Principles and Methods of Law and Economics: Enhancing Normative Analysis

by Nicholas L. Georgakopoulos

• ISBN13: 9780521534116
• ISBN10: 0521534119
• Format: Paperback
• Copyright: 2005-10-03
• Publisher: Cambridge University Press

Summary

This is an introductory book that targets the reader who has the ambition to apply economic analysis but may be missing a technical introduction to its mathematical techniques or seeks a structured elaboration of its philosophical principles. The book juxtaposes economic analysis with moral philosophy, political theory, egalitarianism, and other methodological principles and then passes to the details of methods such as model-building, derivatives, differential equations, statistical tests, and the use of computer programs.

Author Biography

Nicholas L. Georgakopoulos is Professor of Law at Indiana University School of Law.

Table of Contents

Preface	xiii
INTRODUCTION: INNOVATION IN LEGAL THINKING	1	(10)
A. Proposals, Consequences, and Ideals	1	(2)
B. Toward Scientific Analysis of Law	3	(4)
C. Bibliographical Note	7	(4)
PART 1: PRINCIPLES
1. FROM FORMAL LOGIC TO NORMATIVE REASONING	11	(9)
A. Formal Deontic Logic	12	(1)
B. Formal Logic's Failure in Normative Reasoning	13	(2)
C. The Informal Normative Syllogism	15	(2)
Proposals, Consequences, and Ideals in Normative Reasoning	16	(1)
D. Concluding Exercises	17	(2)
E. Bibliographical Note	19	(1)
2. SOCIAL WELFARE VERSUS MORAL PHILOSOPHY	20	(17)
A. Ideals behind Law and Economics: Welfarism and Pragmatism	23	(2)
B. Juxtaposition with Other External Derivations of Ideals	25	(4)
i. Deriving Ideals from Existing Rules (Including Formalism)	25	(1)
ii. Rawls' Contractarianism	26	(1)
iii. The Potential Equivalence of Derived Ideals and Preferences	27	(2)
C. Distinguishing Features of Economic Analysis	29	(6)
i. Avoidance of Moral Relativity	30	(1)
ii. Preference for Applications over Refinement of Principles	30	(1)
iii. Ubiquitous Importance of Incentives	30	(1)
iv. Treatment of Preferences as Objective	31	(3)
v. Lack Bias for Rule Proliferation	34	(1)
vi. Orientation Toward the Future	34	(1)
D. Concluding Exercises	35	(1)
E. Bibliographical Note	36	(1)
3. FROM POLITICAL PHILOSOPHY TO GAME THEORY	37	(35)
A. Political Theory	38	(6)
i. Inefficiencies of Majority Rule	39	(1)
ii. Legal Process: Explaining the Administrative State	40	(2)
iii. Civic Republicanism	42	(1)
iv. Perfectionism	43	(1)
B. Voting System Design	44	(6)
C. Game Theory	50	(7)
i. Cooperation Games: Prisoner's Dilemma	51	(3)
ii. Coordination Games: Driving Side	54	(1)
iii. Game Theory in Legal Scholarship	55	(2)
D. Social Norms	57	(2)
E. Bounded Rationality	59	(7)
F. Concluding Exercises	66	(4)
G. Bibliographical Note	70	(2)
4. THE IMPORTANCE OF DISTRIBUTION OF WEALTH	72	(23)
A. Redistribute!	75	(4)
B. Do Not Redistribute!	79	(5)
C. Delegating Redistribution to Tax Policy	84	(5)
D. Concluding Exercises	89	(5)
E. Bibliographical Note	94	(1)
5. COASE AND LAW'S IRRELEVANCE	95	(17)
A. Coasean Irrelevance	96	(2)
B. Normative Use	98	(1)
i. Revealing Imperfections	98	(1)
ii. An Example	99	(1)
C. Transaction Costs: The Usual Suspect	99	(10)
i. Vantage Point Makes Transaction Costs	103	(1)
ii. Innovations Transform Transaction Costs	104	(1)
iii. Litigation Costs: Transaction Cost or Not?	105	(1)
iv. Example: Increasing Social Gain from Private Litigation	105	(2)
v. Normative Implications for Litigation of the Analysis of Transaction Costs	107	(2)
D. Concluding Exercises	109	(2)
E. Bibliographical Note	111	(1)
6. MORE FAILURES OF COASEAN IRRELEVANCE	112	(17)
A. Negotiation Holdouts	112	(3)
B. Systematic Errors	115	(1)
C. Risk Aversion	115	(5)
i. Imposing a Transaction Cost	118	(1)
ii. Substantive Solutions of Risk Aversion	118	(2)
D. Distribution	120	(1)
E. Concluding Exercises	121	(5)
F. Bibliographical Note	126	(3)
PART 2: METHODS
7. MATHEMATICAL MODELING	129	(25)
A. Symbols, Functions, and Idioms	131	(9)
B. Simplification and the Model as a Premise	140	(2)
C. Modeling Applications	142	(6)
i. Modeling Negligence Law: Optimization	143	(3)
ii. Modeling the End of Affirmative Action: Differential Equations	146	(2)
D. Concluding Exercises	148	(4)
E. Bibliographical Note	152	(2)
