The Situationist

Miscalculating Welfare – Abstract

Posted by The Situationist Staff on March 27, 2008

Michael Dorff and Kimberly Ferzan have posted a new paper, “Miscalculating Welfare,” on SSRN. Here is the abstract.

* * *

In their quest to maximize efficiency, law and economics scholars often produce novel, creative, and counterintuitive legal rules. Indeed, legal economists have argued for baby selling, against anti-discrimination laws in the workplace, and for insider trading.

In this essay, we discuss some concerns about this form of legal scholarship that privileges the creative and counterintuitive over the fair, mundane, and intuitive. Drawing on a rangecapuchin-monkeys-de-waal.jpg of empirical evidence, this essay argues that the failure to include, and to give sufficient weight to, fairness preferences undermines legal economists’ policy recommendations.

Specifically, after setting forth three examples of this phenomenon, in the second part of our essay, we turn to the empirical evidence that legal economists should take fairness concerns seriously. This evidence ranges from the recent happiness research that calls into question the correlation between wealth and happiness, to studies of the capuchin monkey who rejects unequal pay, to cross-cultural results of the ultimatum game. We argue that given the growing body of research revealing that individuals value fairness over their own rational self-interests, it is incumbent on legal economists to take preferences for fairness into account.

From here, we discuss several perils of ignoring fairness. We illustrate that unfair rules may upset reasonable expectations or instigate resistance. Either of these effects would undermine whether the specific legal rule was itself wealth or welfare maximizing. We then turn to two ways in which an unfair legal rule might adversely impact the legal system as a whole. Drawing on the work of [Situationist contributor] Tom Tyler and others, we argue that unfair rules may create general disrespect for the legal system thus undermining the force of law. We also argue that unfair legal rules may undermine more general social norms, thus upending the rule-utilitarian benefits of rules over standards.

Finally, we speculate a bit about the perverse incentives of current legal scholarship. The three proposals at the beginning were published by a University press, a peer-review journal, and a top student-edited journal. Innovative and creative solutions to legal problems may get widespread publicity and may be highly valued over and above realistic solutions to legal problems. In the final section, we sketch out what we believe are the pitfalls and the benefits of our rewarding this sort of scholarship.

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