Law: Demos and Agora (2021) by George Dellis.

l

Introduction to Public Law and Economics

King John and the barons negotiated the Magna Carta in 1215. Three thousand years earlier, Hammurabi enacted his famous code. Law is an ancient discipline. By comparison, economics is young. Adam Smith laid its foundation in 1776 with his masterpiece, An Inquiry into the Nature and Causes of the Wealth of Nations. Since then, economists have studied and influenced policy on many topics. During most of that time, however, economists have not studied or influenced law, at least not in the sense that lawyers use the term.

For lawyers, “law” means more than policy. Law encompasses constitutions, statutes, regulations, treaties, customs, and prior cases. Law involves certain forms of reasoning. To decide if a prior case governs the present case, lawyers reason by analogy. To determine rights and obligations, lawyers interpret law. Through interpretation, judges determine the meaning of law. Interpretation can lead to monumental decisions, as when the U.S. Supreme Court held that the Constitution prohibits racial segregation in public schools.' According to Alexander Hamilton, one of the Founders of the U.S. Constitution, “Laws are a dead letter without courts to expound and define their true meaning and operation?”

To resolve cases, judges apply law to facts. Prior to the 1960s, economists supplied the facts on some market-related topics. For example, economists might have estimated a company’s market share for a case about antitrust law, or they might have calculated the wages lost by a worker injured in an accident. In cases like these, economists provided the inputs necessary for the operation of law, but little more.

Beginning in the 1960s, the relationship between economics and law changed dramatically. Economics expanded into traditional areas of law, especially criminal law, property law, contract law, and torts (the law of accidents). Economists began asking questions like these: Which party to an accident should pay its costs? What is the efficient remedy for a breach of contract? Will harsher punishments deter more crime?

Economics changed the study and practice of law. Today the top law schools in many countries have economists on their faculties; joint degree programs (a Ph.D. in

1 Brown v. Bd. of Ed. of Topeka, Shawnee Cnty., Kan., 347 U.S. 483 (1954). We use the Bluebook style of citation with minor exceptions, the main one being that we don't use short forms. This saves readers from hunting for complete citation information. For cases, the citation begins with the name of the case, followed by the volume of the reporter in which the case was published, the abbreviated name of the reporter, the page on which the case begins, and the year of decision. For articles, the citation begins with the author(s), followed by the name of the article, the volume number of the journal in which it appears, the abbreviated name of the journal, the first page of the article, and the year of publication. Citations for other kinds of work are self-explanatory.

2 THe FEDERALIST No. 22, at 112 (Alexander Hamilton) (Ian Shapiro ed., 2009).

3 The birth of modern law and economics is usually traced to two articles: Ronald H. Coase, The Problem of Social Cost, 3 J.L. Econ. 1 (1960) and Guido Calabresi, Some Thoughts on Risk Distribution and the Law of Torts, 70 YALE LJ. 499 (1961).

Public Law and Economics. Robert D. Cooter and Michael D. Gilbert, Oxford University Press. © Oxford University Press 2022. DOI: 10.1093/0s0/9780197655870.003.0001 economics and a degree in law) exist at many prominent universities; law reviews routinely publish articles using economics; and several journals devote themselves exclusively to the field. Many areas of law, such as corporate law and bankruptcy, are taught from a law-and-economics perspective. In the United States, prominent law-and-economics scholars have become judges. Professional organizations on law and economics exist in Asia, Europe, North America, South America, and elsewhere. Two economists who helped found the field, Ronald Coase and Gary Becker, received the Nobel Prize in Economics.

Economic analysis has enjoyed remarkable success in law. However, it still has room to grow. Lawyers divide law into two parts, private and public. Private law involves private relationships among individuals. When a homeowner hires a painter, private law governs their agreement. When a driver injures a pedestrian, private law resolves their dispute. Public law involves the state. Public law establishes the powers of government and fundamental rights like speech and religion. Public law regulates war, pollution, immigration, elections, discrimination, education, and health.

