Showing papers by "Eric A. Posner published in 2002"

The Law and Economics of Consumer Finance

Abstract: This survey of the law and economics of consumer finance discusses economic models of consumer lending and evaluates the major consumer finance laws in light of them. We focus on usury laws; restrictions on creditor remedies, such as the ban on expansive security interests; bankruptcy law; limitations on third-party defenses, such as the holder-in-due-course doctrine; information disclosure rules, including the Truth in Lending Act; and antidiscrimination law. We also discuss the empirical literature.

Economic Analysis of Contract Law after Three Decades: Success or Failure?

Abstract: Law and economics has failed to produce plausible descriptive theories of contract doctrines. This paper documents these failures and suggests that they are due to a methodological problem involving the concept of transaction costs. If transaction costs refer to writing or information costs, then rational individuals would agree to complex contracts that are not in fact observed, and contract law would, for the most part, have no other function than that of specifically enforcing contracts. If transaction costs refer to limits on foreseeability and other cognitive restrictions, then law and economics assumes implausibly both that people are rational enough to allow legal rules to influence their investment and breach decisions, but not rational enough to allow legal rules to influence contractual design. Implications for normative analysis are discussed, and non-economic approaches to contract law are surveyed and criticized.

Probability Errors: Some Positive and Normative Implications for Tort and Contract Law

Abstract: This paper examines the effect of tort rules on behavior if people are optimistic or insensitive relative to true probabilities. The paper shows that under certain conditions both strict liability and negligence cause levels of care that are higher than, or equal to, what is efficient (rather than lower). The paper also shows that under certain conditions strict liability and negligence cause the same level of activity among optimists (more than is efficient). Other implications for tort law are discussed, as are the sensitivity of the results to the choice of how to model probability errors. Implications for contract law, and some normative issues, are also discussed.

A Theory of the Laws of War

Abstract: The laws of war govern the weapons and tactics that belligerents may use against each other. This paper uses a model of conflict to explain and evaluate the laws of war. In the model a nation's propensity to engage in conflict is a positive function of the effectiveness of military technology, and a negative function of the destructiveness of technology. Accordingly, in theory nations would want to agree to laws of war that permit destructive weapons and tactics but limit their effectiveness. However, nations with different endowments and resources will enjoy differential advantages, and this makes agreement on specific laws of war very difficult. The paper discusses empirical implications of the argument, and discusses whether the Hague Conventions are consistent with the model.

Investing in human capital: the efficiency of covenants not to compete

Abstract: Covenants not to compete (CNCs) are used in employment contracts to prevent an employee from working for other employers, and in so doing pro- tect the firm's investment in human capital. We analyze the motives for including a CNC in employment contracts using an incomplete contracts perspective. We allow for both ecient and inecient breach, and compare covenants not to com- pete with the alternative breach remedies of specific performance and liquidated damages. We conclude that CNCs may be preferable to specific performance and liquidated damages when renegotiation of the contract is not possible, and thus eciency-minded courts should enforce CNCs. With renegotiation, a CNC can lead to both first-best performance and investment, but the eciency of the con- tract will depend on the scope of the CNC, namely how limiting it is in terms of restricting employment. A CNC with too broad a scope will be inecient by allowing a firm to extract quasi-rents from other firms, thus overcompensating the employer for investment. A CNC with too narrow a scope may not allow the em- ployer to appropriately recover his investment in human capital. We argue that courts need to deter parties from agreeing to covenants that are too broad, but also to recognize the eciency of CNCs, in particular when employees are capital constrained and judgment proof.

Interring the Nondelegation Doctrine

Abstract: One of the most exhaustively analyzed topics in public law is the "nondelegation doctrine," which holds that Congress must supply an "intelligible principle" to guide its agents' exercise of statutory authority.' Our excuse for writing this brief essay on delegation is that we have come to hold a far cruder, less nuanced view than any currently found in the literature. The literature, with some notable and honorable exceptions,2 focuses on whether judges can successfully enforce