8. CONFRONTING UNCERTAINTY: BASIC PROBABILITY THEORY	154	(21)
A. Describing Randomness: Probability and Expectation	155	(4)
B. Mathematical Models of Expectation	159	(2)
C. Uncertain Uncertainty: Conditional Probability	161	(5)
D. Concluding Exercises	166	(8)
E. Bibliographical Note	174	(1)
9. ADVANCED PROBABILITY: DISTRIBUTIONS AS THE SHAPE OF RANDOMNESS	175	(22)
A. The Shape of Randomness: Distribution Functions	176	(10)
i. Visual Comparison of Discrete and Continuous Distributions	177	(1)
ii. CDF and PDF: Features and Relations	178	(3)
iii. Truncated and Censored Distributions	181	(5)
B. The Normal Distribution	186	(2)
C. Concluding Exercise: Imperfect Enforcement	188	(8)
D. Bibliographical Note	196	(1)
10. HOW TO PRICE UNCERTAINTY: FINANCE	197	(28)
A. Valuation in Perfect Markets	199	(12)
i. Known Rates: Discounting	199	(4)
ii. Risky Assets	203	(8)
B. Normative Implications of the CAPM	211	(2)
i. Financial Information	211	(1)
ii. Forecasts	212	(1)
C. Financial Market Microstructure: The Game-Theoretical Foundation of the CAPM	213	(1)
D. Normative Application of Microstructure: Insider Trading	214	(6)
E. Concluding Exercises	220	(4)
F. Bibliographical Note	224	(1)
11. FINANCE AND PROBABILITY: OPTIONS AND DERIVATIVES	225	(24)
A. Option Pricing	227	(7)
B. Normative Implications of Option Pricing	234	(10)
i. Recipients of Fiduciary Obligation	235	(1)
ii. Automated Reorganizations via Options	236	(4)
iii. The Options Understanding of the New Value Exception	240	(4)
C. Concluding Exercises	244	(4)
D. Bibliographical Note	248	(1)
12. USING SPREADSHEETS	249	(34)
A. The Basics	249	(12)
i. Obtaining Built-in Help about Functions	251	(2)
ii. Using the Function Wizard	253	(2)
iii. Categories of Built-in Functions	255	(3)
iv. Relative and Absolute References in Copying	258	(3)
B. Graphics	261	(8)
i. Chart Types	262	(3)
ii. Completing the Chart Wizard	265	(2)
iii. Manipulating Charts	267	(2)
C. Solving Equations	269	(2)
i. The Solver	269	(1)
ii. Goal Seek	270	(1)
D. Macros and User-Defined Functions	271	(3)
i. Recording a Macro	271	(2)
ii. Editing a Macro	273	(1)
iii. Assigning a Macro to a Graphic	274	(1)
iv. Entering a Function	274	(1)
E. Downloading and Combining Data	274	(6)
i. Data Files Separating Columns with Commas or Tabs	275	(2)
ii. Specifying the Type of Data	277	(1)
iii. Fixed-Width Data	278	(1)
iv. Combining Data	279	(1)
F. Concluding Exercises	280	(1)
G. Bibliographical Note	281	(2)
13. STATISTICS	283	(32)
A. The Use of Statistics in Legal Thinking	284	(3)
B. Fundamentals: Descriptive Statistics and Distributions	287	(1)
C. Empirical Research	288	(23)
i. Basics: Comparing Data That Take Values and Data That Fall into Categories	289	(9)
ii. Determining Influences: Multiple Outcomes	298	(10)
iii. Determining Influences: Yes/No Outcomes	308	(2)
iv. Observations That Are Filtered by a Threshold	310	(1)
D. Concluding Exercises	311	(2)
E. Bibliographical Note	313	(2)
14. CONCLUSION: IMPORTING METHODOLOGICAL INNOVATIONS	315	(54)
A. Cellular Automata	315	(2)
B. Fractals	317	(3)
C. Evolutionary Theory	320	(1)
D. To End	320	(1)
E. Bibliographical Note	321	(2)
APPENDIX A: MEINHARD V. SALMON 249 N.Y. 458 (1928)	323	(9)
APPENDIX B: GLOSSARY	332	(7)
APPENDIX C: MATHEMATICA NOTEBOOKS	339	(30)
A. Differential Equations in Law: The Effect of Terminating Affirmative Action	342	(5)
i. Determine the Participation in the Workforce	342	(1)
ii. Add the Initial Condition	343	(1)
iii. Manipulate the Exponent to See It Disappear	343	(1)
iv. The Long-Run Participation	344	(1)
v. The Composition of the Candidates	344	(1)
vi. Graphics	345	(2)
B. Derivation of the Normal Distribution	347	(8)
i. Derive the Normal Distribution as Gauss Did	347	(2)
ii. The Standard Normal Distribution	349	(1)
iii. Restating with Standard Deviation	349	(1)
iv. Restating with Average Deviation	350	(1)
v. The Triangular Distribution	351	(4)
C. Application of Triangular Distribution: The Uncertain Apprehension of Speed Limit Violations	355	(5)
D. A Comparison of Insider Trading Regimes	360	(9)
i. Foundation	360	(1)
ii. Problem	361	(1)
iii. Solution: Statement	361	(1)
iv. Solution: Proof	362	(3)
v. Illustration of Price Path	365	(4)
Index	369