What is Posner's point in his "Wealth Maximization" theory? Forum

[stocksly33]

What is he saying judges should do?

He says "law should attempt to promote and facilitate competitive markets and to simulate their results in situations in which market transaction costs are prohibitive."

I especially don't understand the last half in application to enforcing agreements "to simulate their results in situations in which market transaction costs are prohibitive."

[Borhas]

What is he saying judges should do?

He says "law should attempt to promote and facilitate competitive markets and to simulate their results in situations in which market transaction costs are prohibitive."

I especially don't understand the last half in application to enforcing agreements "to simulate their results in situations in which market transaction costs are prohibitive."

the second half means (partially at least) that transaction costs (aka lawyers) sometimes prohibit bringing to parties to bargaining table. Economic Theory law people usually want to give injunctions to the entitled party instead of damages because parties can negotiate outside of the court afterwards... but when transaction costs make those negotiations too costly the injunction will stand and that's not the most efficient outcome... on the other hand when courts assess damages they try to basically simulate some fair market value or something like that... economic theory folks usually think that this is a poor substitute for the free market; here Posner says that sometimes it's a good thing because of transaction costs.

[MjH Inc]

Makes sense to me, Borhas.

[stocksly33]

so Posner is encouraging cts to award damages instead of invalidating agreements? He's saying that lawyer's fees for ct are not as costly as lawyer's fees for negotiations outside the ct?

my prof talked about Wealth Maximization with regard to Justification for non-performance (Impracticability, etc).

[Borhas]

so Posner is encouraging cts to award damages instead of invalidating agreements? He's saying that lawyer's fees for ct are not as costly as lawyer's fees for negotiations outside the ct?

my prof talked about Wealth Maximization with regard to Justification for non-performance (Impracticability, etc).

yes, in some circumstances

The only context I've seen a Posner quote like this was in Property, discussing injunctions v. damages... but I wouldn't be surprised if he extended that elsewhere.

as far as attorney fees, the court has to first find the entitlement, and that'll obviously entail all the standard litigation costs... but after the entitlement's found the court determines damages on its own (TBH I have no fucking idea how damages are calculated, but it seems like it would cost less for the court to throw out a number than to let the parties continue to negotiate in an expensive way)...

also, transaction costs are also much greater than just attorney fees... they also include businesses reputations, for example a business would want a reputation as a tough negotiator so that its competitors don't challenge them fearing that they would just waste money on lawyers and research for nothing, and thus that business would pay in transaction costs, where if the court assessed damages, the business wouldn't lose rep, but also wouldn't have to spend $ to maintain it... transaction costs can also include adversarial relationship between parties, and all the other psychological things that create inertia in transactions.

[stocksly33]

thanks. i understand the theory better now. but i have no idea how it applies to excuses to performance.

[Borhas]

thanks. i understand the theory better now. but i have no idea how it applies to excuses to performance.

hmmm ... I haven't taken contracts so have no idea (if that's a contracts question)

I wouldn't be surprised if it was very similar... seems like an injunction is just the opposite of performance... but like I said wtf do I know

sorry I'm not more helpful g'luck

[dailygrind]

thanks. i understand the theory better now. but i have no idea how it applies to excuses to performance.

applied to excuses to performance, he's talking about allocating the risk of non-occurrence. impossibility, frustration, impracticability, they're basically all the same thing. something happens the parties didn't think would happen, it's pretty crazy whatever it is, and somebody wants out of the contract. the risk of this non-occurrence can typically be borne more easily by one party than the other because they're in a better position to prevent it (e.g. the owner of a theatre that burns down would be in a better position to bear the risk than the person that contracts to use the theatre - the theatre owner can put in sprinklers, ban indoor smoking, hire someone good to work combustible film reels, etc.). what posner's talking about here is putting the risk of non-occurrence on the party that can better bear it, and the part about transaction costs is just him saying that the parties would have allocated these risks that way themselves if they'd had the time to sit down and talk about all the possible outcomes that could occur. that's my understanding anyway, but i have not a single case to back that up as my contracts professor has a different view on excuse.

