Archive for the ‘Incentives’ Category

Hypocratic Oath

December 31, 2017 Leave a comment

It is possible to use the internet to commit a crime. For example, one could use a Silk Road-like website to acquire a controlled substance it is illegal to possess in one’s geographical jurisdiction, or simply use the web’s myriad means of communication to coordinate a financial fraud.

It also is possible to commit an internet crime. The social and commercial interactions that occur within the internet itself are subject to a sort of moral code, and, for all of the flexibility and fluidity the web as a virtual space would seem to offer, one of the highest internet crimes arises out of inconsistency. For many in this realm, there is no greater offense than to be indicted for the offense of hypocrisy. And, indeed, indictment and conviction are nearly simultaneous in this medium, with sentencing following quite swiftly thereafter.

The internet remembers all, or sufficiently all, anyway, to retain record of those off-color tweets you sent years before you took a public stand against others who said similar things, and when someone else finds those old tweets, man are you going to look silly. One of the things at which human brains excel is detecting patterns, and when the alleged hypocrite expresses something apparently inconsistent with his or her prior positions, a little nugget of pleasure releases inside those brains upon the presentation of the irrefutable evidence from the historical record. Guilty on the spot.

The web-seductiveness of exposing apparent hypocrites is so alluring that it makes it easy to forget that hypocrisy, for all its attendant failings, is a sort of derivative or second-level offense, and our obsession with rooting it out can obscure or overwhelm what often is a serious substantive problem underlying the procedural default. In that way, for example, we frequently focus on an evaluation of the authenticity of an entertainment personality’s expressed opposition to the mistreatment of women when we subsequently find that she or he previously engaged in similar (or maybe even not that similar, but, hey, close enough) mistreatment in the past, rather than the actually bad problem itself. (This also touches on why otherwise uninvolved people “coming out as” anti-rape, anti-Nazi, etc., contributes very little to the general good.) Sexual harassment in the workplace and racism in public policy are two very real and significant issues that require real, meaningful effort to address, and yet we are so easily distracted from this work by the thrill of hypocrite hunting.

In the context of last month’s Senate election in Alabama, in which Doug Jones ultimately defeated Roy Moore by a margin the narrowness of which made many uncomfortable, Jonah Goldberg wrote for the Los Angeles Times about the dangers of our national distraction:

This obsession with hypocrisy leads to a repugnant immorality. In an effort to defend members of their team, partisans end up defending the underlying behavior itself. After all, you can only be a hypocrite if you violate some principle you preach. If you ditch the principle, you can dodge the hypocrisy charge. We’re seeing this happen in real time with some of Moore’s defenders, just as we saw it with Clinton’s in the 1990s.

Jonah Goldberg, Taking harassment seriously also requires making serious distinctions, Los Angeles Times, Nov. 21, 2017.

Or, as another thoughtful observer put it in sometimes cruder terms:

Wishing everyone a safe and happy new year filled with a renewed focus and energy for addressing some of our real problems in 2018.


Things to Do in Alabama When You’re Dead

July 31, 2015 Leave a comment

If you die in the United States and your death is someone else’s fault, your surviving family members probably can recover legal damages (i.e., money) from the person who wrongfully caused your death. For example, Georgia allows a surviving spouse to recover “the full value of the life of the decedent, as shown by the evidence.” O.C.G.A. § 51-4-2(a). Placing a monetary value on a human life is a notion and, subsequently, a process fraught with moral, ethical, and practical obstacles, but, as democracy is to forms of government, we have come up with scant else in the way of providing a legal remedy to the surviving victims of a wrongful death. (Indeed, the availability of civil wrongful death actions offer these victims at least two things the criminal justice system does not provide: 1) the possibility of receiving tangible compensation– again, in the form of money– for the loss of their family member, and 2) the ability to control the legal action directly, as the plaintiff in the lawsuit, rather than as an observer to a criminal case controlled by a government prosecutor, who is not strictly bound by the wishes of surviving victims.)

If someone decides that you are going to make Alabama your eternal sweet home, though, things will go a bit differently for your surviving kin than they would had you died in neighboring Georgia, or, really, anywhere else in the country. Unlike those in other states, Alabama’s wrongful death statute does not afford survivors the right to recover based, in some measure, on the value of the life of the decedent; instead, Alabama courts have made clear that only punitive damages are available to wrongful death plaintiffs. Atkins v. Lee, 603 So.2d 937, 942-43 (Ala. 1992). Rather than compensating the surviving family of the deceased for the lost value of their deceased relative’s life, punitive damages are designed to punish the wrongdoer and thereby deter such wrongdoing in the future. Instead of the value of the life of the particular deceased individual, in Alabama, the sole measure of damages potentially available to wrongful death plaintiffs is based on the (jury’s view of the) reprehensibility of the wrongdoer’s action:

The amount of damages should be directly related to the amount of wrongdoing on the part of the defendant or defendants. In assessing damages, [the jury is] not to consider the monetary value of the life of the [deceased], for damages in this type of action are not recoverable to compensate the [family] of the deceased from a monetary standpoint on account of his death, nor to compensate the plaintiffs for any financial or pecuniary loss sustained by the family of the deceased on account of his death.

Id. at 943. As the Alabama Supreme Court explained, this restricted approach “rests upon the Divine concept that all human life is precious.” Id. at 942.


