1 George Mason School of Law Contracts I Paternalism I F.H. Buckley [email protected].
Jan 04, 2016
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Free bargaining makes people better off…
Provided that we assume that their choices satisfy the assumptions of rational choice
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Rational Choice: Six Assumptions
Full Information
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Rational Choice: Six Assumptions
Full Information Choices are Freely Made
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Rational Choice: Six Assumptions
Full Information Choices are Freely Made Non-satiation
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Rational Choice: Six Assumptions
Full Information Choices are Freely Made Non-satiation Completeness or comparability
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Rational Choice: Six Assumptions
Full Information Choices are Freely Made Non-satiation Completeness or comparability No third party effects (externalities)
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Rational Choice: Six Assumptions
Full Information Choices are Freely Made Non-satiation Completeness or comparability No third party effects (externalities) Perfect rationality
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Rational Choice: Six Assumptions
Full Information (later) No mistakes No misrepresentations And no informational asymmetries
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Rational Choice: Six Assumptions
Full Information Choices Are Freely Made (later)
No duress
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Rational Choice: Six Assumptions
Full Information Choices Are Freely Made Non-satiation
More is always better
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A
B
Good 1
More is always better
0
Good 2
Non-satiation: B > A
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A
B
Good 1
More is always better
0
Good 2
Non-satiation: B > A
XA XB
XB > XA
YB
YA
YB > YA
Non-SatiationIs this the same thing as saying “Greed is good”?
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Michael Douglas as Gordon Gekko in Wall Street
Non-SatiationHow would you define greed?
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Michael Douglas as Gordon Gekko in Wall Street
Is it a matter of how avidly one pursues money?
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Work
Leisure
Is it a matter of how avidly one pursues money?
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Scrooge McDuck
●
●
Surfer
B
A
Work
Leisure
Is it a matter of how avidly one pursues money?
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●
●B
A
Work
LeisureJust where would one put lawyers?
Is it a matter of how avidly one pursues money?
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●
●B
A
Work
LeisureIs there a golden mean?
Notorious workaholics
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Is what you do with the money relevant?
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Personal Consumption
Spendingon Charity
Is what you do with the money relevant?
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Greedhead’s consumption at B
●
●
Benefactor’sconsumption at A
B
A
Personal Consumption
Spendingon Charity
Or is it what you pursue?
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Material Goods
Non-materialGoods
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Rational Choice: Six Assumptions
Full Information Choices Are Freely Made Non-satiation Completeness or comparability
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Time 1
0 Time 2
No black holes
Comparability: No incommensurabilities
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Sophie’s Choice
You are a member of a hospital’s ethics committee. You have to choose between allocating a kidney to an alcoholic former sports idol or a mother of two.
IncommensurabilityTragic Choices
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Rational Choice: Six Assumptions
Full Information Choices are Freely Made Non-satiation Completeness or comparability No third party effects (externalities)
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Mary
Bess
Ann
Representing Ann’s utility on a third dimension.
(Please put on your 3-D glasses now.)
Third party effects: Bargaining with a third person
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Mary
Bess
Ann
The intersection of the three indifference curves in three dimensionalspace is the “bargaining core”
Third party effects: Bargaining with a third person
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Paretian norms don’t work—if it’s an external cost
Externalities and Tort Law
What happens if third parties can’t be joined?
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Do we then abandon the concept of efficiency?
A more relaxed standard: Kaldor-Hicks efficiency
A transformation is Kaldor-Hicks efficient when the winners could compensate the losers (“Potential Pareto-Efficiency”) and satisfy Paretian standards
But nearly everything has third party effects…
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It is proposed to abandon steel tariffs that impose costs of $10B on the economy but provide steel manufacturers with a gain of $1B.
The bankruptcy of a failing business imposes a cost to shareholders of $1M, but provides a benefit of $5M to creditors.
Examples of Kaldor-Hicks Efficiency
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Mary
Bess
A
C
Explaining Kaldor-Hicks:C is Pareto-inferior to A Moving from A to C makes Mary worse off
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Mary
Bess
A
C
But C is Kaldor-Hicks Efficient to A 1. At C Bess is on IC and better off than she is at A on IA
IAIC
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Mary
Bess
A
B
C
C is Kaldor-Hicks Efficient to A 2. At C Bess could give up CB roses to move to B and be on IB, where she would still be better off than she was on IA
IA
IBIC
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Mary
Bess
A
B
C
C is Kaldor-Hicks Efficient to A 3. At B Mary would be no worse off than at A.
IA
IBIC
“Potential Pareto-superiority”
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Mary
Bess
A
B
C
Kaldor-Hicks EfficiencyC is Pareto-inferior to A but Bess could make it Pareto-superior by transferring wealth to Mary
IA
IBIC
“Potential Pareto-superiority”
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It is proposed to abandon steel tariffs that impose costs of $10B on the economy but provide steel manufacturers with a gain of $1B.
The bankruptcy of a failing business imposes a cost to shareholders of $1M, but provides a benefit of $5M to creditors.
Examples of Kaldor-Hicks Efficiency
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The bankruptcy of a failing business imposes a cost to shareholders of $10M, but provides a benefit of $5M to creditors.
Examples of Kaldor-Hicks InEfficiency
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Rational Choice: Six Assumptions
Full Information Choices are Freely Made Non-satiation Completeness or comparability No third party effects (externalities) Now—Perfect rationality
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Relaxing the Rationality Assumption: Transitivity: A Technical Definition
If A is preferred to B and B is preferred to C, then A is preferred to C
A}B, B}C A}C
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Relaxing the Rationality Assumption: Transitivity: A Technical Definition
If A is indifferent to B and B is indifferent to C, then A is indifferent to C
AB, BC AC
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Transitivity: A>B, B>C A>C
Good 1
0
Good 2
C
B
A
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Transitivity: Indifference curves can’t touch
Good 1
a b
c 0
Good 2
A violation of transitivity
If a ~ c and c~ b,then a ~ b.But b > a
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Relaxing the rationality assumption:Paternalism
Suppose that, lacking perfect rationality, we knew that our choices might harm us.
Might we not, in such cases, wish to let the paternalist choose for us?
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Relaxing the rationality assumption:Byron, The Prisoner of Chillon
At last Men came to set me free –I asked not why, and recked not where--It was at length the same to me,Fettered or fetterless to be--I learned to love despair…
My very chains and I made friends,So much a long Communion tendsTo make us what we are, even I Regained my freedom with a sigh
Castle of Chillon, Switzerland
Infants: Kiefer
What happened?
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Infants: Kiefer
What happened? The Wisconsin statute’s version of
restatement § 14 referred to 21 years as the standard. Was that dispositive? Should it have been?
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Infants: Kiefer
What about the mature 16 year old? And the immature 25 year-old? Or the married person under the age of majority? The evidence from criminal law.
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Infants: Kiefer
Did the Δ know that the Π was an emancipated minor?
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Infants: Kiefer
Did the Δ know that the Π was an emancipated minor? Does that matter?
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Infants: Kiefer
Did the Δ know that the Π was an emancipated minor? Does that matter? Contrast Restatement §§ 14 and 15(2).
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Merchant ProtectionWhat if he presents a fake ID?
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Fraud by the InfantWisconsin Loan v. Goodnough
What’s the difference between estoppel and recovery in tort for fraud?
Qu. the age-of-majority clause in Kiefer?
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Why an exception for necessities?
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