Most work in law and economics addresses private law. The economic analysis of private law has exerted enormous influence on legal scholarship and teaching. By comparison, the economic analysis of public law has not. We do not mean that scholars have not written in this area. Many important works apply economics to topics in public law. We will discuss many of those works in this book. Outside of criminal law, however, economics has had limited influence on public law scholarship and pedagogy. When teaching constitutional law, legal scholars do not usually think of economic analysis. When arguing cases about elections, lawyers do not ask, “What do economists say about voting?” When interpreting statutes, judges do not use economic models.

We believe that economics can illuminate public law in the same way that it has illuminated private law. This book attempts to show how and why. Our ambition is to make public law and economics as influential as its private law counterpart.

To explain the potential of economics in public law, we begin by discussing its roots. Economic analysis of law proceeds in three modes: positive, normative, and interpretive. Positive theory predicts when laws arise and how people respond to them. Normative theory evaluates laws using different conceptions of efficiency. Interpretive theory ascertains the meaning of law. We will elaborate briefly on each mode.* Although we have strived for clarity, some readers might find this discussion a little daunting. Beginning in the next chapter and continuing throughout the book, we will work through the ideas step by step.

I. Positive Law and Economics

Lawmakers make laws to achieve certain objectives. To illustrate, legislators lower the speed limit to slow traffic, and regulators cap emissions to reduce pollution. To achieve these objectives, law usually must influence the behavior of people.

4 Our discussion draws on Robert D. Cooter & Michael D. Gilbert, Constitutional Law and Economics, in RESEARCH METHODS IN CONSTITUTIONAL Law: A HANDBOOK (Malcolm Langford & David S. Law eds., Forthcoming).

Introduction To Public Law And Economics 3

Thus, the behavior of people is usually relevant to making, revising, repealing, and interpreting law. Economics provides a theory of behavior. The theory relies on three concepts: preferences, maximization, and equilibrium. We will briefly explain each.°

Economists assume that people can rank the benefit or “payoff” to themselves from different outcomes. Thus, a consumer can rank goods—gourmet coffee, leather shoes, smartphones, electric cars, and chocolate cake. A politician can rank offices— town council, governor, member of Congress, and President. A college student can rank careers—business that promises wealth, or art that gives pleasure. “Utility function” is the technical name that economists give to a preference ranking. Sometimes utility functions involve complicated math. However, the idea behind utility functions is simple. As a person better satisfies her preferences, her payoff or “utility” increases.

Preference rankings must fulfill some formal conditions. However, economics does not assume anything about the reasons for a preference ranking. The values underlying a person's preferences might include pleasure, love, status, happiness, wealth, power, altruism, or justice. People’s actual preferences are complicated and difficult to measure. To simplify the analysis, economists make assumptions. In business, economists often assume that people care only about money. Economic models of material self-interest are often simple and compelling. However, the analysis need not end there. Immaterial values—political philosophies, moral commitments, religious beliefs—influence people too.

Having discussed preferences, we consider their satisfaction. Each person wishes to satisfy her preferences to the greatest extent. When alternatives are ranked, a rational person chooses the highest-ranking alternative. Given boundless opportunities, everyone would fully satisfy their preferences. In reality, opportunities are limited. People have imperfect information, and we face many constraints, including time and money. Economists assume that people satisfy their preferences as best they can given their beliefs and constraints. To make specific predictions, economists use the mathematics of maximization.

Utility maximization often provides a good model for predicting how people will behave. However, the model is imperfect. Real people are psychological, not purely logical. Many people err when making choices, especially when facing novel situations and time pressure. Whereas traditional economics anticipates “full rationality,’ real people exhibit “diminished rationality.” Cognitive psychologists and behavioral economists study diminished rationality. Incorporating diminished rationality into economic models improves their predictions.

So far, we have concentrated on individuals’ behavior. Next, we consider how individuals interact. A social interaction tends to persist when no individual can increase her satisfaction by changing behavior, given that others do not change their behavior. Everyone maximizes simultaneously. This characteristic defines an “equilibrium” If others drive on the right side of the road, I cannot increase my satisfaction by driving on the left side of the road. Driving on the left would cause an accident, decreasing my

5 Readers can find fuller introductions to microeconomic analysis in many sources, including ROBERT COOTER & THOMAS ULEN, Law AND Economics (6th ed. 2016). é The usual list has three conditions: reflexivity, completeness, and transitivity.

satisfaction. Everyone reasons this way, so everyone drives on the right side of the road. Driving on the right is an equilibrium.