Alabama’s adoption of the legislative premise, whether “Divine” or otherwise, “that all human life is precious” is laudable, but the state’s unique wrongful death statute does not necessarily operate to advance the goal of valuing all human life equally. First, it simply does not treat each case identically, as different juries will award different amounts to wrongful-death plaintiffs in different cases (based upon the reprehensibility of the wrongdoer’s action). Second, by taking a purely punitive stance, the civil action essentially duplicates the purpose of any companion criminal action. Third, and related to the second point, it is not obvious that a strictly punitive civil arrangement operates as a greater deterrent on actions resulting in wrongful deaths than the more common, compensatory schemes of other states. Fourth, and related to the third point, the practical effect of this statute is that it is more difficult for wrongful-death plaintiffs to collect in Alabama than it would be if their deceased relative died in a different state, because they must convince a jury of the (degree of) wrongfulness of the defendant’s actions that caused the decedent’s death instead of focusing on the value of the life lost, which can be challenging when the act that caused the death looks more like mere negligence than intentional homicide. Indeed, and fifth, the result of Alabama’s approach is that the wrongdoer effectively is allowed to determine the value of the life lost; whatever label the state applies to the variety of damages recoverable, it seems likely that plaintiffs in Alabama will, for all practical purposes, view whatever they recover in a wrongful death action to represent a measure of what they wrongfully lost.

There is nothing necessarily wrong with enacting idealistic or aspirational legislation. Such pronouncements can serve practical purposes, and a document like the Declaration of Independence would seem to serve as a good example. Legislatures must take care, though, that the immediate practical effects do not serve to undermine, in actual effect, the principled stance taken. When that happens, one rightly wonders about the government’s true aim. Is Alabama’s goal to treat “all human life [as] precious,” or is it simply to make the legal landscape less hospitable to wrongful death plaintiffs and their attorneys?

Categories: Compassion, Incentives, Law, Legal

Are the “Best” Airlines Environmentally Friendly?

March 31, 2015 1 comment

Earlier this year, the Wall Street Journal recently released its 2014 rankings of major airlines, as determined by evaluating the carriers according to seven different factors, including on-time arrivals, cancelled flights, mishandled baggage, and complaints. Environmental-impact factors were not included in the Journal’s analysis. Here are the Journal’s results:


FiveThirtyEight also recently released a ranking of major airlines, but their analysis focused exclusively on environmental impact. More specifically, FiveThirtyEight ranked carriers based on fuel efficiency:

The International Council on Clean Transportation (ICCT), an independent nonprofit funded by private foundations and entities such as the UE and World Bank, has been tracking airline fuel efficiency since 2010. Its latest report found no overall net gain in fuel efficiency from 2012 to 2013, and a 27 percent gap between the three most efficient carriers — Alaska, Spirit and Frontier Airlines— and the least efficient one, American Airlines.

The report’s “fuel efficiency score” is a unitless measure calculated using an airline’s revenue passenger miles, the number of airports it serves and its flight frequency per unit of fuel burned. A score of 1.00 is the industry average. The greater the number, the better the efficiency.

Here are their results:


As the following crude chart indicates, setting aside outliers like Alaska and American, there generally appears to be an inverse relationship between consumer satisfaction and fuel efficiency:


This chart plots the eight airlines appearing in both reports according to their ranks for consumer satisfaction (WSJ) and fuel efficiency (FiveThirtyEight), a larger number being “better” (i.e., greater consumer satisfaction or greater fuel efficiency). As plotted, Frontier, Southwest, JetBlue, Delta, and Virgin American illustrate an unmistakable inverse relationship between consumer satisfaction and fuel efficiency: as the former increases, the latter decreases. The two extreme outliers are Alaska, which earned top marks for both consumer satisfaction and fuel efficiency, and American, which was ranked second-worst in consumer satisfaction and worst in fuel efficiency.   Read more…

Backwards Down The Number Line?

July 1, 2011 1 comment

The disconnect between the principles and practices of the new wave of ostensibly fiscally conservative politicians may not be a unique feature of those serving on the federal level. As I previously noted, U.S. House Republicans, behind the fiscal leadership of Rep. Paul Ryan, may be a bit mixed up when it comes to the privatization of healthcare benefits. The situation at the state level, where Michigan legislators, with the strong support of Governor Rick Snyder, have eliminated state income tax credits for charitable donations, is a bit more conceptually nuanced.

Earlier this month, the Flint Journal reported on the policy change:

As part of a massive tax reform bill signed into law last month, all state income tax credits for charitable donations were eliminated to help close Michigan’s $1.5 billion budget deficit.

The tax measure is expected to save the state $35 million or more a year. . . .

In 2009, the $35 million the state gave back for tax credits leveraged nearly $100 million in charitable giving to nonprofits.

Kristin Longley, “Michigan income tax credits for donating to charities end next year,” Flint Journal (June 13, 2011). In eliminating the tax credit, Snyder “relied on research that showed charitable giving doesn’t necessarily hinge on a tax credit, but rather a personal cause or inclination toward generosity.” Id. 

As best I can tell, economists of all stripes probably would agree that, as a general policy matter, eliminating tax credits is good because a broader tax base taxed at a lower rate is preferable and less distorionary, and because “tax credits,” more properly termed “tax expenditures,” are a less transparent form of government spending. (For more on these ideas, see my earlier comment here.)

By eliminating tax credits, Snyder is trimming government spending, an unobjectionable outcome for fiscal conservatives. Charitable donations may present a special case, however, for the fiscally conservative view that government should tax less so that it spends less in order to stay out of the way of the private sector, which, the view holds, can provide services more effectively and efficiently. A perhaps less frequently enunciated, but necessary tenet of this view is that citizens freeing themselves from the burden of compulsory wealth redistribution (i.e., taxes to fund social services) must personally shoulder the burden of private charity. To do otherwise (just as to privatize services even where privatization will lead to less effective and more inefficient provision of those services) is simple greed, and greed is not the basis of fiscal conservatism or any other viable political theory.