Fear and the Regulatory Model of Counterterrorism

Abstract: In the aftermath of the terrorist attacks of September 11, two models of government response dominated public discussion. One model vests the criminal justice system with the authority to combat terrorism. The FBI and local authorities track down the terrorists; lawyers prosecute and defend them in courts; judges and juries try them; prisons await them. If terrorists or their associates reside abroad, American officials apply for extradition under existing treaties. Another model vests the military with the authority to combat terrorism. While the military pursues terrorists overseas, local officials exercise emergency powers to detain, search, and interrogate. The government does not so much punish the terrorists as disrupt their networks, harass their supporters, and defeat them on the field of battle. Authorities may use propaganda and censorship, and may abrogate civil liberties to a limited extent. A third model of government response to terrorism has received less attention. This model views terrorist threats as risks to public health and safety, risks that call for a bureaucratic response. Unlike the military and law enforcement models, the third model the regulatory model, focuses on the need for long-term reform of regulatory agencies, such as OSHA, EPA, and FDA. Regulatory agencies have jurisdiction over countless activities vulnerable to, or related to, terrorist attacks, and they have increased their counterterrorist regulatory activity dramatically in the months since September 11. OSHA has issued guidelines for the handling of mail that potentially contains anthrax spores. (1) FAA is evaluating new security standards for airports. (2) Bank regulators have cracked down on financial institutions used by terrorists to launder money. (3) EPA and DOE have reappraised the security needs of utilities, factories, and shipping companies that handle hazardous materials. (4) FDA and CDC have taken a new look at the supplies of antibiotics and vaccines. (5) Much regulatory activity, however, predates September 11. A recent GAO report describes earlier preparations undertaken by government agencies, focusing on coordination among federal agencies and with state and local agencies, and the development of response teams designed to contain an attack involving weapons of mass destruction. (6) GAO has paid less attention to more humdrum regulatory efforts to make workplaces, buildings, bridges, tunnels, dumps, and other locations more secure against terrorist attack, although the security of computer networks and air travel has received scrutiny. The regulatory model, then, is not an innovation; it describes a longstanding element of the government's response to the threat of terrorism. It thus deserves more public and academic attention than it has received. (7) This Article examines the regulatory model, with special attention paid to the ways this model illuminates the problem of fear and mass panic provoked by terrorist attacks. I will emphasize the difference between using regulation to minimize risks that people fear, and using regulation to reduce fear. Both are difficult, but the latter is more ambitious and offers the most hope for undermining the use of terror to achieve political objectives. I. PRELIMINARIES: TERRORISM AND TERROR [T]errorism [is] a distinctive mode of unconventional psychological warfare aimed ultimately at bringing about a climate of fear and collapse in an incumbent regime or target group. (8) The regulatory model invites one to draw analogies between terrorism and other sources of risk. Manufacturing processes pose risks to workers; OHSA obliges employers to take health and safety precautions. Factory pollution creates health risks for nearby residents; EPA obliges factories to install scrubbers or clean up spills. If these analogies hold, then agencies should recognize that terrorism poses similar risks to the health and safety of American citizens. …

Legislative Entrenchment: A Reappraisal

Abstract: There is a principle of constitutional law holding that \"one legislature may not bind the legislative authority of its successors.\"' The Supreme Court recently discussed that principle at length in United States v. Winstar, and although the case was decided on other grounds, it is clear that the Court sees the principle as a constitutional axiom.2 When cashed out in terms of constitutional doctrine, the principle means that legislatures may not enact entrenching statutes or entrenching rules: statutes or rules that bind the exercise of legislative power, by a subsequent legislature, over the subject matter of the entrenching provision. Judges have applied this rule of constitutional law in various settings,3 and the academic literature takes the rule as given, universally assuming that legislative entrenchment is constitutionally or normatively objectionable.4 The goal of the academic

Moral and Legal Rhetoric in International Relations: A Rational Choice Perspective

Abstract: Critics of realist and rational choice approaches to international law argue that if nations were motivated entirely by power or self‐interest, their leaders would not make moral and legal arguments because no one would believe them. Thus, the prevalence of moral and legal rhetoric on the international stage refutes the behavioral assumptions of realism and rational choice. This paper argues that even if nations are not motivated by a desire to comply with morality or law, the use of moral and legal arguments could occur in equilibrium. Signaling and cheap‐talk models show that nations may engage in talk in order (1) to deflect suspicion that they have unstable political systems or adversarial interests and (2) to coordinate when gains from coordination are available. International talk is often moral and legal because the obligational vocabulary of moral and legal dispute between individuals is also useful for purely amoral strategic interactions when cooperation and coordination are involved.

Using Net Benefit Accounts to Discipline Agencies: A Thought Experiment

Abstract: This paper considers the possibility of giving agencies “net benefit accounts,” which are devices for keeping track of the benefits and costs of regulations. When an agency issues a regulation, the net benefits of the regulation would be added to the account (or the net costs subtracted). Agencies would start with a surplus and be forbidden to issue regulations that in the aggregate would reduce the balance of the account below zero. Net benefit accounts have two purposes: (1) to reduce the cost of monitoring agencies’ regulatory activities; and (2) to provide agencies with carrots as well as sticks for issuing efficient regulation. The carrot takes the form, paradoxically, of the option to issue inefficient regulations that are close to the agency’s sense of mission. 1 Professor of Law, University of Chicago. Thanks to Matthew Adler, Beth Garrett, Doug Lichtman, and Cass Sunstein for comments, and to The Sarah Scaife Foundation Fund and The Lynde and Harry Bradley Foundation Fund for financial support. Using Net Benefit Accounts to Discipline Agencies: A Thought Experiment