Posts filed under ‘Law and Economics’

Contracts as Technology

| Peter Klein |

That’s the title of an interesting new law review article by Kevin Davis (New York University Law Review, April 2013). Just as we can treat organizational structure as as sort of technology, and study the introduction and diffusion of new organizational forms with the same theories and methods used to study technological innovation and diffusion, we can think of contracts as structures or institutions that emerge, are subject to experimentation and competition, and evolve and diffuse. Here’s the abstract:

If technology means, “useful knowledge about how to produce things at low cost”, then contracts should qualify. Just as mechanical technologies are embodied in blueprints, technologies of contracting are embodied in contractual documents that serve as, “blueprints for collaboration”. This Article analyzes innovations in contractual documents using the same kind of framework that is used to analyze other kinds of technological innovation. The analysis begins by laying out an informal model of the demand for and supply of innovative contractual documents. The discussion of demand emphasizes the impact of innovations upon not only each party’s incentives to collaborate efficiently, but also upon reading costs and litigation costs. The analysis of supply considers both the generation and dissemination of innovations and emphasizes the importance of cumulative innovation, learning by-doing, economies of scale and scope, and trustworthiness. Recent literature has raised concerns about the extent to which law firms produce contractual innovations. In fact, a wide range of actors other than law firms supply contractual documents; including end users of contracts, specialized providers of legal documents, legal database firms, trade associations, and academic institutions. This article discusses the incentives and capabilities of each of these potential sources of innovation. It concludes by discussing potential interventions such as: (1) enhancing intellectual property rights, (2) relaxing rules concerning the unauthorized practice of law and, (3) creating or expanding publicly sponsored clearinghouses for contracts.

See also Lisa Berstein’s comment. (HT: Geoff Manne)

17 March 2014 at 3:49 pm 1 comment

CFP: Coase Memorial Issue of Man and the Economy

| Peter Klein |

An important announcement from Ning Wang, editor of Man and the Economy:

Man and the Economy
Call for Papers for a Special Issue in Memory of Ronald Coase

“R. H. Coase: The Man and His Ideas”

Man and the Economy will devote a special issue (December 2014) to the life and ideas of Ronald Coase, the 1991 Nobel Laureate in Economics and Founding Editor of this journal. During his long academic life, Coase devoted himself to economics, which, in his view, should investigate how the real world economy works, with all its imperfections. Coase viewed and practiced economics as a social science, a study of man creating wealth in society through various institutional arrangements. To honor the memory of Coase, we welcome original research articles that extend and develop the Coasian economics, including empirical studies of the structure of production and exchange. We also welcome critical and constructive commentaries that clarify and elaborate the Coasian themes, from a law-and-economics/new institutional economics perspective, which include, but not limited to, topics on transaction costs, property rights, theories of the firm and China’s economic transformation. In addition, we also welcome personal reflections and reminiscences of Coase as a colleague, a teacher, an editor, and/or a friend.

Submissions must be made online via the Journal’s website: http://www.degruyter.com/view/j/me

Deadline for submissions is September 30, 2014.

12 February 2014 at 8:51 am Leave a comment

Symposium on Allen’s Institutional Revolution

| Peter Klein |

Here is a symposium on Doug Allen’s very important book The Institutional Revolution (Chicago, 2011). The symposium features essays by Deirdre McCloskey, Joel Mokyr and José-Antonio Espín-Sánchez, and our own Dick Langlois, along with a reply by Doug. The issue revolves around the role of measurement, and Doug’s thesis that reductions in measurement costs are central to improved economic performance.

My favorite line, from Doug’s reply:

I have read “The Problem of Social Cost” more times than I can recall, and study as I may, I have never found a logical error in it. But here is the point: if the author, both at the time and 30 years later, still failed to fully grasp his own perfect work, then it is an understatement to note that the ideas are subtle.

25 October 2013 at 9:24 am Leave a comment

Private, For-Profit Legal Education

| Peter Klein |

The WSJ profiles InfiLaw, a network of private-equity backed, for-profit law schools that is challenging the established model of legal education. From what I understand, InfiLaw seems to be the University of Phoenix of law schools, providing vocationally oriented training for the lower-end of the market (but, unlike for-profit business schools, charging upmarket prices).