Does elimination of the charitable donation tax credit do more to benefit the provision of private charity by allowing taxpayers to hold more money for that purpose, rather than filter it through the governing apparatus, or does maintaining the credit do more to benefit the provision of private charity by (imperfectly) removing money from the public taxing-and-spending cycle funds that no longer need to be used for publicly provided services? (At the very least, there is an empirical tax question here that is beyond my grasp: does the state net more money by eliminating the tax credit that it can turn around and spend on public services, do taxpayers end up with more in their pockets for private charity under the broad-base/low-rate tax structure, or is the best result an appropriately valued tax credit combined with a decrease in public spending on services?)

In debating the elimination of the credit, the two sides seem to be talking slightly past each other. The Governor’s view, in part, is that elimination of the credit is acceptable because the credit “doesn’t necessarily” provide a real incentive for giving– people decide to give based on other reasons. Proponents of the credit, though speaking with multiple voices, seem to see the credit as part incentive (to do good), part reward (for having done good), and part compromise (by freeing more assets for private use without evaporating resources for public services). In other words, the credit is more than an incentive, and saying that it may not function as one is not a complete justification for its elimination.

State-level politicians may simply be choosing among competing fiscally conservative values in this case, rather than being (apparently) ignorant of them, as in the federal-level situation I previously described. I do find merit in the broad push to eliminate tax expenditures, but I think it is worth asking whether charity presents a special case worthy of exceptional treatment.

Phish – “Backwards Down the Number Line,” Joy (2009)

Reverse Greenwashing; or, It’s Not Easy Being Green

May 23, 2011 9 comments

Part of the reason it is difficult to advance environmental protection policies is that it is difficult to inform and educate oneself on environmental issues. The issues have substantial scientific components, usually requiring specialized knowledge. Because humans live in the environment and most all of our actions affect the environment in some way, environmental proposals also often have the feature of affecting these many areas of our lives. By contrast, the conventional way of thinking about most types of legislative proposals– for example, health care, narcotic policy, or foreign policy– is that they are compartmentalized, directly comparable only as to their price. Environmental policies typically require expenditures too, but they are not so easily compartmentalized, and their effects more apparently spill over to other areas of policy and life. This results in incentives for and allegations of the politicization of science, which feeds back into the initial point: it is difficult to inform and educate oneself on environmental concerns, and this is an impediment to effective policy decisions. Typically, these informational hurdles result in inaction, but they also can result in bad policy. Federal ethanol subsidies– which had many unintended, negative consequences while failing to achieve environmental benefits– are an example of the latter. See here; see also here.

Read more…

Book Review: Nudge

September 29, 2010 2 comments

As promised, the following is my review of Nudge: Improving Decisions About Health, Wealth, and Happiness, by Richard H. Thaler and Cass R. Sunstein. This isn’t an especially timely post (the book originally was published in 2008, and I read the “Revised and Expanded Edition” from 2009), but, for its popularity and apparent influence, I do not think many of the readers of this site also have read this book.

The book is concerned with the way people deal with choices in their lives. The authors refer to an arrangement of options– for example, the layout of a food buffet– as choice architecture. Choice architecture is manipulable, and choice architects have the ability to control decision making in a meaningful way through the presentation and arrangement of options. “Humans predictably err,” and, by understanding these cognitive biases, choice architects can shape outcomes. Richard H. Thaler & Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness 7 (Penguin Books 2009) (2008). There is an entire set of studies and literature on cognitive biases that is emerging, particularly in the behavioral economics literature. Examples include confirmation bias, self-serving bias, and anchoring bias. A detailed exploration of these and other cognitive biases is beyond the scope of the book and this post. What is important for Thaler and Sunstein is that everyone has these systematic biases. Also important to Nudge is pointing out the “misconception…that it is possible to avoid influencing people’s choices”; in other words, there is no such thing as neutral choice architecture. Id. at 10; see also id. at 249-51 (discussing different types of neutrality and situations in which neutrality may be possible). Intended or not, every arrangement of options has an effect on those faced with the options.

The core of Nudge‘s contribution is an approach to choice architecture (which also could be thought of as system organization) the authors call “libertarian paternalism.” As the authors explain:

Libertarian paternalists urge that people should be free to choose. We strive to design policies that maintain or increase freedom of choice. When we use the term libertarian to modify the word paternalism, we simply mean liberty-preserving….Libertarian paternalists want to make it easy for people to go their own way; they do not want to burden those who want to exercise their freedom.

The paternalistic aspect lies in the claim that it is legitimate for choice architects to try to influence people’s behavior in order to make their lives longer, healthier, and better. In other words, we argue for self-conscious efforts, by institutions in the private sector and also by government, to steer people’s choices in directions that will improve their lives. In our understanding, a policy is “paternalistic” if it tries to influence choices in a way that will make choosers better off, as judged by themselves.

Id. at 5 (quotation marks omitted). Thaler and Sunstein call this influencing “nudging”:

A nudge…is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not.

Id. at 6. The authors acknowledge that “some of our nudges do, in a sense, impose cognitive (rather than material) costs, and in that sense alter incentives,” but argue that “nudges count as such, and qualify as libertarian paternalism, only if any costs are low.” Id. at 8.

