ECON 4494W — Assignment 3

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Our next speaker will be Tom Miceli, will talk about law and economics.

Many potential accident settings involve economic decisions by the parties involved (call them the “injurer” and the “victim”) that can reduce the risk. The economic theory of accident (tort) law focuses on how legal rules that assign liability for accidents after the fact create incentives for these parties to invest in such precautions (or care) beforehand. In this way, the threat of liability is like a Pigovian tax that internalizes the externality.

An especially interesting version of the accident problem arises when the injurer and victim act in sequence — for example, a person is observed driving recklessly, and other drivers are compelled to veer out of his or her way. Although the first driver is clearly acting negligently, the question is whether the other drivers have a legal duty to take evasive action — that is, to take “compensating precaution.”

This problem is famously portrayed in F. Scott Fitzgerald’s novel The Great Gatsby in a conversation between Nick Carraway (the narrator) and Jordan Baker. The conversation, which is quoted in the opening page of “Common Law Control of Strategic Behavior: Railroad Sparks and the Farmer” (Journal of Legal Studies 17 (1988): 15-42), provides the motivation for Mark Grady’s analysis of the problem. (Grady mistakenly describes it as a conversation between Nick and Daisy Buchanan.) The specific issue he studies is the trade-off between the economic benefits of compensating precaution by the second mover in the presence of prior negligence and the risk of strategic negligence by the first mover (as epitomized by Jordan’s final retort).

Note that, like the economics of the law in general, this analysis builds on Ronald Coase's other path-breaking article, "The Problem of Social Cost," Journal of Law and Economics 3: 1-44 (1960).

Make an argument about the Fitzgerald trade-off and the manner in which the common law of torts has sought to address it. Do the legal remedies have an economic logic?