InfiLaw’s schools aren’t designed to compete with the Harvards and Stanfords. The approach, the company says, has mostly been to target students, including many minorities, whose grade-point averages or LSAT scores don’t qualify them for admission at the top schools. . . .

Some in the academy think InfiLaw is compounding the problems in legal education, which is graduating far more students than there are entry-level jobs for lawyers. Critics, including former students who have sued Florida Coastal, see the company as a predatory outfit that peddles false promises to students in exchange for high tuitions.

Others think criticisms of InfiLaw are based on elitism embedded within the legal academy,

As we’ve noted before, it is unlikely that newer, private, for-profit colleges, universities, and professional schools can compete head-to-head with the traditional schools, but why should they? Certainly there is room for more creativity, experimentation, and innovation, structurally and pedagogically, in legal education, as with other forms of higher learning. InfiLaw may be ineffective, or even a scam, but viva la diversité!

21 October 2013 at 9:57 am Leave a comment

Ronald Coase (1910-2013)

| Peter Klein |

Ronald Coase passed away today at the age of 102. One of the most influential economists of the 20th century, perhaps of all time. His “Problem of Social Cost” (1960) has 21,692 Google Scholar cites, and “The Nature of the Firm” has 24,501. Adam Smith’s Wealth of Nations, summed across editions, has about 30,000. Coase changed the way economists think about the business firm and the way they think about property rights and liability. He largely introduced the concepts of transaction costs, comparative institutional analysis, and government failure. Not all economist have agreed with his arguments and conceptual frameworks, but they radically changed the terms of debate in the economics of law, welfare, industry, and more. He is the key figure in the “new institutional economics” (and co-founder, and first president, of the International Society for New Institutional Economics).

Coase did all these things despite — or because of? — not holding a PhD in economics, not doing any math or statistics, and not, for much of his career, working in an economics department.

We’ve written so much on Coase already, on these pages and in our published work, that it’s hard to know what else to say in a blog post. Perhaps we should just invite you to browse old O&M posts mentioning Coase (including this one, posted last week).

The blogosphere will be filled in the coming days with analyses, reminiscences, and tributes. You can find your favorites easily enough (try searching Twitter, for example). I’ll just share two of my favorite memories. The first comes from the inaugural meeting of the International Society for New Institutional Economics in 1997. After a discussion about the best empirical strategy for that emerging discipline. Harold Demsetz stood up and said “Please, no more papers about Fisher Body and GM!” Coase, who was then at the podium, surprised the crowd by replying, “I’m sorry, Harold, that is exactly the subject of my next paper!” (That turned out to be his 2005 JEMS paper, described here.) A few years later, I helped entertain Coase during his visit to the University of Missouri for the CORI Distinguished Lecture. At lunch we talked about his disagreement with Ben Klein on asset specificity. After the lunch he got up, shook my hand, and announced, with evident satisfaction: “I see all Kleins are not alike.”

2 September 2013 at 9:40 pm 4 comments

ContractsProf Blog Symposium on Stuart Macaulay

| Peter Klein |

Economists and management scholars know Stuart Macaulay’s landmark 1963 article, “Non-Contractual Relations in Business: A Preliminary Study,” as the foundation for modern work in relational contracting. As Williamson (1985, p. 10) put it, “Macaulay’s studies of contractual practices support the view that contractual disputes and ambiguities are more often settled by private ordering than by appeal to the courts — which is in sharp contrast with the neoclassical presumptions of both law and economics.” A new book on Macaulay has promoted a symposium over at the ContractsProf Blog. I’m particularly looking forward to this week’s contributions, especially the one from Gillian Hadfield.

26 August 2013 at 10:48 am Leave a comment

The Coase Theorem in under 140 Characters

| Dick Langlois |

From the Stanford alumni newsletter:

Goodbye @SUAthletics, Hello @gostanford

Stanford athletics knows how to drive a hard bargain. The department recently traded its longtime Twitter handle, @SUAthletics, to Syracuse University in exchange for a yet-to-be determined order of local goods, including one case of oranges. The fruit will be used to refill Stanford’s 2011 Orange Bowl trophy. Athletics will now tweet as @GoStanford, which had emerged as a more popular choice.