Much of the book covers case studies showing nudging in action or how the greater use of effective choice architecture could improve outcomes for people. These examples include saving money, financial investment, the privatization of social security, prescription drug plans, organ donation policies, environmental conservation, school choice, health care, and marriage policy. While I’m not sure that Thaler and Sustein’s proposal for a “privatization” of marriage in which states only issue civil unions fits neatly within this book’s framework, I do think it could make a good topic for a future post here. If you are especially interested in these and the many other examples of nudges, the revised edition of the book or the authors’ regularly updated blog are good places to look.

Near the end of the book, the authors respond to certain objections to their approach. The first objection is that of the classic slippery slope: if we permit this limited paternalistic intervention, it won’t be long before government overreaches, and “highly intrusive interventions will surely follow.” Id. at 239. Thaler and Sunstein have substantive and structural responses to this objection: first, they would prefer this sort of critic to engage with them as to the merits of the chosen policy preferences rather than the structure itself, and second, this sort of structure is inevitable: “It is pointless to ask government simply to stand aside. Choice architects, whether private or public, must do something.” Id. at 240. They continue:

Those who make this argument sometimes speak as if government can be absent– as if the default terms that set the background come from nature or from the sky. This is a big mistake. To be sure, the default terms that now apply in any particular context might be best…. But that view must be defended, not assumed. And it would be odd for those who generally hold government in extremely low esteem to think that in all domains, past governments have somehow stumbled onto a set of ideal arrangements.

Id. at 241. Thaler and Sustein also do not think that a traditionalist, Burkean response based on the wisdom of longstanding social practices has much value here because “inertia, procrastination, and imitation often drive our behavior.” Id.

A second objection is that choice architects may have their own agendas, the implication being that these agendas could be “evil” or otherwise not in people’s best interest. Recognizing “that choice architects in all walks of life have incentives to nudge people in directions that benefit the architects…rather than the users,” the authors nevertheless believe that “lin[ing] up incentives when we can, and employ[ing] monitoring and transparency when we can’t” will be sufficient to overcome this issue. Id. at 242. Freedom of choice and transparency are important in this area. Related is John Rawls’ publicity principle: “In its simplest form, the publicity principle bans government from selecting a policy that it would not be able or willing to defend publicly to its own citizens.” Id. at 247. This would prohibit secrecy on the part of the government when it alters legal default rules, for example.

Thaler and Sunstein present and respond to other objections, but, at this point, I would like to both encourage readers to include their questions and critiques in the comment section below and offer my own thoughts.

First, despite the widespread, sweeping accolades for Nudge, I am not convinced that this is an especially groundbreaking book. Advertisers have been doing this sort of thing for years, grocery stores and casinos are consciously designed to make us spend more time and money in them, and there are entire fields of public relations, marketing, and advertising focused on driving individuals’ decision making towards particular ends by playing on the individuals’ desires, habits, interests, and incentives. Nudge does bring the idea of cognitive biases to the public in a way probably not present before, but it barely explains these biases, and there’s almost no discussion of the fascinating research in that area. The book also missed a chance to do a bit more (perhaps empirical) work to explore just how people respond to various nudges as a general matter that might allow readers to apply the conclusions that followed therefrom in leadership settings in their own lives. I appreciate that the book is geared toward a general audience (of which I may or may not be a member),  but I found it a bit too light.

Second, I think the second objection I mentioned above– a concern over the goodness of the intentions of choice architects– is a serious one that the authors fail to rebut sufficiently. Anyone who spends time studying cognitive biases and systematic human behavior should be able to take that knowledge and design a system that preferences any particular outcome, even ones that are not “beneficial” to users. Thaler and Sunstein recognize, through the myriad examples they cite throughout their book, that this happens all the time; they simply chalk it up to bad choice architecture and poor nudging. This might very well be the case in the examples they chose. The “bad” outcomes there could be a result of a lack of organization, planning, awareness, knowledge, or forethought. But what if similarly “bad” outcomes resulted from a knowledgeable, organized, aware choice architect and choice architecture? Freedom of choice and transparency might help here, but there seems to be no special reason why they should. An early example in the book is a school cafeteria in which a choice architect may organize food in a way that makes students more likely to choose fruits and vegetables and less likely to choose junk food. The reason this works has nothing to do with the nature of the fruits and vegetables (or that nature vis-a-vis the students) and everything to do with the systematic biases of the students themselves. So long as the libertarian constraint is in place, the students can choose whatever they want, but the paternalistic element permits the choice architect to select any option as the preferred option. Fruit, vegetables, and junk food are mere variables in this arrangement. (In political theory terms, the structure here is largely deontological, the right to define “the good” resting solely with the choice architect.) Additionally, Thaler and Sunstein place no duties on the choice architect in his or her selection of the “good” alternative. An obvious one might be a duty to be informed. The cafeteria administrator might have some idea that fruits and vegetables are healthier than junk food, but we also are told that dark chocolate and red wine (though not for children) have health benefits too. How should one evaluate this particular tradeoff, and how should one evaluate it against all of the dietary decisions that go into putting together a balanced meal? Does a “balanced meal” mean the same thing for every student? For a majority of students?

An architect

I think concerns about the qualifications and motivations of choice architects are greater than Thaler and Sunstein admit, and, if nothing else, deserved a more adequate defense. Overall, though, I am glad I read the book, and I think it does a good job of spurring discourse. Irrespective of whether you’ve read Nudge, I welcome your thoughts below.