Law creates incentives, and people respond to them. Positive incentives create opportunities to increase preference satisfaction, as when a constitution protects political expression. Negative incentives create opportunities to avoid preference frustration, as when a law punishes discrimination. Economics specializes in predicting incentive effects. It predicts these effects by combining utility maximization for individuals and equilibria for groups.

Economics cannot model human behavior perfectly. However, its models are accurate enough to be useful when predicting the causes and effects of many laws.

II. Normative Law and Economics

“Positive” economics makes predictions without evaluating. To illustrate, when economists predict the amount of coal burned, the number of cars produced, and the pounds of potatoes eaten, they conduct positive analysis. In contrast, “normative” economics evaluates. Should we increase the minimum wage, subsidize solar energy, or forbid high-interest loans? To answer questions like these, economists conduct normative analysis. Normative analysis involves values.

Economists usually focus on one value: efficiency. Most people prefer efficiency to inefficiency. The fact that one law achieves a goal more efficiently than another is usually an argument in its favor, regardless of the law’s topic. Economists rely on three standards of efficiency: Pareto efficiency, cost-benefit efficiency, and social welfare.

A change in law is Pareto efficient if someone supports it and no one opposes it. This standard of efficiency does not cause much controversy. If someone prefers the new law and no one opposes it, most people would agree that we should enact the new law. Unfortunately, Pareto efficiency is not very useful. Nearly every law has at least one supporter. How else could a law get enacted in the first place? If a law has even one supporter, then changing it is not Pareto efficient. If we only make Pareto-efficient changes to law, then we will not make many changes. Laws that nearly everyone hates will remain in place.

To move beyond Pareto efficiency, we can inquire into magnitudes. We can assess whether a change in law helps beneficiaries more than it harms others. To illustrate, consider a ban on high-interest loans. The ban will benefit consumers who get tricked by predatory lenders. However, it will harm some consumers who lose access to credit. The ban is not Pareto efficient because one or more people oppose it (consumers who lose access to credit). However, the ban might be cost-benefit efficient. Cost-benefit analysis might compare the money saved by the first group of consumers to the money lost by the second. Specifically, it might compare the first group’s willingness to pay to enact the law and the second group’s willingness to pay not to enact the law. The ban is cost-benefit efficient if the first group is willing to pay more.

Cost-benefit efficiency helps economists evaluate many laws. However, it has shortcomings. Among other features, it often gives equal weight to rich and poor. A law that creates a one-dollar loss for the poor and a two-dollar gain for the rich is cost-benefit efficient. Sometimes equal weighting of dollars makes sense. Other times, however, equal weighting does not make sense.

Introduction To Public Law And Economics 5

Public law often makes equality a goal. When equality is a goal, we might set aside cost-benefit efficiency and concentrate on social welfare. Social welfare aggregates the utility functions of all individuals in society.” We achieve “social welfare efficiency” by maximizing aggregate utility.

Social welfare can account for inequalities. A poor person uses money to satisfy urgent needs, such as food, shelter, and clothing. A rich person uses money to satisfy wants, such as entertainment and leisure. When he gets even more money, he buys luxuries—fine food in restaurants, designer clothing, and international vacations. According to a long tradition in philosophy, the utility that a person gets from an additional dollar decreases as he gets more money. Receiving $1,000 increases the utility of a poor person by more than it increases the utility of a rich person. Social welfare accounts for this. Moving money from rich to poor does not increase the total amount of money in society. However, it might increase social welfare.

Social welfare provides a powerful framework for assessing many laws. It can accommodate a variety of commitments that people hold, including commitments to equality.