18 July 2013 at 8:41 am Leave a comment

Shelanski Tapped for Top Regulatory Post

| Peter Klein |

shelanski-howard2My old classmate, fellow Oliver Williamson student, and coauthor Howard Shelanski has been nominated to head the Office of Information and Regulatory Affairs (the post typically described as Regulation Czar). Howard was in the joint PhD-JD program at Berkeley, went on to clerk for Antonin Scalia, joined the faculty at Berkeley’s School of Law, and served in a number of regulatory posts before moving to Georgetown. He currently heads the FTC’s Bureau of Economics.

Howard’s a super-smart guy, whom I’d describe as an antitrust moderate (unlike me, an anti-antitrust extremist). He’s sympathetic to “post Chicago” antitrust theory and policy, but more of a nuts-and-bolts, case-by-case guy. I’m not a fan Cass Sunstein, current head of the OIRA, and I expect to like Howard’s performance much better. Howard doesn’t share Sunstein’s enthusiasm for behavioral analysis, for example, as seen in an interview last December, where he said this about the role of behavioral economics in antitrust:

I think there is a role, but one needs to be very modest and cautious. There has been a lot written and a lot said about how behavioral economics fundamentally undermines the models on which we do antitrust analysis. And I think most people involved with antitrust enforcement, most people who think about competition issues, would disagree that there is some fundamental new paradigm shift in the works. But behavioral economics does supply insights into how consumers might respond to certain kinds of information, contracting practices, or pricing schemes. This can be very useful to understanding certain kinds of market performance and has led to greater modesty about imputing perfect foresight or rationality to  consumers.

But one needs to understand that that is not the sign of a broader behavioral economics revolution in antitrust.

My general feelings about regulatory czars are well summarized by this passage from Fiddler on the Roof, quoted today by Danny Sokol in the same context:

Young Jewish Man: Rabbi, may I ask you a question?
Rabbi: Certainly, my son.
Young Jewish Man: Is there a proper blessing for the Tsar?
Rabbi: A blessing for the Tsar? Of course! May God bless and keep the Tsar . . . far away from us!

26 April 2013 at 3:40 pm 3 comments

Henderson on Business Ethics

| Dick Langlois |

Rebecca Henderson, one of my favorite management scholars, has a new paper (with Karthik Ramanna) on – Milton Friedman and business ethics. Here’s the abstract.

Managers and Market Capitalism

In a capitalist system based on free markets, do managers have responsibilities to the system itself, and, in particular, should these responsibilities shape their behavior when they are attempting to structure those institutions of capitalism that are determined through a political process? A prevailing view — perhaps most eloquently argued by Milton Friedman — is that managers should act to maximize shareholder value, and thus that they should take every opportunity (within the bounds of the law) to structure market institutions so as to increase profitability. We maintain here that if the political process is sufficiently ‘thick,’ in that diverse views are well-represented and if politicians and regulators cannot be easily captured, then this shareholder-return view of political engagement is unlikely to reduce social welfare in the aggregate and thus damage the legitimacy of market capitalism. However, we contend that sometimes the political process of determining institutions of capitalism is ‘thin,’ in that managers find themselves with specialized technical knowledge unavailable to outsiders and with little political opposition — such as in the case of determining certain corporate accounting standards that define corporate profitability. In these circumstances, we argue that managers have a responsibility to structure market institutions so as to preserve the legitimacy of market capitalism, even if doing so is at the expense of corporate profits. We make this argument on grounds that it is both in managers’ self-interest and, expanding on Friedman, managers’ ethical duty. We provide a framework for future research to explore and develop these arguments.

On the one hand, we might quibble about whether they get Friedman right. Friedman meant in the first instance that managers should pursue their self-interest within the framework of “good” institutions, not in the (Public Choice) context of changing the institutional framework itself. I haven’t actually gone back to see what Friedman says about this, but here is how Henderson and Ramanna interpret the Chicago tradition: “Friedman and his colleagues were keenly aware that capitalism can only fulfill its normative promise when markets are free and unconstrained, and that managers (and others) have strong incentives to violate the conditions that support such markets (e.g., Stigler, 1971). But they argued both that dynamic markets tend to be self-healing in that the dynamics of competition itself generates the institutions and actions that maintain competition and that government could be relied on to maintain those institutions—such as the legal system—that are more effectively provided by the state (on this latter point, see, in particular, Hayek, 1951).” There is a sense in which Chicago saw (and economic liberals in general see) the system as self-healing in the longest of runs: every inefficiency is ultimately a profit opportunity for someone who can transmute deadweight loss into producer’s surplus; and economic growth cures a lot of ills. But one can hardly accuse Chicago of being insensitive to those bad incentives for rent-seeking in the short and medium term.