Lawyers: It’s a Regulated Life For Us

July 30, 2010 5 comments

This week, aspiring lawyers across the country sat for state bar examinations, hoping to be admitted to practice law in that particular state. Having already expressed my thoughts on law school in particular, this seemed like a good week to step back and think about how law school fits into the broader professional regulatory scheme.

When the regulator in question is not a government agency, commission, or department, it can be difficult to detect that regulation even is taking place. When it comes to individuals in daily life, I have suggested the possibility that it doesn’t really matter whether a powerful actor is public or private, but experience shows that public regulators are easier to identify than private ones. The situation with the legal profession is even less obvious where there are multiple regulatory actors.

Two things to look for when attempting to identify a regulatory scheme are externally imposed hurdles and costs. In trying to do something, has someone else prescribed steps you must take to reach your goal? Does someone charge you money as a part of these intermediate steps to reaching your goal? If so, there’s a good chance you’re engaging in regulated activity. A familiar example from the public regulatory context is driving a car. Before operating the car you recently purchased, the state in which you live must license you to do so. State Departments of Transportation or Motor Vehicles must issue you a license, often after a series of competency examinations (e.g., vision, operating competency, and vehicular emissions) and assessment of a variety of fees for the privilege of using your car on government-owned roads.

Before examining the particularities of the legal profession, it is important to recognize that, while other professions self-regulate through various means, no profession is better at getting its professional protectionist measures enshrined in law than the legal profession. In most states, it is a crime to practice law without a license. In effect, this fact gives the other, privately required costs the force of law.

Rather than dwell on the details of each regulatory hurdle, a numbered list follows, identifying the gatekeeping element and a price tag. “Cost,” in this discussion, is about more than price, and includes autonomy and opportunity costs too. The list is arranged chronologically.

  1. Preparation for the Law School Admission Test (LSAT). This is a non-mandatory step, but it is included because it is highly recommended and nearly universally taken. The Law School Admission Council (LSAC), the company that owns and administers the LSAT (the only law school admission test) does offer for free an extremely limited set of free preparatory materials. Most people opt for a third-party preparation course, like those from Kaplan, which range from $899 to $7,999.
  2. The LSAT. The single-day test costs $136 to take.
  3. The law school application process. Applicants must submit their application materials like transcripts, writing samples, and letters of recommendation to the LSAC-run Credential Assembly Service (CAS). At a cost of $124, plus $12 per school, CAS repackages these materials, along with the applicant’s LSAT score, and sends them to law schools. Applicants submit only basic application information directly to law schools, which charge their own application fees of about $75.
  4. Law school. This earlier post focused on law school itself, and the comments have additional information relevant to this post. The fact that many students finance law school through loans complicates the assessment of tuition cost.
  5. Preparation for the bar examination. As with #1, preparation is non-mandatory but highly recommended and widely done. Courses from the most popular third-party service, BARBRI, cost between $3,000 and $4,000.
  6. The bar examination. The length of the exam and cost to take it vary by state. The price usually is between $200 and $1,000, and the exam takes place over two or three days.
  7. The state bar association. Some states also mandate membership in the state bar association and payment of membership dues.
  8. Continuing legal education. Some states require attorneys to take continuing legal education (CLE) courses as a part of maintaining their license to practice. Most CLE credits come with a price tag.

Unmentioned in this list is the American Bar Association (ABA). Membership is optional and not all lawyers join. The ABA is the major source of CLE offerings, though, and is the accrediting organization for law schools. The latter role is important because graduation from an ABA-accredited law school is a prerequisite to sitting for the bar exam in most states.

Also unmentioned is the role of each state’s rules of professional responsibility. State supreme courts are the usual promulgators of these rules, which give the rules a higher legal authority than the ethics rules of other professions. The ostensible purpose of the rules, like those prohibiting non-lawyers to have a stake in a litigation matter, is to protect the legal profession from corruption and unethical incentives. In practice, these rules provide a basis for economic protection of the profession in the form of barriers to entry. The only way to be a lawyer is to overcome the eight regulatory hurdles listed here. To take another path is a criminal offense.

Unlicensed practitioners are criminal losers

When there is a mismatch of information between professional and layperson, licensing can serve an important informational function to potential customers. Here, licensing takes the form of a multi-part regulatory scheme carried out by a variety of public and private entities– LSAC, law schools, state bar associations, state supreme courts, and the ABA– colluding to maintain the regulatory scheme, protect the profession from corruption and entry, and protect their own profitable, powerful roles within their own scheme. The goals of upholding ethical behavior and quality of service are valid. The question is whether the described arrangement is the best way to pursue those goals.

Categories: Incentives, Legal, Privatize

Gambling Insurance

June 9, 2010 7 comments

Life, in many ways, is a carnival, a broad array of games of chance with varying stakes. The difference is that the decision whether to play some of these games– whether to undertake the risk of loss for a chance at reward– is not voluntary. Being involved in a car crash comes to mind, although the drivers and passengers did make the choice to get into a car that day. Losing property to theft or fire is another example, although owners can take preventative measures to protect against loss by those means. Contraction of a genetic disease may be a better example, as we do not have much choice of whether or to whom to be born, as far as I recall.

To deal with risk over which we believe we have less control, we spread it across a population that shares resources for the purpose of compensating those who actually suffer a loss. This is the insurance principle, the idea of pooling resources to be paid out to the subset that suffers bad outcomes. The members of the pool know that there is a chance that they will have a bad outcome, but not all of them actually will. Because they cannot know beforehand who will suffer the harm, they all pay in advance to compensate the ones who actually do, possibly themselves.

