Coase Defends Coase: Why Lawyers Listen and Economists Do Not

A Review of The Firm The Market and The Law by Ronald Coas

Coase, Rents, and Opportunity Costs

Professor Posin is to be congratulated on his recent article in this Review, The Coase Theorem: If Pigs Could Fly, for creating a precise example that purports to disprove the Coase Theorem. Legal scholarship should strive more towards verifiable or falsifiable statements about the law. Of course, falsifiable statements are a risky strategy, and in this case the risk has materialized. Posin\u27s claim—that his example shows a flaw in the Coase Theorem—is false. Posin\u27s claim is an especially bold one, for his example deals with a shifting legal entitlement between two producers. Most successful attacks on the Coase Theorem have critiqued its purported applicability to consumers. Indeed, Professor Coase himself has recently declared that he never claimed his analysis could be applied to consumers. Thus, if correct, Posin\u27s claim that the Coase Theorem fails as applied to producer behavior would be news indeed. Professor Posin is also to be congratulated on a clever title to his article. He colorfully suggests that the reasoning surrounding the Coase Theorem is like assuming pigs have wings, and then constructing a science of animal husbandry around the principle of porcine aerodynamics. He implies that a world where pigs can fly is not earth. I agree that the Coasean world is a strange place. I will not claim that pigs can fly in such a world, but wooden accountants cannot soar either. Certainly, whether the rule of law is for or against him, a cattle rancher will add ponies to the herd if that is the best alternative, and will add cows if they become more profitable again. Wooden accounting measures of cost and rate of return, which infect Posin\u27s analysis, are unlikely to capture the dynamics of the Coasean world. Finally, Posin is on to something when he suggests that rents are an essential part of the Coase Theorem (although rents are not essential). After examining how Posin erred, I will attempt to make a silk purse out of this fallen pig by discussing several features of the Coase Theorem that Posin\u27s example touches on, particularly the necessity for rents in the Coase Theorem

Law-and-Economics Approaches to Labour and Employment Law

This article describes the distinctive approaches that law and economics takes to labour and employment law. The article distinguishes between ‘economic analysis of law’ and ‘law and economics’, with the former applying economic models to generally simple legal rules while the latter blends messier institutional detail with legal and economic thought. The article describes three eras of law-and-economics scholarship, recognizing that economics teaches that markets work and markets fail. Era One emphasizes that labour laws and mandatory employment rules might reduce overall social welfare by preventing a benefit or term from going to the party that values it most highly. Era Two emphasizes that labour and employment laws might enhance overall social welfare by correcting market failures arising from monopsony power, externalities, public goods, asymmetric information, information-processing heuristics, and internal labour markets. Era Three uses empirical methods to referee between markets-work and markets-fail approaches. The article argues that unequal bargaining power is not a standard market failure, because even powerful employers have a profit-maximizing motive to provide benefits, such as vacation or safety, that workers are willing to pay for

The Union As Broker of Employment Rights

Most employment-law rights are mandatory. Individual workers cannot decline the protections the law gives them. For example, a nonexempt worker must get at least $7.25 per hour and time-and-a-half for overtime, even if she would agree to less. A worker’s pension must vest within five years. If she is injured on the job, a worker is entitled to compensation through a state system and cannot opt out in advance. Interestingly, in these examples and others like them, the law forces its protection only on nonunionized workers. Unions in a collective bargaining contract can bargain away these rights, acting as broker in return for something more valuable to their workers. This chapter examines the choice between waivable and mandatory employee rights and, in particular, whether some rights should be mandatory for individual workers but subject to negotiation by labor unions. Section I sets the stage with two examples. Section II explores why most employee rights are mandatory. Section III asks whether unions should be allowed to waive (or broker, to use a more palatable term) employee rights even when individuals cannot. Section IV documents the large degree to which current employment law already has this feature of mandatory individual rights that unions can broker. Section V then explores whether unions and society should welcome the role of union as broker

Regulating Noncompetes Beyond the Common Law: The Uniform Restrictive Employment Agreement Act

The common law has never treated a post-employment noncompete agreement between employer and employee like an ordinary contract. Rather, a court will enforce a noncompete only if it is reasonably tailored in time, geography, and scope of business to further a legitimate employer interest. Suppressing competition is an understandable but not legitimate interest. While the common-law approach works well enough for some occupations, it is problematic for both workers and employers in many cases. It is a challenge for workers who don’t know about the noncompete until after starting work, for lowwage workers who are unlikely to have trade secrets or star power over customer relationships, and for workers who are uncertain whether the noncompete is enforceable. The vagueness and variation between jurisdictions is also challenging for employers trying to avoid litigation while writing an enforceable noncompete or hiring an experienced worker purportedly subject to a noncompete. Adding to the complexity are related agreements such as nonsolicitation agreements, confidentiality agreements, payment-for-competition agreements, and training-reimbursement agreements. Some states subject the entire family of agreements to a single framework, but many states use different standards or are silent about these siblings. In recent years, at least eighteen states have enacted statutes regulating noncompetes more or less comprehensively. This is leading to a cacophony of statutory commands around the hum of the common law. The frustration, complaints, variety, and confusion inspired the Uniform Law Commission in July 2021 to promulgate the Uniform Restrictive Employment Agreement Act to be pushed out to the states for adoption in the upcoming months and years. The Uniform Restrictive Employment Agreement Act clarifies and codifies the common law by specifying four legitimate employer interests for a noncompete (sale of a business, creation of a business, trade secrets, and customer relationships) and articulating a narrowly tailored standard. The Act adds precision by giving an outer time limit of one year for most agreements. The Act makes four key moves beyond the common law: it prohibits as well as makes unenforceable improper agreements, with statutory damages; it sets maximum restrictive periods, usually one year; it bans noncompetes for low-wage workers; and it requires advance notice for an enforceable agreement. This Article explains the motivation behind the Uniform Restrictive Employment Agreement Act and ways in which it codifies and clarifies the common law and ways it goes beyond

A Coasean Experiment on Contract Presumptions

Despite the theoretical importance of the Coase Theorem, scholars have given surprisingly little attention to verifying its predictions empirically. Supporters often accept the theorem as dogma, while armchair critics assail its assumptions. In an exciting series of recent articles, however, Elizabeth Hoffman and Matthew Spitzer have presented experimental evidence, as have others, that largely supports the Coasean prediction that bargainers will negotiate around inefficient property rights to reach a Pareto-optimal solution. The methodology has even gained sufficient attention to have its detractors. The existing experiments analyze the results of bargains when one side has the power to impose unilaterally one outcome but can negotiate with others for other outcomes. As discussed below, the unilateral power of one side makes these experiments most insightful to the world of property and tort. The present article, by contrast, analyzes the efficiency and distributive effects of a contract presumption, whereby the nominal beneficiary must obtain the contractual consent from the other side before benefiting from the rule. The experiment tends to confirm the Coasean prediction that contract presumptions do not affect the efficiency of bargains. The results question, however, the Coasean wisdom that contract presumptions should not affect the distribution of wealth between the parties