On the other hand, Henderson and Ramanna make a valuable point when they draw our attention to the gray area in which market-supporting institutions (the same term I tend to use) are often forged through private action or through public action in which the private actors possess the necessary local knowledge. There is a scattered literature on this – the setting of technical standards, for example – but it is not a major focus of Public Choice or political economy. Perhaps it is naïve to say that managers in this gray area have an ethical duty to support institutions that make the pie bigger rather than institutions that transfer income to them. But what else can we say? It’s a lot better than blathering on about “public-private partnerships,” which are frequently cover for rent-seeking behavior. One (possibly embarrassing) implication of this stance is that it makes a hero of the much-reviled Charles Koch, who funds opposition to many of the rent-seeking institutions from which his own company benefits.

At one point Henderson and Ramanna mention the Great Depression as a “market failure” that incubated anti-capitalist sentiment. The second part of that assertion is certainly true, but the Depression was not a market failure but a spectacular failure of government. (Read Friedman (!), whose once-controversial view about this is now widely accepted by economic historians and monetary economists, including Ben Bernanke.) The Depression is actually an interesting case study in the gray area of institutions. Before the Fed, private financiers acted collectively to provide the public good of stopping bank panics. Now that role has fallen to the state, with private interests – and their asymmetrical local knowledge – influencing the bailout process. Which system was less corrupt? A more general question: are there any examples of fully private creation of institutions in which the self-interest of the participants led to inefficient rent-seeking?

27 March 2013 at 2:33 pm 2 comments

Coasean Bargaining Opportunity

| Peter Klein |

Forget Wrigley Field: here’s a colorful example for classroom discussions of property rights, external costs, bargaining, and the Coase Theorem. Literally colorful. (Via Bob Subrick.)

19 March 2013 at 2:21 pm Leave a comment

Armen Alchian (1914-2013)

| Peter Klein |

Armen Alchian passed away this morning at 98. We’ll have more to write soon, but note for now that Alchian is one of the most-often discussed scholars here at O&M. A father of the “UCLA” property-rights tradition and a pioneer in the theory of the firm, Alchian wrote on a dizzying variety of topics and was consistently insightful and original.

Alchian was very intellectually curious, always pushing in new directions and looking for new understandings, without much concern for his reputation or legacy. One personal story: I once asked him, as a naive and somewhat cocky junior scholar, how he reconciled the team-production theory of the firm in Alchian and Demsetz (1972) with the holdup theory in Klein, Crawford, and Alchian (1978). Aren’t these inconsistent? He replied — politely masking the irritation he must have felt — “Well, Harold came to me with this interesting problem to solve, and we worked up an explanation, and then, a few years later, Ben was working on a different problem, and we started talking about it….” In other words, he wasn’t thinking of developing and branding an “Alchian Theory of the Firm.” He was just trying to do interesting work.

Updates: Comments, remembrances, resources, links, etc.:

19 February 2013 at 10:48 am 4 comments

Arrunada Seminar: Benito Arruñada – Underprovision of Public Registries?

| Benito Arruñada |

Underprovision of Public Registries?

Organizing registries is harder than it seems. Governments struggled for almost ten centuries to organize reliable registries that could make enabling rules safely applicable to real property. Similarly, company registries were adopted by most governments only in the nineteenth century, after the Industrial Revolution. Moreover, though most countries have now been running property and company registries for more than a century, only a few have succeeded in making them fully functional: in most countries, adding a mortgage guarantee to a loan does not significantly reduce its interest rate.

US registries show that these difficulties do not only affect developing countries. Many US registries are stunted, shaky institutions whose functions are partly provided by private palliatives. In land, the public county record offices have been unable to keep up with market demands for speed and uniform legal assurance. Palliative solutions such as title insurance duplicate costs only to provide incomplete in personam guarantees or even multiply costs, as Mortgage Electronic Registry Systems (MERS) did by being unable to safely and comprehensively record mortgage loan assignments. In company registries, their lack of ownership information means that they are of little help in fighting fraud, and their sparse legal review implies that US transactions require more extensive legal opinions. In patents, a speed-oriented US Patent and Trademark Office combines with a strongly motivated patent bar to cause an upsurge of litigation of arguably dangerous consequences for innovation.