Insurance companies often advertise their services as providing the support of “a good neighbor,” the security of being “in good hands,” or the assurance of “peace of mind.” Does the purchase of an insurance policy really reduce risk, though, or does it merely trade one type of risk for another? Many people in a risk pool will never suffer the bad outcome that triggers payment, instead spending their whole lives (or whatever length of time they continue to participate) paying into the pool, in some sense, for nothing. Ex post, after the fact, all they did was give their money away to what could most kindly be described as an inefficient charity fund. Of course, no one can know ex ante, before the fact, whether he or she will suffer the harm, which is why so many people buy insurance. What is less obvious is that the decision whether to buy insurance itself carries risk.

I am resistant to the notion of living one’s life through the constant lens of economic analysis. The concept of opportunity cost, in general terms, is a valid and meaningful consideration, however, and even if we shy away from a conscious weighing of the financial costs and benefits of everything in our lives, we undertake a subconscious experiential opportunity cost analysis all the time. Despite the advances in transportation technology and our supposed ability to multitask, we can only be in one place at one time, doing (for the most part) one thing at one time. The limitations of our reality force us to make choices. The choice to do one thing necessarily forecloses other options.

Is there a meaningful difference between a legitimate gambling house and a fraudulent one?

Like it or not, the stability and security so many seek may be elusive in a world of opportunity costs. No matter how you toss the dice, we are all gambling men and women, constantly betting on one alternative over another with the choices we make. Even in an area ostensibly about security and comfort– insurance– both sides are gambling: policyholders are betting that they will suffer the insured-against harm, and the issuers are betting that they won’t.

Some readers may find themselves dismissive of this account, unsurprised about and cognizant of the risky nature of the world. With every rambling step through life another wager made with imperfect information, though, is it better to press on, attempting to gain a complete set of information; surrender to the flow, in full acknowledgement of the unattainability of omniscience; or take some middle or alternate path?

From ancient Egypt to modern America, people have been struggling to work out an approach to this life of uncertainty:

Since it cost a lot to win
and even more to lose,
You and me bound to spend some time
wondering what to choose.

Goes to show you don’t ever know,
Watch each card you play
and play it slow.
Wait until your deal comes round,
Don’t you let that deal go down.

Robert Hunter, Jerry Garcia & Bill Kreutzmann, Deal, Garcia (Jan. 1972).

How are you holding your cards?

Categories: Incentives, Information

Executive Research Summary: The Future of Third-Party Litigation Finance

May 20, 2010 10 comments

As mentioned, I have spent much of the past few weeks working on two research projects. One attempted to sketch a theoretical course of development for international environmental criminal law. See supra here. The other, the subject of this post, explored a possible analogy between third-party litigation finance and health insurance, and considered the consequences of such a relationship. As in the last post, the goal here is to offer an abstract and basic summary sufficient to allow for informed comments.

The thrust of this project is the presentation of an analogous relationship between emerging third-party litigation finance and the history and current establishment of the health insurance industry. Separated in time, the lessons of the latter– to the extent that the analogy holds– can be applied to shape and improve the development of the former. (All quoted portions omit citations.)

Third-party finance is a developing area in American civil litigation. It is common for potential personal injury plaintiffs to lack the resources to finance a lawsuit. Lawyers have adjusted to meet this market gap by offering clients contingent fee arrangements. Those arrangements allow clients to initiate and pursue litigation without fronting any money. They pay their legal fees only if they recover, and the payment comes out of that recovery.

Entities outside of the lawyer-client relationship are seeking to enter this and related markets by structuring funding arrangements with plaintiffs and defendants. This field is more developed in other countries, including Britain and Australia, although some new ventures are cropping up in the United States. By funding litigation, these firms facilitate risk transfer by the party. For a fee, the firms bear the risk of litigation, giving predictability to defendants and allowing otherwise unaffordable litigation on the plaintiffs’ side to proceed.

Part of the reason third-party finance has not caught on in the United States in the same way that it has abroad is legal uncertainty. State laws present hurdles to the expansion in litigation funding options. Many states have archaic champerty and maintenance laws that may limit the ability of nonlawyers to enter and take an interest in litigation. Experts are unsure about the applicability of these old laws and their bearing on new financial options.

The legal profession’s ethics rules also present a difficulty for third-party finance. To function effectively, a litigation finance firm presumably would need to be able to evaluate prospective cases. Such an investigation likely would require information in the hands of the attorney and litigant, however, and may encroach upon the lawyer’s disclosure restrictions and information privileged under the attorney-client privilege. Disclosure outside the lawyer-client relationship could violate professional responsibility rules and waive the attorney-client privilege at trial.

Laws and ethics rules are amendable, of course, should third-party finance prove fruitful, desirable, and beneficial. The normative question is more significant: Should we clear the way for third-party litigation finance? By making litigation more affordable and less risky, third-party funding could encourage trials. Making the necessary changes in the law and ethics rules could meaningfully alter the lawyer-client relationship and have other consequences for the legal profession.

Clearing the path for third-party funding also could lead to the rise of a new financial sector of substantial size. In some ways, the emerging field, together with proposals for its further development and expansion, resembles the health insurance industry. This paper presents an examination of the analogy between third-party litigation finance and health insurance beginning with a look at the history of each area.

A quick overview on the basics of litigation finance:

The current, uncontroversial model for litigation finance is the contingency fee arrangement…. Individuals with fewer resources, typically plaintiffs in a rare entry into the realm of litigation, are unable to make the up-front payments to a lawyer necessary to seek a civil remedy for their injury. In response, plaintiffs’ attorneys offer clients a contingency fee arrangement. Under such an arrangement, the client pays his or her attorney nothing out-of-pocket. If the lawyer is to receive any payment, it will be a portion of the client’s settlement or recovery at trial, and if the suit is unsuccessful, the lawyer receives nothing.

