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Law and Markets

AcknowledgementsThe legal foundations of marketsCompetitive markets and efficiencyThe invisible hand theoremAnalysing the welfare effects of policy interventions - the long-run effects of a specific taxKey assumptions of the invisible hand theoremTransaction costsPer unit transaction costs in competitive markets.Long-run equilibrium in a competitive market with per unit transaction costs.Property rights and externalitiesPareto-relevant and -irrelevant externalities.Informational imperfections and asymmetriesMarket power and barriers to entryNotesExercisesCourts, Legal Rules, and MarketsIntroductionLegal rules and law enforcement: Private or public goods?Example: Reporting a crimeThe normative approach to legal decision makingCourts as efficiency maximisersNormative as positive theory (NPT) and the role of legal precedentLegal rules and institutions: Coordination devices or restraints on behaviour?Law and social normsCourts as implementers of 'fair' or 'just' economic outcomesCourts as interpreters of evidence: The economics of updating of informationStrategic evidence gatheringCourts as biased policy makersAggregation of individual judicial or juror decisionsAre group decisions better than individual decisions?NotesAppendixExercisesThe Coase TheoremIntroductionExternalities, the Coase Theorem and the Edgeworth BoxEfficiencyLegal rules in the Edgeworth BoxRules favour the factory: No liabilityRules favour the residents: The residents enjoy the property rightDoes the legal regime matter?Distribution of utilities and the utility possibilities curveWhen does the invariance version of the Coase Theorem hold? The special case of quasi-linear preferencesThe Coase Theorem and the role of transaction costsLump-sum transaction costsPer unit transaction costsA rule of no liabilityIf the residents have the property rightImplications of transaction costsThe Coase Theorem with more than two partiesCooperative game theory in law and economicsThe core of a cooperative gameApplying the concept of the core: The Coase Theorem with three or more partiesAn example with a non-empty core.Modifying the example.Is the result a general one? Searching for examples with an empty core'Rescuing' the Coase Theorem, part I: The existence of multiple externalities requires multiple legal rules'Rescuing' the Coase Theorem, part II: Enforceable contracts penalty clausesThe core and transaction costsNotesExercisesAccident Law and Markets, Part I: The Unilateral Care ModelIntroductionThe unilateral care modelThe efficiency of legal rules in the unilateral care modelThe efficient level of careLegal rules in the unilateral care modelNo liabilityStrict liabilityA negligence rule or due standard of careContrast with the Pigouvian approachApplications of the unilateral care modelPunitive damages and the effects of legal errorsThe judgement proof problemNo liability.Strict liability.Negligence rule.Extending the unilateral care model to a market setting: Liability rules in competitive marketsLiability rulesNo liabilityStrict liabilityShort- and long-run competitive equilibrium under strict liability.Negligence ruleShort- and long-run equilibrium under a negligence rule.The second-best due standard of care under a negligence ruleOther policies when there is a rule of no liabilityA lump-sum subsidy.Legal rules in competitive markets: The case of two industriesLegal rulesLiability rules, Pigouvian taxes and combinations of the two approachesExtending the unilateral care model to other market situations: Liability rules in imperfectly competitive marketsMonopolyStrict liabilityNegligence ruleA no liability ruleCournot oligopolyStrict liabilityS.2.2 Negligence ruleA no liability ruleDiscussion and comparison with perfect competitionLiability rules versus taxes and quantity regulationQuantity regulationA Pigouvian taxPigouvian taxation versus quantity regulation:A strict liability ruleApplication: The economics of emissions taxes and emissions trading ('cap and trade') schemesNotesExercisesAccident Law and Markets, Part II: The Bilateral Care ModelIntroductionThe basic bilateral approachLegal rules in the bilateral care modelNo liabilityStrict liabilityA negligence rule'No fault' liability schemeOptimal choices of care. The optimal choice of care for the victim is:Sequential care in the bilateral care modelIf the injurer moves firstIf the victim moves firstThe bilateral care model in a market settingNo liabilityStrict liabilityA negligence ruleOther legal rules in the bilateral care modelStrict liability with a defence of contributory negligenceApplication: The bilateral care model when there is no distinction between injurers and victimsComparative negligenceNotesExercisesMarkets for Potentially Harmful Goods - The Economics of Product Liability RulesIntroductionEfficiency when goods are potentially