The introduction of registries has often been protracted because part of the benefits of registering accrue to others. They also have to compete with private producers of palliative services (i.e., documentary formalization by lawyers and notaries) who usually prefer weak or dysfunctional registries, as they increase the demand for their services. Moreover, most legal resources, including the human capital of judges, scholars, and practitioners is adapted to personal instead of impersonal and registry-mediated exchange.

Information and communication technologies have opened new possibilities for impersonal trade, thus increasing the demand for the institutions, such as registries, that support impersonal trade. Economic development therefore hinges, more than ever, on governments’ ability to overcome these difficulties, which are allegedly holding back the effective registries needed to enable impersonal exchange and exhaust trade opportunities.

4 February 2013 at 5:22 am 3 comments

Creativity and Property Rights

| Peter Klein |

I haven’t been following the Cato Unbound debate on US copyright law, but Adam Mossoff directs me to Mark Schultz’s post, “Where are the Creators? Consider Creators in Copyright Reform.” Mark thinks current debates over copyright law neglect the role of creativity: “Too often, the modern copyright debate overlooks the fact that copyright concerns creative works made by real people, and that the creation and commercialization of these works requires entrepreneurial risk taking. A debate that overlooks these facts is factually, morally, and economically deficient. Any reform that arises from such a context is likely to be both unjust and economically harmful.” Adam thinks Mark’s position “calls out the cramped, reductionist view of copyright policy that leads some libertarians and conservatives to castigate this property right as ‘regulation’ or as ‘monopoly.'”

As one of those libertarians critical of copyright law, but also an enthusiast for the fundamental creativity of the entrepreneurial act, let me respond briefly. Mark is certainly right that creative works are created by individuals (not, “discovered,” as some of the entrepreneurship literature might lead you to believe). But I don’t see the implications for copyright law. The legal issue is not the ontology of creative works, but the legal rights of others to use their own justly owned property in relation to these creative works. Copyright law is, after all, about delineating property rights, and whether legal protection should be extended to X does not follow directly from the fact that X was “created” instead of “discovered.”

Mark uses the language of entrepreneurship, and I think this argues against his conclusion. Property law protects the property of the entrepreneur, and the ventures he creates, not the stream of income accruing to those ventures. Suppose Mark has the brilliant insight to open a Brooklyn-style deli on a street corner here in Columbia, Missouri, makes lots of money, and then I open a similar shop across the street, cutting into his revenues. No one would argue that I’ve violated Mark’s property rights; the law rightly protects the physical integrity of Mark’s shop, such that I can’t break in and steal his equipment, but doesn’t protect him against pecuniary externalities. The fact that Mark’s restaurant wouldn’t have existed if he hadn’t created it — that “real people make this stuff,” as he puts it — has no bearing on the legality of my opening up a competing restaurant, even though this harms him economically.

Likewise, if I write a book, and Mark makes a copy without my permission, he may have reduced my income stream, but he doesn’t “steal” my book — I still have the original. The thorny issue in these debates over copyright is whether my underlying idea — the thoughts that are expressed, in a particular way, in that book — constitutes “property” that deserves legal protection. I’ll state for the record that I think ideas are not property per se, and that preventing Mark from copying my book is a violation of Mark’s property rights. But wherever one comes down on this issue, the fact that the book resulted from a creative act — that it wouldn’t have existed if I hadn’t exercised my creative faculties, worked hard, and so on — does not, it seems to me, have any particular implications for copyright law. Creative things are created by real people, but it doesn’t follow that all created things warrant legal protection.

1 February 2013 at 2:32 pm 14 comments

Arrunada Seminar: Corrado Malberti – What could be the next steps in the elaboration of a general theory of public registers?

| Corrado Malberti |

What could be the next steps in the elaboration of a general theory of public registers?

From a lawyer’s perspective, one of the most important contributions of Arruñada’s Institutional Foundations of Impersonal Exchange is the creation of a general economic theory on public registers. Even if this work is principally focused on business registers and on registers concerning immovable property, many of the results professor Arruñada achieves could be easily extended to other registers already existing in many legal systems or at the transnational level.

