Fast notes regarding Business Law (2014)

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Universidad Universidad Pompeu Fabra (UPF)
Grado International Business Economics - 1º curso
Asignatura International Business Law
Año del apunte 2014
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Fecha de subida 22/06/2014
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BUSINESS LAW  Ex Post: This perspective means that we take the case as unique and only focus in what happened in order to achieve a fair solution for that special case, without thinking on consequences or similar cases. It is static as it considers the parties’ positions as fixed.
 Ex Ante: This perspective considers that what happened is over and cannot be fixed, so we must use the issue as a possible model for future similar cases. The solution we want to achieve is not always the fairest but the one that will prevent future similar conflicts to arise better, the one that settles the best incentives for the future. It is dynamic as it considers the parties’ position to be able to change throughout the time.
 Efficiency: The law requires the cheaper way even if it means that some good claims have to be dismissed to keep the incentive strong. The law tries to keep the cost of wrong situations to a minimum by penalizing people who make problems more expensive than they have to be. Efficiency is a legal goal, it wants to create incentives for people to find the cheapest ways to solve problems.
 Property rights also encourage the most efficient solutions to things. Ownership gives people incentives to get the most out of whatever they own and to take care of it. Contracts allow those who own something and can’t have the best of it to sell it to someone that would take the best profit of it. Both things are enforced by the law.
 Margins: Any action that seems simple involves a huge number of small decisions. Each of them is called a margin.
The law always acts on the margin as it is easier for it to act on some margins than on others, not acting on the aggregate. Usually you can make substitutions between margins: one can get wider if pressure is put on another.
Law looks at the problems not in a total way but in incremental terms. Legal rules may not cause entire changes in behavior, but they work well if they cause some shifts at the margins. Incentives are supposed to make you make good substitutions on margins, because the best solution often involves just little adjustments. There is a danger to think about when trying to force substitutions: you may create unwanted ones.
 Single Owner: People often create waste for others because it creates gains to them and don’t feel the cost of it (negative externalities). If we make this people to feel the costs of others as if they were their own, they would not act in the same way. This is the Single Owner tool: the idea is to picture all the interests at stake in a case where there is just an owner of everything, and ask him what he would do. The Reasonable Care we talked about is what a Single Owner would do. A single owner would compare the costs and decide which of them causes fewer costs to him to minimize waste.
 Least Cost Avoider: when there is an expense, just sent the bill to whoever could have avoided it most cheaply, either by taking precautions or by switching to some activity less likely to create such expenses (the Least Cost Avoider). This makes the Least Cost Avoider compare the cost of paying the bills with the cost of taking more precautions, and do whatever is cheaper. This allows the law to derive to the Least Cost Avoider the need to think like a Single Owner, and courts don’t have to spend time and resources deciding whether you were negligent or not. Least Cost avoider is the party that could avoid the waste most easily, not just by the power of taking precautions but also by the power to foresee the need for them.
 Strict liability is the legal name for this approach in accident cases: the maker of some act pays for all the damages the act causes. Courts don’t ask directly who the Least Cost Avoider was, but we usually see that the one held strictly liable is usually the one that was in the best position to reduce the risk.
 Breach of contract: A Principal pays an Agent or Promisor to perform a task. If it isn’t performed, the law considers the contract as breached and makes the agent pay for damages. Here nobody cares whether the defendant was reasonable. He either performed or not, so there is strict liability for breaches in contract.
Performing a contract usually isn’t a joint activity between the two parties: one pays and the other performs.
Whether a bad outcome occurs is up to the performer. The law doesn’t always expect the promisor to fulfill the contract, but it makes sense to send him the bill when he doesn’t. He can decide for himself whether it makes more sense to perform or pay damages. If there are factors that are beyond the agent’s control, he is not necessarily the Least Cost Avoider.
 Administrative costs: If we are going to worry about avoiding waste, or about solving problems the way a single owner would, there is another dimension to take into account: we have to think about how expensive the rules will be when courts and the parties try to apply it (the Administrative Cost). This is crucial in lots of cases. The law tends to use objective measures rather than subjective measures when the administrative cost is taken into account, although they seem more unfair.
 Statutes of limitations: Give a plaintiff a fixed period and no more to bring lawsuits about an accident, a breach of contract, etc. Cases need to be brought before the evidence in them gets old. Instead of asking whether the       period has expired, they could ask whether the evidence in the case has indeed disappeared or it is as solid now as it ever has been. However, that has a higher administrative cost as it is more subjective, so a fixed period is usually enforced.
Rents: (rent seeking) means wasteful efforts to gain a prize, a competition over the way some good thing has to be distributed. There are two ways of increasing wealth: by producing some good or service that others will find valuable, or by fighting over a prize. The first one creates wealth globally. Fighting for the prize is sterile, it doesn’t produce anything, just move the wealth around. The more a society spends on rent seeking the poorer it becomes. The waste involved in rent seeking is a worry to the law. Monopolies are a good example. Lobbying is another example of rent seekin. Patent laws have the objective of giving an incentive to firms to create the invention in the first place, but it may create a race (rent seeking) between firms to get to that precious monopoly. That is why patent law has some clarifications: a patent can be transferred to another company if a rival is able to improve the patented device. However, now the first company can also have rent seeking to make little improvements to the subject of a patent. When writing legal documents is essential to avoid rent seeking. In the case of standards or unclear rules, the decision of the judge can make the parties engage in big efforts (rent seeking) to lobby him.