III. Interpretive Law and Economics

Positive theory predicts law’s effects, and normative theory evaluates them. These modes of analysis are familiar to all economists, including those who do not study law. Together these activities constitute much of law and economics. However, they do not constitute all of it. Sometimes scholars deploy a third mode of analysis that we consider especially interesting and that we develop throughout the book: interpretive law and economics. This mode of analysis does not predict or evaluate law’s effects. It identifies law’s meaning.

Laws impose obligations on people. Clients pay lawyers to advise them on their obligations. Lawyers tell people what the law requires them to do. What the law requires people to do is the law’s content, or the law’s meaning, or an account of the law itself.

Sometimes a lawyer can tell a person what the law requires by reciting a statute, regulation, or other official document. However, most legal documents require more than recitation. They require interpretation. To interpret law, jurists draw on various sources including the text of the law, the intent of lawmakers, and the history of the law, including prior cases about it. Jurists find law’s meaning by reasoning about diverse sources. The practice of law requires mastering legal reasoning, not just remembering rules. Legal reasoning is a humanistic discipline expressed in legal practice and theory and learned by legal education and experience.

Interpretive law and economics merges the humanistic discipline of law and the social science of economics. Combining different methodologies can seem confusing. Economic reasoning does not always resemble legal reasoning. Proof in law does not resemble proof in an economics journal. However, combining the two disciplines is rewarding. Economics can increase rigor in legal reasoning, and legal reasoning can increase the relevance of economics to public life.

7 In its simplest formulation, social welfare is the sum of the utility of all individuals. In more complicated formulations, social welfare is some other function of the utility of all individuals.

Economics can aid interpretation in different ways that we will elaborate throughout the book. Here we sketch one way. The purpose of a law often provides an important source in interpretation. Laws have various purposes, such as preserving liberty, increasing equality, reducing discrimination, and protecting endangered species. Sometimes the correct interpretation of a law is the one that best fulfills its purpose. Whether an interpretation fulfills the law’s purpose depends in part on the incentives it creates. Economics specializes in incentives. By identifying the incentives that will best fulfill a law’s purposes, economics can help with interpretation.

To illustrate, consider tort law. Ifa person behaves negligently and causes an accident, she is often liable for the harm. What does it mean to behave “negligently”? According to a common account, the purpose of tort law is to protect people from unreasonable risks imposed by others. Thus, a person is negligent when she imposes unreasonable risks. What constitutes an unreasonable risk? Economists help answer by comparing costs and benefits. Specifically, they compare the marginal costs of additional precautions against accidents and the marginal benefits of reduced risk. If a person fails to take a precaution for which the marginal benefit exceeds the marginal cost, he acts negligently. This is not a normative argument about what negligence ought to be. It’s an interpretive argument about what negligence is. Interpreting negligence this way incentivizes people to take cost-justified precautions.

The purpose of some laws is efficiency. For such laws, the normative and interpretive modes of analysis generally yield the same conclusions. The efficient reading of the law (normative) is the legally correct reading of the law (interpretive). This overlap makes interpretive law and economics easy to overlook. However, many laws have purposes other than efficiency. For such laws, the normative and interpretive modes of analysis diverge. Economists might be tempted to follow the normative road. Lawyers and judges care about the interpretive road, so we will try throughout the book to follow it. One of our main objectives is to develop interpretive law and economics.

IV. Making Economics Relevant to Public Law

We have summarized the three modes of analysis used in law and economics. Scholars have successfully deployed these modes (especially the positive and normative modes) in private law. However, these modes have not enjoyed the same success in public law. Why? We offer three hypotheses.

First, as described earlier, economics emphasizes efficiency as the proper measure of social value. Efficiency seems like a natural value to prioritize in many areas of private law. Parties to a contract do not want to leave value on the table. No one wants to waste money on unnecessary precautions against accidents. The connection between efficiency and contract law, property law, and torts helps explain the success of economics in those subjects. In public law, the connection is weaker. Many public laws do not seem to involve efficiency. People doubt the relevance of economics to topics such as human rights, discrimination, and constitutional interpretation.

Second, scholarship on public law and economics tends to be technical. Economics journals overflow with game theory, calculus, statistics, and specialized language.