harmfulConsumer misperceptions of harmProduct liability rules in perfectly competitive marketsStrict liabilityNo liabilityA negligence ruleProduct liability rules in imperfectly competitive markets: The case of Cournot oligopolyStrict liabilityA no liability ruleA negligence ruleWelfare analysisApplication: Employment lawA no liability ruleStrict liabilityStrict liability with a defence of contributory negligenceNotesAppendixExercisesThe Economics of Property RightsIntroductionProperty rights versus liability rulesWhen are liability rules inferior to property rights?Overlapping and conflicting property rightsOpen access with overlapping usage rightsPrivate ownership with a single, non-overlapping exclusion rightPrivate ownership with overlapping exclusion rightsOverlapping disposal rightsA large number of atomistic owners with overlapping disposal rightsTwo owners with overlapping disposal rightsThree shareholders with overlapping disposal rightsThe economics of insecure property rightsA model of insecure property rightsSecure property rights to landInsecure property rights to landThe economics of intellectual property rightsA simple model of intellectual property rightsWelfareThe optimal length of a patentNotesExercisesContract Law and MarketsIntroductionBreach of contract in competitive marketsBreaches of contract by buyersBreaches of contract by sellersMarket forces, reputation, and contractual performanceDamage measures for breach of contractEfficiencyExpectation damagesThe seller's behaviourThe buyer's behaviourEquilibriumReliance damagesThe seller's behaviourThe buyer's behaviourRestitution damagesThe seller's behaviourThe buyer's behaviourThe rule in Hadley v. BaxendaleThe seller's behaviourThe buyer's behaviourEquilibriumNotesExercisesCrime, Punishment and Deterrence - Markets for Illegal Activities and the Economics of Public Law EnforcementIntroductionThe economic approach to crime: A general analytical frameworkDeterring illegal activity with monetary finesCriminal behaviourEfficient finesOptimal enforcement when fines cannot be increased without limitThe effects of legal errorsEfficient imprisonmentOptimal enforcement with imprisonment termsOptimal enforcement when imprisonment terms cannot be increased without limitFault-based criminal liabilityMarkets for illegal goodsCompetitive markets for illegal goods and servicesWelfare analysisEfficient finesEfficient confiscationApplication of the market approach: The economics of evasion of a specific taxPlea bargaining and the costs of trialPlea bargaining and the prisoner's dilemmaThe economics of organised crimeTaxation, black markets, and organised crimeThe monopoly criminal enterpriseNotesExercisesTopics in Corporate Law and Competition LawIntroductionLiability rules and the gains from mergers and corporate takeoversStrict liabilityThe gains from merging under strict liabilityA negligence ruleVicarious liability, managerial compensation and the manager-shareholder relationshipStrict liabilityVicarious liabilityCorporate takeovers and the dilution of shareholder property rightsShareholder voting and corporate governanceOne share/one valueShareholder voting powerThe Shapley-Shubik power indexThe Banzhaf power indexThe Deegan-Packel power indexCorporate takeovers, welfare, and the measurement of market concentrationThe link between market concentration and economic welfareDoes welfare always fall when concentration rises?Collusion and price fixingCollusion in the Cournot modelEfficient deterrence for price fixers and monopolistsNotesExercisesLitigation, Settlement and the Market for LawyersIntroductionLegal disputes and the influence of bargaining rules and institutions on economic outcomesLegal disputes and non-cooperative bargaining theoryNon-cooperative bargaining when T is finite The role of bargaining rules in dispute resolutionBargaining when T is infiniteNon-cooperative bargaining without frictions: The split the surplus ruleThe axiomatic bargaining approachBargaining theory and rational threatsObjections and counterobjections: The Nash approach as a model of haggling and dispute resolutionLegal disputes and the gains from settling out of courtLitigation versus settlement as a bargaining situationWhy go to court?Asymmetric informationDiffering perceptionsAnother reason why parties might prefer to go to courtA general model of legal conflict: Legal expenditure as a rent-seeking gameCost-shifting rulesThe market for lawyersWelfare analysisComparative staticsWelfare effects of policy interventions in the market for legal servicesA tax on purchases of legal servicesA price ceilingA price floorAn aggregate quantity constraintSummarySimplicity, complexity and variability of legal rulesThe common law efficiency hypothesis and the evolution of the common lawEvolutionarily stable strategiesNotesExercisesNotes
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