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George Mason School of Law

Contracts I

Paternalism I

F.H. Buckley

fbuckley@gmu.edu

Free bargaining makes people better off…

Provided that we assume that their choices satisfy the assumptions of rational choice

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Rational Choice: Six Assumptions

Full Information

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Rational Choice: Six Assumptions

Full Information Choices are Freely Made

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Rational Choice: Six Assumptions

Full Information Choices are Freely Made Non-satiation

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Rational Choice: Six Assumptions

Full Information Choices are Freely Made Non-satiation Completeness or comparability

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Rational Choice: Six Assumptions

Full Information Choices are Freely Made Non-satiation Completeness or comparability No third party effects (externalities)

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Rational Choice: Six Assumptions

Full Information Choices are Freely Made Non-satiation Completeness or comparability No third party effects (externalities) Perfect rationality

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Rational Choice: Six Assumptions

Full Information (later) No mistakes No misrepresentations And no informational asymmetries

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Rational Choice: Six Assumptions

Full Information Choices Are Freely Made (later)

No duress

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Rational Choice: Six Assumptions

Full Information Choices Are Freely Made Non-satiation

More is always better

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A

B

Good 1

More is always better

0

Good 2

Non-satiation: B > A

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A

B

Good 1

More is always better

0

Good 2

Non-satiation: B > A

XA XB

XB > XA

YB

YA

YB > YA

Non-SatiationIs this the same thing as saying “Greed is good”?

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Michael Douglas as Gordon Gekko in Wall Street

Non-SatiationHow would you define greed?

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Michael Douglas as Gordon Gekko in Wall Street

Is it a matter of how avidly one pursues money?

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Work

Leisure

Is it a matter of how avidly one pursues money?

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Scrooge McDuck

●

●

Surfer

B

A

Work

Leisure

Is it a matter of how avidly one pursues money?

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●

●B

A

Work

LeisureJust where would one put lawyers?

Is it a matter of how avidly one pursues money?

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●

●B

A

Work

LeisureIs there a golden mean?

Notorious workaholics

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Is what you do with the money relevant?

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Personal Consumption

Spendingon Charity

Is what you do with the money relevant?

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Greedhead’s consumption at B

●

●

Benefactor’sconsumption at A

B

A

Personal Consumption

Spendingon Charity

Or is it what you pursue?

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Material Goods

Non-materialGoods

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Rational Choice: Six Assumptions

Full Information Choices Are Freely Made Non-satiation Completeness or comparability

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Time 1

0 Time 2

No black holes

Comparability: No incommensurabilities

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Sophie’s Choice

You are a member of a hospital’s ethics committee. You have to choose between allocating a kidney to an alcoholic former sports idol or a mother of two.

IncommensurabilityTragic Choices

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Rational Choice: Six Assumptions

Full Information Choices are Freely Made Non-satiation Completeness or comparability No third party effects (externalities)

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Mary

Bess

Ann

Representing Ann’s utility on a third dimension.

(Please put on your 3-D glasses now.)

Third party effects: Bargaining with a third person

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Mary

Bess

Ann

The intersection of the three indifference curves in three dimensionalspace is the “bargaining core”

Third party effects: Bargaining with a third person

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Paretian norms don’t work—if it’s an external cost

Externalities and Tort Law

What happens if third parties can’t be joined?

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Do we then abandon the concept of efficiency?

A more relaxed standard: Kaldor-Hicks efficiency

A transformation is Kaldor-Hicks efficient when the winners could compensate the losers (“Potential Pareto-Efficiency”) and satisfy Paretian standards

But nearly everything has third party effects…

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It is proposed to abandon steel tariffs that impose costs of $10B on the economy but provide steel manufacturers with a gain of $1B.

The bankruptcy of a failing business imposes a cost to shareholders of $1M, but provides a benefit of $5M to creditors.

Examples of Kaldor-Hicks Efficiency

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Mary

Bess

A

C

Explaining Kaldor-Hicks:C is Pareto-inferior to A Moving from A to C makes Mary worse off

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Mary

Bess

A

C

But C is Kaldor-Hicks Efficient to A 1. At C Bess is on IC and better off than she is at A on IA

IAIC

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Mary

Bess

A

B

C

C is Kaldor-Hicks Efficient to A 2. At C Bess could give up CB roses to move to B and be on IB, where she would still be better off than she was on IA

IA

IBIC

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Mary

Bess

A

B

C

C is Kaldor-Hicks Efficient to A 3. At B Mary would be no worse off than at A.

IA

IBIC

“Potential Pareto-superiority”

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Mary

Bess

A

B

C

Kaldor-Hicks EfficiencyC is Pareto-inferior to A but Bess could make it Pareto-superior by transferring wealth to Mary

IA

IBIC

“Potential Pareto-superiority”

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It is proposed to abandon steel tariffs that impose costs of $10B on the economy but provide steel manufacturers with a gain of $1B.

The bankruptcy of a failing business imposes a cost to shareholders of $1M, but provides a benefit of $5M to creditors.

Examples of Kaldor-Hicks Efficiency

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The bankruptcy of a failing business imposes a cost to shareholders of $10M, but provides a benefit of $5M to creditors.

Examples of Kaldor-Hicks InEfficiency

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Rational Choice: Six Assumptions

Full Information Choices are Freely Made Non-satiation Completeness or comparability No third party effects (externalities) Now—Perfect rationality

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Relaxing the Rationality Assumption: Transitivity: A Technical Definition

If A is preferred to B and B is preferred to C, then A is preferred to C

A}B, B}C A}C

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Relaxing the Rationality Assumption: Transitivity: A Technical Definition

If A is indifferent to B and B is indifferent to C, then A is indifferent to C

AB, BC AC

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Transitivity: A>B, B>C A>C

Good 1

0

Good 2

C

B

A

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Transitivity: Indifference curves can’t touch

Good 1

a b

c 0

Good 2

A violation of transitivity

If a ~ c and c~ b,then a ~ b.But b > a

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Relaxing the rationality assumption:Paternalism

Suppose that, lacking perfect rationality, we knew that our choices might harm us.

Might we not, in such cases, wish to let the paternalist choose for us?

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Relaxing the rationality assumption:Byron, The Prisoner of Chillon

At last Men came to set me free –I asked not why, and recked not where--It was at length the same to me,Fettered or fetterless to be--I learned to love despair…

My very chains and I made friends,So much a long Communion tendsTo make us what we are, even I Regained my freedom with a sigh

Castle of Chillon, Switzerland

Infants: Kiefer

What happened?

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Infants: Kiefer

What happened? The Wisconsin statute’s version of

restatement § 14 referred to 21 years as the standard. Was that dispositive? Should it have been?

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Infants: Kiefer

What about the mature 16 year old? And the immature 25 year-old? Or the married person under the age of majority? The evidence from criminal law.

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Infants: Kiefer

Did the Δ know that the Π was an emancipated minor?

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Infants: Kiefer

Did the Δ know that the Π was an emancipated minor? Does that matter?

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Infants: Kiefer

Did the Δ know that the Π was an emancipated minor? Does that matter? Contrast Restatement §§ 14 and 15(2).

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Merchant ProtectionWhat if he presents a fake ID?

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Fraud by the InfantWisconsin Loan v. Goodnough

What’s the difference between estoppel and recovery in tort for fraud?

Qu. the age-of-majority clause in Kiefer?

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Why an exception for necessities?

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