[smittytron3k]

thanks. i understand the theory better now. but i have no idea how it applies to excuses to performance.

applied to excuses to performance, he's talking about allocating the risk of non-occurrence. impossibility, frustration, impracticability, they're basically all the same thing. something happens the parties didn't think would happen, it's pretty crazy whatever it is, and somebody wants out of the contract. the risk of this non-occurrence can typically be borne more easily by one party than the other because they're in a better position to prevent it (e.g. the owner of a theatre that burns down would be in a better position to bear the risk than the person that contracts to use the theatre - the theatre owner can put in sprinklers, ban indoor smoking, hire someone good to work combustible film reels, etc.). what posner's talking about here is putting the risk of non-occurrence on the party that can better bear it, and the part about transaction costs is just him saying that the parties would have allocated these risks that way themselves if they'd had the time to sit down and talk about all the possible outcomes that could occur. that's my understanding anyway, but i have not a single case to back that up as my contracts professor has a different view on excuse.

see american trading co. v. shell. the court actually finds that a military conflict in the suez canal does not make a shipping contract commercially impracticable, and one of the ways it reaches that conclusion is by saying that the shipping company is better able to bear the risk associated with potential shipping hazards than the oil company who hires it because it has better geopolitical knowledge and is better suited to assess the risks associated with various routes.

[Harry Ballsogna]

What is he saying judges should do?

He says "law should attempt to promote and facilitate competitive markets and to simulate their results in situations in which market transaction costs are prohibitive."

I especially don't understand the last half in application to enforcing agreements "to simulate their results in situations in which market transaction costs are prohibitive."

the second half means (partially at least) that transaction costs (aka lawyers) sometimes prohibit bringing to parties to bargaining table. Economic Theory law people usually want to give injunctions to the entitled party instead of damages because parties can negotiate outside of the court afterwards... but when transaction costs make those negotiations too costly the injunction will stand and that's not the most efficient outcome... on the other hand when courts assess damages they try to basically simulate some fair market value or something like that... economic theory folks usually think that this is a poor substitute for the free market; here Posner says that sometimes it's a good thing because of transaction costs.

Not really sure what you are saying here, but most of it is wrong as applied to contract law.

In contract law, economists specifically argue in favor of damages. Specific performance ("injunction") leads to overperformance. Overperformance causes economic waste, and does not lead to efficient breach

The expectation measure of damages (which economists in contract law explicitly argue for) does lead to efficient breach. Modern courts only use specific performance where the good is unique or damages are impossible to value.

[Na_Swatch]

What is he saying judges should do?

He says "law should attempt to promote and facilitate competitive markets and to simulate their results in situations in which market transaction costs are prohibitive."

I especially don't understand the last half in application to enforcing agreements "to simulate their results in situations in which market transaction costs are prohibitive."

the second half means (partially at least) that transaction costs (aka lawyers) sometimes prohibit bringing to parties to bargaining table. Economic Theory law people usually want to give injunctions to the entitled party instead of damages because parties can negotiate outside of the court afterwards... but when transaction costs make those negotiations too costly the injunction will stand and that's not the most efficient outcome... on the other hand when courts assess damages they try to basically simulate some fair market value or something like that... economic theory folks usually think that this is a poor substitute for the free market; here Posner says that sometimes it's a good thing because of transaction costs.

Not really sure what you are saying here, but most of it is wrong as applied to contract law.

In contract law, economists specifically argue in favor of damages. Specific performance ("injunction") leads to overperformance. Overperformance causes economic waste, and does not lead to efficient breach

The expectation measure of damages (which economists in contract law explicitly argue for) does lead to efficient breach. Modern courts only use specific performance where the good is unique or damages are impossible to value.

Too much generalizing of "economists in contract law"... there is a multitude of opinions and arguments on both sides. Using costs/benefit analysis you can argue from either direction, and you also can have allocation problems from "efficient" breach

[AreJay711]

You know studying this from an economics point of view in undergrad is what first made me interested in law school

[dailygrind]

In contract law, economists specifically argue in favor of damages. Specific performance ("injunction") leads to overperformance. Overperformance causes economic waste, and does not lead to efficient breach

The expectation measure of damages (which economists in contract law explicitly argue for) does lead to efficient breach. Modern courts only use specific performance where the good is unique or damages are impossible to value.

Too much generalizing of "economists in contract law"... there is a multitude of opinions and arguments on both sides. Using costs/benefit analysis you can argue from either direction, and you also can have allocation problems from "efficient" breach

agreed. for instance, why would someone ask for specific performance if damages was an adequate remedy? by asking for specific performance, the aggrieved party is showing preference of the one over the other, demonstrating that damages is an inadequate remedy. if a court grants specific performance, then the parties would then negotiate amongst themselves to see if the breacher could get out of the contract, and THIS is when we discover whether or not it is economically efficient to breach.