For example, a first extension of the theories proposed by professor Arruñada could be made by examining the functioning of the registers that collect information on the status and capacity of persons. A second field that should probably benefit from professor Arruñada’s achievements is that of public registers that operate at a transnational level and established by international treaties. In particular, in this second case, the reference is obviously to the Cape Town convention on International Interests in Mobile Equipment which will, and — to some extent — already has, resulted in the creation of different registers for the registrations of security interests for Aircrafts, Railway Rolling Stock, and Space Assets. In my view it will be important to test in what measure the solutions adopted for these registers are consistent with the results of Arruñada’s  analysis.

Corrado Malberti, Professor in Commercial Law. University of Luxembourg.  Commissione Studi Consiglio Nazionale del Notariato.

30 January 2013 at 10:51 am 3 comments

Arrunada Seminar: Matteo Rizzolli – Will ICT Make Registries Irrelevant?

| Matteo Rizzolli |

Will ICT Make Registries Irrelevant?

With this brief post, I would like to add some further discussion on the role of new technologies and ICTs for the evolution of registries. The book of Prof Arrunada touches upon the issue in chapter 7 where the role of technical chance is tackled. He discusses mainly the challenges in implementing different degrees of automation in pre-compiling and lodging information from interested parties and even in automating decision-making by the registry itself.

These challenges represent the costs of introducing ICTs in registries. In the book the benefits of ICTs for abating the costs of titling/recording are not discussed at length. Think of them in terms of the costs of gathering, entering, storing, organising and searching the data. I assume it is trivial to say that ICTs decrease the fixed and variable costs of registries even when some issues raised in the book are considered. In terms of the figure below (my elaboration of figure 5.1 on pg 133) this is equivalent to say that, thanks to ICTs, the black line representing the “Value of land under public titling” shifts upwards and therefore the “Indifference point for individual titling decisions” shifts leftward and makes registries more desirable.

However, i think that an important effect of ICTs is neglected in this analysis. In fact ICTs are now pervasive in most transactions. Land is observed with all sorts of satellite technology and the movement of objects and people is traced in many ways. Communications, both formal and informal are also traced and information on companies is just one click away for most individuals. I don’t want to discuss philosophical, sociological or legal aspects of this information bonanza. Neither neglect that more information doesn’t mean better or more trustworthy information. On the other I think we can agree that the quantity of information available to counterparts of a transaction is greatly increased and -more important- that verifiable evidence can be produced more easily should legal intervention in case of conflict arise.

All this information windfall may -this is my hypothesis- decrease the costs of keeping transactions out of registries and therefore improve the value of transactions under privacy. In terms of the figure below, this amounts to rotating the red line upwards and, as a result, shifting the “Indifference point for individual titling decisions” on the right.

In a sense, ICTs both i) decrease the costs of registries and ii) makes registries less relevant. On balance, it is hard for me to say which effect of ICTs may prevail. I think however this could be a very interesting empirical question to research.

Matteo Rizzolli. Assistant Professor of Law and Economics at the Free University of Bozen, Italy. Board member and secretary of the European Law & Economics Association

Click figure for higher resulution:

rizzolli picture

23 January 2013 at 6:15 am 1 comment

Arrunada Seminar: Rod Thomas – Developing a Credible Automated System for Agency Registration under a “Registration of Rights” Model

| Rod Thomas |

Developing a Credible Automated System for Agency Registration under a “Registration of Rights” Model

In his book, Arruñada rehearses the debate between mere recordation of deeds versus registration of rights. Under the “registration of rights” model, the registration event may be backed by a State guarantee of ownership, as is the case under a Torrens system. Under such a system, the need for a credible automated system is paramount. This is because the registration event is normally conclusive as to title rights, even in the face of third party ineptness or fraud in undertaking the registration.  By way of example, in Torrens systems, the transaction, once completed, can conventionally only be overturned where the transferee is found to have been fraudulent in obtaining the registered title interest even if the dealing is void at law.

Under a registration of rights model there is a heightened sense of vulnerability where the registration even is undertaken by an agent.  This is because the agent and not the transferee may have been either fraudulent or inept in undertaking the transaction. An example of such a system in operation is the Landonline System, as it presently exists in New Zealand, where only agency registration is possible.