Contingent fee arrangements really are three bundled products: the lawyer’s legal services, credit, and legal-cost insurance. The credit extended is for the duration of the litigation, postponing payment until the client recovers a judgment, and then only if the lawyer wins a judgment for the client—the legal-cost insurance, through which the lawyer shares risk with the client. Plaintiffs’ attorneys developed this bundled arrangement and, presumably, were happy to do so (the choice being between having clients and not having clients). Some nonlawyer entrepreneurs and scholars believe there is value in unbundling these products, however, and are taking various steps—actual and theoretical—in that direction.

The basic notion of third-party litigation finance comes from an unbundling of these three products—legal services, credit, and legal-cost insurance—and the belief that there are efficiency gains and other benefits from a system that allows for third-party provision of legal-cost insurance. “At its core,” litigation funding is “a contractual arrangement whereby a third party pays the cost of litigation and in return, if the case succeeds, receives a percentage of the proceeds.” Broadly speaking, litigation finance options can take a variety of forms, including a simple line of bank credit for a law firm, venture capital loans to plaintiffs (and sometimes their lawyers), and venture lenders for defendants. While…the majority of the third-party financing market focuses on options for the plaintiffs’ side, there [also] is a case to be made for making available similar opportunities on the defense side.

Third-party litigation finance has taken off abroad, especially in Australia and the United Kingdom, but it has lagged in the U.S. due to two types of legal uncertainty:

The first is uncertainty about possible legal bars to these arrangements within state law, and the second has to do with the ethical and professional rules surrounding the lawyer-client relationship.

Champerty involves an agreement between a litigant and a party that assists the litigant in pursuit of the claim in exchange for a portion of the proceeds of the judgment. Some, but not all, states prohibit champerty…making entry a confusing and complicated endeavor. A thorough sift through the applications of this arcane doctrine across the country may indeed show that the prohibition is fading.…The obstructing effect of the second uncertainty, the legal profession’s ethics rules, may be a more vital and challenging hurdle, however.

The lawyer-client relationship is one of the most important relationships the law seeks to protect. Communications between attorney and client are confidential, and cannot be compelled as evidence at trial. Work product immunity is related, and it protects from discovery the lawyer’s notes, drafts, research, and other preparatory work. These two protections are necessary to foster open and honest dialogue between client and attorney, but involving a third party—by sharing communication otherwise privileged—can be enough to waive the privilege. Third-party funding firms need to investigate cases before investing in them, and it is likely that the lawyer and client posses the information most relevant to the investment decision, including information that will help determine the likelihood of success and value of the suit.

Involvement of a third-party financing firm threatens waiver of the attorney-client privilege and the work-product immunity. It also conflicts with lawyers’ duty to protect the privilege and safeguard confidential information. Concerns about waiver and professional duties have led some reformers to propose amendments to these rules and the champerty rules that would clear the path for third-party litigation finance. Even if the rules and laws that constrain full-fledged third-party litigation finance are incompatible with the modern impulses of civil litigation, amending them to address financing concerns may have unintended consequences for the values behind the relationships they are supposed to protect.

The world of modern health care is one that health insurers dominate, leading to undesirable realities for patients.

American health care is a “national dilemma of runaway costs and poorly covered millions” of people, and insurance is the basis of the system. Much of the problem is due to what David Goldhill calls the “moral-hazard economy.” The moral hazard economy has three interacting features. First, due to the ubiquity and primacy of insurance as a payment method for health care, it is “implicit that someone else will be paying most or all of” the bill, and “that means we give less attention to prices for medical services than we do to prices for anything else.” Second, doctors “benefit financially from ordering diagnostic tests, doing procedures, and scheduling follow-up appointments.” Third, extensive training gives physicians an informational advantage over their patients that gives them authority in their relationship with their patients. The combination of these three creates “a system where physicians can, to some extent, generate demand at will.” They can, and, Goldhill writes, they do: “physician supply often begets patient demand.” Controlling costs in this economy is difficult because “moral hazard has fostered an accidental collusion between providers benefitting from higher costs and patients who don’t fully bear them.

My argument is that there is an analogy between the developed health insurance industry and the relatively new litigation cost insurers:

Lawyers and doctors both are sophisticated, highly trained professionals offering technical services to their unsophisticated clients and patients. The relationship between professional and client in each situation is highly prized, both formally and informally. Formally, a code of ethics and responsibility guides each profession and its duty to its clients. Informally, the popular perception, from the clients’ perspective, is a relationship of confidence and trust in which the client’s interests are of first importance, subject, of course, to professional advice. Doctors and lawyers were solo, general practitioners during the early days of each profession, and plaintiffs’ attorneys, of particular focus here, remained that way longer than did their defense-side counterparts. Both professions largely have coalesced into group practice, which has allowed for the rise of the specialist. Plaintiffs’ attorneys had already established a type of financing by offering to work for a contingent fee, which encouraged a portfolio approach to the pool of client claims they were handling. The formal and informal expectations of the profession remain in place, however, despite these and other changes in professional reality. The entrance into these relationships by a separate insuring entity could not help but alter the dynamic of the relationships.

In both cases, the third-party insurer entered, in part, to respond to a resource need on the part of the patient or client. In terms of relationship dynamics, the conceptual position of the insurer is on the side of the client. The insurer’s ostensible role is to help the client pay for the service he or she has selected after consultation with the professional. These services are expensive and, in most cases, difficult to anticipate. Client support is not the only reason insurers are invited into these relationships, however, which complicates their role in the relationships.

