The University of Chicago Law School Faculty Blog

Audio/Video: Levmore on "Climate Change and the Battle of the Generations"

Why have we taken so few precautions in the face of threatening climate change? In a February Chicago's Best Ideas talk entitled "Climate Change and the Battle of the Generations" Dean Saul Levmore focused on the difficulty of dealing with a long-off threat in our political system.

The question, he says, is how voters and their politicians can be encouraged to care about problems that can be deferred for consideration by a different electorate or set of taxpayers – but at much higher cost. We know that we should solve most long term problems sooner rather than later, but there are pressures that put off painful solutions. Dean Levmore draws on what we know about “median voters” and median citizens in order to hazard guesses about the coming battle among generations. In this “battle,” young voters will grow increasingly concerned about what is likely to occur as they age – but these voters do not yet have sufficient political power. In turn, arrangements among countries will be seen to depend in part on the disparate age profiles of countries. The topic, in other words, is global warming and the public choice problem of intergenerational bargaining.

Unfortunately, technical difficulties are preventing us from embedding the video in this blog post, but you can download and/or view a Quicktime (.mov) file. If video isn't your thing, you can download/listen to an .mp3 file.

The Case for the Virtual, Free of Law, World of the Playman Islands (Blog Debate: LIV)

I'm a bit disappointed in Orin's examples and responses, because I was hoping someone would argue that we ought to work hard to use the virtual world, which is to say carefully a demarcated part of the real world, as an experimental domain free, or almost free, of the law that permeates the rest of our worlds. I thought Orin was heading there with his provocative paper, though that one begins with a more modest claim about criminal law (not all law) and virtual harms (no leakage into the real world). My debate point was that  legal intervention is to be expected ("law goes where we go") and that it would be hard to argue that law must absolutely stay away from things virtual ("virtual wrongs can be real wrongs"). But now I see that Orin was not aiming to argue, or at least not broadly argue, against LIV (legal intervention in virtual worlds), but rather is holding out for the narrow point that if there are examples where the wrong suffered is a purely virtual wrong, then there should be no real remedy. In his world, virtual and real, if my game character cheats and kills yours, then your remedy is with the game administrator and, if you are in the right, your character might be returned to its pre-wrong state -- in a wonderful imitation of the remedial norm we aspire to in the real world. We are left to debate pre-judgment interest.

Debate: LIV (Legal Intervention in Virtual Worlds)

Having predicted that law will follow activity (and complaints) into the virtual worlds, let me now respond to Orin Kerr and look for obvious places where even some libertarians might favor intervention, criminal and otherwise. Most of us think that fraud ought to generate government intervention, so what about fraud in the virtual world? I understand that when one cheats when playing poker or in calling fouls on the basketball court, the normal remedy is social disapproval and, eventually, removal from the game. Occasionally, the fraud is so severe that law comes into play because the fraud has so affected one's out-of-game wealth or physical safety.

Isn't all this likely to be true when one "plays" or lives part-time in virtual worlds? If A deletes much of B's existence in the virtual world, or A manipulates B in that world to such a degree that B's real world health and safety are at issue, why should criminal law be thought out of bounds? I think Orin's argument (we will find out shortly) might be that there will be too much of a chill on participation, but that is something we can take into account with our remedies; it is rarely if ever something that causes us to promise that there will be no criminal law intervention. I can be held accountable for things I do and say in a church (despite the chill problem), such as fraudulently inducing marriage or charitable contributions. I can be accountable for things I do and say in a classroom. And the same is true for the basketball court and for many other settings that might have been set aside as safe havens.

It is part of the growing pains of a field, I think, for early settlers to wish that it be kept pure and clear of outsiders. But it is inevitable that the logic and interest groups, good and bad, that brought about legal intervention in the old worlds will bring about similar intervention in the new.