Coase theorem: in a world without transaction costs (meaning that making contracts were costless) with welldefined property rights, the initial allocation of property rights does not matter in the final allocation of them: the one that valuates more a property right will pay more for the other to give it to him (bargaining). States that the court doesn’t need to figure out who valuates more the activity: the parties will do it by themselves through bargaining. The law doesn’t matter much about the final decision, it is taken as a starting point and then people are ready to bargain, but it matters in terms of distribution: depending on its resolution, the distribution of wealth will be one or another. in the reality there are in fact transaction costs, so the court is supposed to act making a winner of the side which valued the rights higher – acting like a contract that the parties would do in case there weren’t transaction costs.
Agency Problems: There is a person called Principal, who can be a client, a boss or a citizen. On the other hand, there is the Agent, who can be a lawyer, an employee or a politician. The agent is the person who is supposed to be working to the principal’s interest. Between them there is a conflict of interest. The agent doesn’t feel all the benefits he creates by working hard. The shirking wouldn’t be a problem if the principal could just pay the agent according to his efforts, so that the harder the agent works, the more money he gets. But, the main problem is that effort is hardly observable, so principals need ways control the agents when they are not observing. That’s why we call agency costs to the expenses that both parties incur to control each other. When all this efforts fail there is a residual loss. There are different ways to solve this problem. One of them is monitoring. If the agent’s effort could be monitored perfectly, there would not be an agency problem. But a perfect monitoring usually involves more costs than benefits it reports. The more interesting solution to agency problem involves contracts that give the agent an incentive to take the principal’s interest seriously. The contract is a compromise between the interest of the principal and the agent. It manages to align their interests, but there are a couple of problems.
Firstly, the incentives created by this device aren’t perfect. Collusion between agents is a common problem in agency relationships, and once the contract has been established, agents usually try to shirk considering the weaknesses of the contract (what is called Moral Hazard). Secondly, most agents have more than one task the principal wants them to do well, and the incentive to work hard at one of them may come at the expense of the others. The usual solution is to align the seller’s interests with the agent’s by paying the agent a commission. One of the easiest solutions to the problem is reputation. It turns to be very relevant in large firms and when it is important to settle long run relationships, so it acts as a security for possible opportunistic behaviors.
Prisoner’s dilemma: If the performance is expected to be repeated, you have to worry that your decision will disappoint your partner and he will change his behavior (reputation). In this repeated actions, the most used strategy on this dilemma is the tit-for-tat (“ojo por ojo”), begin by cooperating, then in each round to whatever the other player did in the last round. It is a nice strategy as one is never the first to defect, it’s reciprocal. But when looking at non-repetitive actions, reputation is not available. Just an enforceable contract by law would take your fears off by beating the prisoner’s dilemma and enjoying the gains from cooperation. When such contract isn’t available, the law imposes rules to do the same effect. In the dilemma, you aren’t punished for defecting. If you put a penalty (e.g. fines to tax avoiders), you dissuade a player from defecting. We all want the benefits of cooperation, so we need mechanisms that make it rational for each other to cooperate.
Public goods: Public goods are things that, once made, are available to everyone; you can’t exclude people from enjoying them. You can’t exclude people who didn’t contribute to the cause. This is why public goods are a classic job of a government. The government tries to solve it by forcing everyone to pay for public goods.
Intellectual property rights: By creating property rights, a patent that forbid anyone but the inventor to capture the benefits, we create that incentive.
 Copyright laws: copyright law gives the artist the exclusive right to the expression (the shape) of the idea, but not the idea itself, that one is free for everybody. That is why a copyright protection is easy to get and usually last for generations, whereas a patent is difficult and lasts for short.
 Subsidizing: an alternative way to create incentives to make people create public goods instead on imposing taxes.
 Stag Hunt: In the prisoner’s, the best individual outcome is to defect while you cooperate, but here my favorite result is that we both cooperate. We can agree to work jointly, but there is a risk in it. Unless we trust each other, the temptation to give up is big. In the Stag Hunt my first choice may be to cooperate. Here the risk is just defensive, so it is an assurance game. Often it is difficult to make enforceable contracts that assure our behavior.
The challenge in Stag Hunt is to get from an inferior equilibrium to a better one. There can appear to be a mixed game of prisoner’s dilemma and Stag Hunt depending on people’s preferences. Law must convince people that everyone is hunting stag so that they are all better off.
 Nash Equilibrium: It is equilibrium in which, given what everyone else is doing, no one can do better by changing of strategy. If we both cooperate we’re better off, but it is not equilibrium as it isn’t stable. But sometimes there is more than one equilibrium.