Insurers entered doctor-patient and lawyer-client relationships to respond to needs from the professional side as well as the client side. When taking on clients of humbler means, or when they are unaware of their clients’ resources, the professionals risk late payment and nonpayment. A well-capitalized, third-party payer is more likely to be able to assure the professionals a steady and reliable payment stream. By making the professional’s services more affordable, the insurer’s presence can create more potential clients.

Where large amounts of money and consumer interests are at stake, government usually appears as well. For health insurance, a public role has been on the table since the first days, and the government’s role continues to be a matter of debate to this day. Perhaps unsurprisingly, reformers have advocated a role for government in third-party litigation finance as well. One model is a “public option” in the form of a government fund that would spur entry and competition in the market for litigation-cost insurance. In addition to direct participation, government plays a more traditional regulatory role in the health insurance market. As the litigation-cost insurance market grows, this type of passive participation seems likely.

This analogy, and its consequences, play out along a number of lines, including the professional-client relationship (cutting out the client, preferred service providers, and funding and coverage limitations), deprofessionalization, the role of government, economic concerns (increased costs in insurance-dominated markets and growth of industry and the possibility of exclusivity), as well as a number of practical challenges:

It is difficult to anticipate just what a mature litigation finance market will look like, but if it were to grow to resemble today’s health insurance industry, practical problems would arise if the same third party was funding and exercising some measure of control over adverse parties to the same litigation. It is easy to say, in terms of theory, that one insurer cannot represent both sides of a case, but if litigation-cost insurance becomes as prevalent and engrained as health insurance, it is likely that the insurer may already cover the two sides prior to the litigation. The difficulty is in developing a policy to decide which party should have to surrender its coverage.

Health insurance works as a business model, in large part, because actuaries are able to make accurate predictions about health risks, and especially when they have information about individuals’ health and lifestyle. Responses to diseases and injuries are relatively undifferentiated from person to person. Treatment for a broken arm or cancer does not vary wildly from patient to patient, and insurers usually restrict coverage to mainstream, well-understood treatments and exclude new and experimental approaches.

Litigation may not be susceptible to the same sort of actuarial prediction, however. The relevant facts of each case can vary significantly, and the riskiness of a particular case may not be immediately obvious. Unless insurers impose coarse coverage restrictions, the difficulties of broad risk prediction may necessitate a different model for a broader application of legal-cost insurance.

In distinguishing between different types of risk, though, Painter argues that most of the risks of litigation are of the sort that a third-party funder can reduce through diversification. While systematic risk is risk that affects the market as a whole and is much more difficult to diversify away, an investor can avoid unsystematic risk easily through diversification. In litigation, most of the risks are unsystematic because they involve the specifics of individual cases and are unlikely to affect other cases, especially those with unrelated facts, law, or parties. Systematic risks (e.g., the widespread appointment of judges hostile to plaintiffs or the enactment of laws to that effect), on the other hand, exist in litigation but are comparatively rare. Those who assume litigation risk therefore should be able to eliminate much of that risk with a diverse portfolio of cases, something Painter argues it would be easy for third-party legal-cost insurers to do.

To the extent that this analogy is valid, it counsels caution to those pushing the financing envelope, and it encourages a reexamination of the lawyer-client relationship and the reasons and means by which we protect it.

Incentivizing Discourse: Bringing Scholars and Policy Makers to the Table

April 12, 2010 Leave a comment

Incentives direct behavior because people act in response to them. Successful systems provide incentives that direct people to act so as to bring about the desired outcomes of the systems’ creators and implementors. Systems sometimes break down because of an internal misalignment of incentives. Other times, breakdowns or other undesirable results happen when two interacting systems have internal incentives inconsistent with the desired nature of the external interaction between the two.

The relationship between the scholarly world and the policy world has a problem of the latter variety. The academy incentivizes scholars to publish and publish often, job security and advancement depending upon publication. These bright minds produce volumes of material that are themselves voluminous, but, beyond satisfying publication editors, they have little incentive to ground their work in any semblance of reality. Meanwhile, policy makers (legislators and their advisors) need the latest and best scholarship, but the growth of government has put them in a position in which they have very little time to peruse the wide array of scholarly journals and publications. When they believe that the bulk of  the material is not helpful to the high-pressure, results-oriented world of legislation, they may be even less likely to seek out this information. In short, both groups need to channel Siddhartha Gautama and leave their pleasure palaces and come in contact with the nitty gritty of the real world. Aside from the possibility of communitarian nirvana, however, they have little incentive to do so.

Professor Michael Vandenbergh identified the environment as an area in particular need of functioning interaction between academics and policy makers and sought to create a new set of incentives that would bridge the described gap between the two. The result is the Environmental Law and Policy Annual Review (ELPAR), a once-a-year publication that republishes condensed versions of the best articles in environmental law and policy, along with short, responsive commentaries from governmental, industry, legal, and academic voices. By providing a prestigious venue for (re)publication and the knowledge that policy makers will read their work, ELPAR incetivizes scholars to produce realistic, implementable policy proposals for and solutions to current environmental issues. In addition to a publication, ELPAR brings the two groups face-to-face with annual conferences on Capitol Hill. See here (2010 conference schedule); see also here (discussing ELPAR’s new Nashville conference, held for the first time this spring).

The 2010 Washington, D.C. conference is this Friday, April 16. Details are available here.