Law & Economics I

Introduction
Course coordinator and examiner:
Adam Jacobsson
Department of Economics
Law and Economics I, Department of
Spring 2008 Economics, Stockholm University

Law & Economics I and II

The courses are a joint effort between the departments
of law and economics.

Law & Economics I provides an introduction to the area

starting with a review of core concepts in law and
economic analysis. It then proceeds to develop the l & e
perspective and to apply it to a number of themes.
Law and Economics II (administered by the Law
department) examines a number of central topics
including intellectual property, labour markets,
competition law and taxation law.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

Organization of the course

Intro + 10 lectures covering the main text :
Cooter, R, & Ulen, Law and Economics, Pearson, 5th edition.
Examination: Written exam, no books or other aids allowed.
Info on web page: www.ne.su.se
Click on ”Grundnivå”.
Proceed to ”Fristående kurser”.
Proceed to ”Law and economics 1, 7,5 hp (period 1) ”
There you find: Schedule, syllabus, handouts, etc.
For exam information, schedules, old exams etc, click on ”Grundnivå”,
then click on ”Tentamensinfo”, then on ”Tentamensinformation
Nationalekonomi II & III, samt valfria specialkurser”. There is also a link
”exam information” on the course homepage.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

1
Teachers in order of appearance

Adam Jacobsson (E)

Mårten Schultz (L)
Lars Vahtrik (E)
Per Henriksson (L)

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

Who am I?
Adam Jacobsson
PhD, Stockholm University, ”War, drugs and
media – Arenas of conflict”
Research interests
Political economy
Pol econ of conflict and appropriation
Media economics
Most important tool: game theory
Teaching: Micro theory, law and econ, game
theory, introductory economics.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

Contact details
Course Coordinator & examiner
Adam Jacobsson
Room A793
E-mail: aja@ne.su.se
Office hours: by appointment

Course Administrator
Malin Stråby
Room A787
E-mail: malin.straby@ne.su.se

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

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Today’s agenda
What is law & economics?
The economic viewpoint.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

Legal traditions
Common law (English speaking world)
Root in social norms.
Develops by precedent.
Civil law (Code Napoleon)
Focus on the code itself and commentaries to it.
To confuse things the term ”civil law” also appears in
the civil and criminal law dichotomy.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

Two perspectives on the law

Laws as providers of justice.
Laws codify what is right and just.

Laws as providers of incentives.

Laws influence behaviour and different
designs of legal rules may lead to different
outcomes.
This will be the focus here.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

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Laws addressing economic
problems
Legislation has long been used to remedy
typically economic problems. For example:
Competititon/antitrust laws and regulation are tools for
dealing with imperfectly competitive markets.
Law against counterfeit money protects the value of a
currency.
Taxes on tobacco, alcohol or pollution are used to
reduce consumption or emissions.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

What is Law & Economics?

What does law and economics contribute to this
field of study respectively?
Subject matter.
Analytical tools.
In fact, some economists view economics more
as a method than a subject matter.
In l&e economics provides a framework for
analyzing the behavioural implications of legal
rules in a scientific way.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

Two developments
The usefulness of economic analysis has gained
in recognition among legal scholars.
Hopefully, you will share this view by the end of
the course.
Economists also increasingly recognize the
profound importance of the rule of law and
institutions for the functioning of the economy.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

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Example: The importance of
property rights and contracts
"Institutions provide the basic structure by which human beings
throughout history have created order and attempted to reduce
uncertainty in exchange. Together with the technology employed,
they determine transaction and transformation costs and hence the
profitability and feasibility of engaging in economic activity."
Douglass C. North, 1990.
”Market economies require a rule of law. A society without state
protection of individual rights, especially the right to own property,
would not build private long term assets, a key ingredient of a
growing modern economy. Yet an excess of rules—in the extreme
case, central planning—has also been shown to stifle initiative and
produce economic stagnation.”
Alan Greenspan, 2004.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

Enforcing contracts
From the World Bank’s doing business database:
http://www.doingbusiness.org/ExploreTopics/EnforcingContracts/

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Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

Some stylized facts...

Log GDP on y-axes

Source:
IMF:http://www.imf.org/external/pubs/ft/weo/2003/01/pdf/chapter3.pdf

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

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In sum...
The design of legal rules may have significant
economic consequences.
It is thus valuable to understand and predict the
effects of different rules.
It is also important to understand how well
enforced these rules are.
Economic theory can provide analytical tools for
this.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

The core concepts of neoclassical

economics
The Economic man is:
Rational (more so than you might imagine) and,
Maximizes utility (which is a fairly general concept).
Similarly firms maximize profit.
Equilibrium.
Out of equilibrium events have little predictive value.
(Pareto) Efficiency.
If at least someone can be made better off without
making anyone worse off, the allocation is not
efficient.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

Do people respond to economic

incentives?
Money often makes the world go around...
... but other things may matter too, such as
norms concerning reciprocity and fairness,
... and people may be less than fully
rational.
The last two points are increasingly being
incorporated into economic theory.
Law and Economics I, Department of
Spring 2008 Economics, Stockholm University

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Positive vs normative analysis
Positive analysis: To predict effects.
Often no alternative is superior in all respects and for
everyone. Hence, choices involve value judgments.
Normative analysis: To evaluate effects.
Welfare economics.
That is, saying ”this or that is better”.
Private law: Focus on efficiency.
Not a good instrument for redistribution.
Better to use broad-based taxes.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

The objective is to shape legal

rules to engender efficiency
Clear allocations of property rights can facilitate
bargaining (injunctions).
Damages (compensatory and punitive) tempered by
negligence rules and doctrines of forseeable reliance
can provide optimal incentives for:
Care to avoid accidents.
Efforts to perform or breach contracts.
The degree of reliance on the other party’s performance.
Different legal systems lead to different rates of litigation
and social costs of the legal process.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

Course plan
The following 10 lectures cover:
Economic analysis.
Property rights.
A critical perspective.
Contract theory.
Tort law.
The legal process.
Crime and punishment.

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University

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The next lecture (mocroeconomic
theory)
This is a basic ”crash course lecture” on very
basic microeconomic tools that will be used in
the course.
For the economists among you, this may be a bit
elementary…
Have a look at chapter 2 and if you feel you
need a ”refresher” do come and listen!
Everybody is of course welcome!

Law and Economics I, Department of

Spring 2008 Economics, Stockholm University