Arruñada also argues that for a registration system to be successful, it needs to be both cost effective and accessible. Consequently a tension arises under a registration of rights model, operated by agency registration. On the one hand effective measures need to be put in place to protect consumers from inept or fraudulent transactions. On the other hand, a system which is overly complex, or expensive to operate, is unlikely to be successful.

Such concerns may be less pressing in countries where digitalised signatures already play a key role in authorising transactions. In those jurisdictions it appears to be a relatively straightforward procedure to incorporate the need for the existing interest holder’s digitalised signature before a transaction can occur. What however of jurisdictions such as the United Kingdom, Australia or New Zealand where digitalised signatures are not in ready use and agency registration is common?

Various possibilities come to mind for these other jurisdictions.  One may be imposing a system where each dealing must first be authorised by a private PIN number known only to the existing land interest holder.   This however may be cumbersome to operate and regulate.  Also, PIN number may not be securely kept, so abuses could still occur.  Another possibility may be to incorporate “flags” into the automated system, so the interest holder is notified of any proposed dealing with his or her interest, and can therefore block the proposed registration before it occurs.

The question therefore needs to be asked; “what possibilities exist under a registration of rights model  (in the absence of electronic signatures) for setting up a safe and cost effective automated system, operated by agency registration?”

Rod Thomas. Senior Lecturer in Law, Auckland University of Technology, New Zealand

21 January 2013 at 4:04 am 2 comments

Arrunada Seminar: Stephen Hansen – Public Institutions and Endogenous Information in Contracting

| Stephen Hansen |

Public Institutions and Endogenous Information in Contracting

Benito Arruñada’s Institutional Foundations of Impersonal Exchange: Theory and Policy of Contractual Registries is an impressive and erudite study of the relationship between legal institutions and impersonal exchange. While clearly valuable for better understanding policies regarding formalization, in my mind it also introduces ideas that are relevant for contract theory more generally and yet hardly treated in the literature.

Since the 1970’s economic theorists have understood that information asymmetries between parties who write contracts are a key source of inefficiencies in exchange. Since then, a vast literature has developed exploring this idea from many different angles. Nevertheless, two key features usually appear. First, the set of parties who write contracts all observe each other, know they are contracting with each other, and (with some exceptions) observe the terms of the contracts agreed. Second, the information asymmetries are assumed to be a fixed, exogenous feature of relationships.

Benito’s book convincingly shows that both of these limit our understanding of trading frictions in the real world. A key insight is that, in addition to his “type” or “action” (to use the language of contract theory), the formal contracts that an economic agent has written with others may be unobservable. After reading the book, it became clear to me that this dimension of non-observability is just as important for generating market failure as others. The second, and intimately related, insight is that the degree of non-observability of contractual rights depends on public institutions, in particular registration systems. Whereas it is unclear how a public body would help contracting parties discover — to take a standard example — each other’s preferences over the good they are proposing to trade, Benito shows that they can affect the amount of information they have about each other’s formal legal rights. And, in line with what one would expect, when institutions can reduce this information asymmetry, the likelihood of efficient trades increases.

Putting these two ideas together provides an original and to me very exciting view on the value of legal systems. Economists often discuss “good” legal systems as those which enforce written agreements transparently at low cost. After reading Benito’s book, I recognized that legal systems also act to endogenously affect the amount of information that parties have available to reach those agreements in the first place. This deserves to be an influential idea in future discussions of law, economics, and contract theory.

Stephen Hansen. Assistant Professor. Economics Department. Universitat Pompeu Fabra. Barcelona, Spain

19 January 2013 at 5:24 am 1 comment

Arrunada Seminar: Corrado Malberti (2) – An Empirical Test on the Differences between Recordation and Registration

| Corrado Malberti |

An Empirical Test on the Differences between Recordation and Registration

One key point of professor Arruñada is that “[i]t is safe to assume that recordation is less effective than registration in avoiding title uncertainty”. However, the Author acknowledges that it would be essential to perform some empirical analysis to support his conclusions. Importantly he also acknowledges that comparing the performance of titling systems is a daunting task, and that it should be important to consider the specifics of each country.