 Chicken case: We (society) don’t mind whether both swerve or just on). We don’t want a collision, but we don’t want both to stop either, because that wastes time. That is why a yield sign arranges this, imposes a little cost on the party it disfavors but there is no unfairness. The yield sign also changes the nature of the contest by removing worries about honor and humiliation. Yielding becomes a deference to the law, not to the other driver. The best outcome is that you cooperate and I defect, and my second best outcome is that we both cooperate. However, there is a difference: in the prisoner’s dilemma, the worst outcome is to cooperate and the other to defect, whereas in the chicken the worst outcome is to both defect, in which we get killed.
 Cascades: All the parties feel they are acting rational: as they are uncertain about something, it seems logical to rely on others’ experience to decide. But this sometimes leads to an empty momentum: there is a growth in acceptance but not in its likelihood to be true. Entrepreneurs often try to start them deliberately. Your vulnerability to a cascade depends on your knowledge and how ready you are to assume what others think is true. Cascades also occur in law: a first resolution may lead to a second court to rely on the first’s criteria and so confirms its resolution, and so on and so forth, maybe underestimating the appeal of the defendant.
 Availability Cascade: It starts with the fact that people try to decide how likely something is true, they do it by asking themselves how many examples can come to their mind. The more that people talk about a problem, the more everyone has it in mind, so more important a problem seems. That is useful in political campaigns.
 Reputational Cascade: You try to get others to like you. You do it by saying things I think they will find agreeable. Then I get on the scene and I also want to be liked, so I say the same as you, although I might not really agree with that.
 Voting paradoxes: The preferences of groups don’t work the same way as preferences of a single person. Single preferences usually are transferable.
 Suppressed Markets: Much of our private law is about bargains, and how to facilitate them or imitate them, and much of our public law is about the suppression of bargaining and other market mechanisms that aren’t wanted for various reasons. This is called to suppress a market. In general communities face a trade-off between the drawbacks of competitiveness and bargaining that markets bring to with them and the many other benefits of having them:  In any community or institution the egalitarian treatment of its components is a safeguard and a principle that helps to preserve the notion of the group itself.
 Communities are interested in the positive effects of competition and worry about how competitive is among other communities as well.
The balance between competition and community is struck differently in different places, and differently in the same places over time. The usual approach used by institutions to the problem is the limitation of competition and the removal of the hardness of these markets and their consequences. They create a suppress market and they put market competition out of the community under the auspices of the law. The point is that competition is used and bargaining in many laws, just not too openly. Voting paradoxes: The preferences of groups don’t work the same way as preferences of a single person. Single preferences usually are transferable.
 Rule: Clear statements understood by people. Ex-Ante: rules provide certainty. Ex-Post: Rules can be very severe and unfair. The consequences are triggered once we settle the facts.
 Standard: Open norm. Interpreted with more difficulties. Can decide cases, regulate activities,…Are more flexible than rules. Are costly to apply. Can be different in each case, depending on the particular behavior of the parties.
A judgment about the facts is required before it kicks in.
 Hand Rule: If an activity has a high probability of damage, it has to raise the level of precaution. If the burden is higher than the precaution of the damage, this is the case of a reasonable person. If not, it’s negligence. Problem: Difficulties when assessing values to burden and precaution. Through the appliance of this rule we can reach 3 decisions.
 No liability: The person is not entitled for compensation  Strict Liability: Victim has arrived to be compensated  Negligence liability: If the person causing the accident acted in a unreasonable way (not the case of the reasonable person)  Path Dependence: Sometimes an initial decision affects later ones by sending everyone down a path that becomes expensive to leave. This happens easily in common law systems.
 Conduct rules: the ones that tell people how to act  Decision rules: the ones that tell judges how to decide the cases  Acoustic separation: implies risks when one accepts the loss of transparency.
 Baseline: the condition of the natural resources and services that would have existed had the incident not occurred. It means any occurrence or series of occurrences having the same origin, involving one or more vessels, facilities, or any combination thereof.
 Endowment effect: things seems to be perceived more valuable to people once they own them and become part of their “endowment” (en este caso de su “forma de ser”)  Social norms: selling things makes people feel more responsible for the results than merely declining to buy them.
 Wealth effects: once someone has an entitlement they may value it more than when it wasn’t.
 Hindsight bias: once something happens it seems much more likely and logical to have occurred in that way and much easier to foresee than it really was at that time.
 Creeping determinism: once the outcome is already known, the human mind focus on the reasons that brought to that final, and ignores all those factors that would have been important if the result had been completely different.
 Framing: how the alternatives are described or the order they follow.
 Compromise effect: the attraction people feel to a middle point in whatever context or surrounding options.
 Contrast effect: An option is less appealing alone than when set against another option that is clearly inferior.
 Prospect theory: People are more likely to grab a sure thing than take risks in hopes of doing better. However, people usually are more inclined to gamble and risk for a determinate outcome than to take the sure thing and loose.
 Anchoring: The ways that initial points of reference serve as anchors for thoughts that follow them. People prefer making judgments from some reference point rather than from scratch and make it sound right.
 Self-serving bias: When you are better off if something is true, you are more likely to believe it.
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