To start the debate on this point, professor Arruñada compares simple averages for two samples of European Union countries with different titling systems. The Author discovers that, apparently (at least in Europe), registration systems are not only more effective, but also less costly than recordation systems. However, Arruñada also acknowledges that this data is more a starting point for a fruitful discussion than the end of the debate, since it would be ”premature . . . to interpret these empirical differences as causal effects, given the small samples involved”.

I completely agree with this perspective and, I also believe that, starting from this data, it will be important to further investigate the matter.

However, this also poses the question on which is the direction empirical research should take in future. In fact, it is conventional wisdom among legal scholars that registration is superior to recordation. For example, it was also for that reason that, after the end of WWI, Italy decided to preserve in the new provinces the registration system already in place in Austria-Hungary, and that France decided to maintain the livre foncier in Alsace-Moselle.

Since any generalization concerning the classifications of public registers may have little predictive value on how real legal problems are solved, probably, in future, it will be prudent to carry out empirical analyses that consider homogeneous legal frameworks. This would limit the risks of giving the same label to systems that practically adjudicate disputes in completely different ways. Thus, from this perspective, it would probably be more interesting and valuable to focus the attention on those legal systems, like the French and the Italian, where two different public registers coexist.

Corrado Malberti, Professor in Commercial Law. University of Luxembourg.  Commissione Studi Consiglio Nazionale del Notariato.

17 January 2013 at 6:08 am 1 comment

Arrunada Seminar: Corrado Malberti – The Different Dimensions of Recordation and Registration

| Corrado Malberti |

The Different Dimensions of Recordation and Registration

Concerning the characteristics of registration and recordation, I think that the classification made by professor Arruñada should adopt a more nuanced perspective. In fact, the distinction between, on the one hand, recordation systems where deeds are deposited to facilitate their inspection and that rely on what professor Arruñada calls a property rule, and, on the other hand, registration systems that define rights and that give preference to what professor Arruñada calls a property rule, is probably sacrificing important complexities that exist in the public registers falling in each of these two categories.

In fact, legal scholarship highlighted that the dimensions that should be taken into account in classifying public registers are, at least, three:

  • the first dimension concerns what is entered in the register, either a deed or a right;
  • a second dimension is related to the effects of the entry in the register, either the entry simply regulates the conflicts between two or more acquirers from the same owner, or the entry defines the right;
  • finally, the third dimension concerns the role played by bad faith in making a valid entry in the public register.

The combination of these different dimensions makes the dichotomy between registration and recordation more intricate. And it has been argued that, from a legal perspective, it would be impossible to give to these categories anything more than a didactic relevance. In addition, it should also be noted that, even when classified along these three dimensions, in certain cases public registers adopt peculiar principles (e.g. the sometimes radically different rules governing adverse possession could be taken as evidence of how peculiar the practical results of each legal system could be).

Professor Arruñada makes important efforts in trying to include many of these nuances in his analysis. Yet, for many public registers it is difficult to deny the existing contaminations between recordation and registration.

Corrado Malberti, Professor in Commercial Law. University of Luxembourg.  Commissione Studi Consiglio Nazionale del Notariato

16 January 2013 at 5:00 am 1 comment

Arrunada Seminar: Pamela O’Connor – Conflating Contractual and Property Rights

| Pamela O’Connor |

Conflating Contractual and Property Rights

Coming from a property law perspective, I welcome Arruñada’s recognition of the need for economists to acknowledge the nature of property as as rights in rem (rights in things, enforceable against third parties) and their essential difference from contractual rights that bind only the contracting parties. Although legal scholars such as Bernard Rudden, Thomas Merrill and Henry E Smith have been pointing out the inadequacies of traditional economic conceptions of property for some time, economic theorists have been slow to grapple with the implications.
One consequence of conflating contractual and property rights is apparent in recent Australian legislation on resource rights. State legislatures have introduced new types of rights that run with land and bind third parties as rights in rem, but are largely defined by individual agreements. Their relationship to other property rights remains unclear, and their variability makes them costly for other people to assess. Although uptake of the new rights has been slow, they have the potential to burden land titles with proliferating rights that bind all future owners and which nobody really understands.

Pamela O’Connor. Associate Professor, Faculty of Law. Monash University. Australia

14 January 2013 at 5:13 pm 3 comments

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