Legal Intervention in Virtual Worlds (Blog Debate: Levmore on Kerr)

My reaction to Orin's interesting piece on keeping criminal law out of the virtual world(s) is largely pragmatic and positivist. Any area of activity that generates outcries (as will Second Life and other planets in the virtual world when they become more populated and when some inhabitants resort to hate speech, and other offenses to majoritarian sentiments) will generate regulation over libertarian objections. We can think of the virtual world as following on the heels of the securities markets, religions, and universities. In each of these domains a good case could have been (and often was) made that government-as-we-know-it ought to stay out and allow the internal rules of the domain to regulate its voluntary inhabitants. But in each of these areas, as more citizens opted in to these worlds, there was less of a sense that they had agreed to prevailing rules, more of a sense that those in control could misbehave and fail to regulate themselves appropriately and, eventually, occasional or (in the case of securities markets) frequent intervention and regulation by law, including criminal law, followed.

Next Week: Debate on the Legal Regulation of Virtual Worlds

How should the law respond to the growing importance of virtual worlds?  In this essay, forthcoming in the University of Chicago Legal Forum, Professor Orin Kerr of Volokh Conspiracy considers how criminal law does and should apply to conduct in virtual worlds. The first part argues that existing laws regulate virtual worlds with little or no regard to the virtual reality they foster. Criminal law tends to follow the physical rather than the virtual: it looks to what a person does rather than what the victim virtually perceives. This dynamic greatly narrows the role of criminal law in virtual worlds. The second part concludes that legislatures should not enact new criminal laws to account for the new social harms that may occur in virtual worlds.  Virtual harms are better regulated by game administrators than federal or state criminal laws.  Internal virtual harms should trigger internal virtual remedies. It is only when harms go outside the game that the criminal law should try to punish and deter wrongs not redressable elsewhere.

Dean Saul Levmore and Orin will debate Orin’s paper next week on the Faculty Blog. We hope you'll join in the conversation!

The End of Gift Cards

So gift cards are even more interesting than I first thought.  Theft is one problem (more in a minute) and transferablity is another. As readers of newspapers or this blog know, millions of dollars of gift cards go unused. Perhaps $2 million a year for Best Buy alone, and once a card is unused for two years it is, apparently, quite unlikely ever to be used. I had argued that even if we thought of gift cards as generating some deadweight loss (as people bought things they did not much want), and even if we were offended by the wealth transfer to sellers (with discounting through competition unlikely because those who knew they would buy an item would simply buy a discounted gift card just before the intended purchase), we must compare these losses to those infamously created by "regular" gift-giving, where there are all too many unwanted sweaters and chocolates. But when I mentioned this at home, the kids at the table immediately made plans to serve as arbitrageurs, buying up gift cards at a discount and then selling them to people on the verge of making purchases where the gift cards could be used. Simple arbitrage is prevented by the fact that an item bought with a gift card and then returned, generates a gift card credit. Nor can gift cards be used to pay store or credit card bills.

Financial Aid Strategies (Harvard now, and more to come)

Harvard and now Yale College have made news this week with new and generous financial aid policies. The Harvard policy was preceded by a promise made some three years ago  (the “Financial Aid Initiative”) that students with parental income of less than $60,000 a year would receive full scholarships. The new policy tells those who make as much as $100,000 more than that, that they will expected to pay (or borrow and pay) only 10% of income. It was already the case that 20% of aid went to families with income over $100,000, and now this figure will rise. The financial aid budget is expected to grow by more than $20 million a year – and then presumably by much more than that in subsequent years. Yale will detail a similar plan, and we can expect a very few elite schools to follow suit.

There are several ways to think of these strategies: (1) competitive (2) public relations (3) How else should Harvard spend money?) (4) a restructuring of the intergenerational bargain. I think (4) is the most important piece of the answer, but first some comments on the others.

Very few accepted students turn down Harvard. It would not seem that it needs to offer more financial aid in order to attract students from families who can afford to pay if willing to save or borrow or both. A family with $150,000 in income can probably borrow $100,000 for each of two children and pay the money back over ten years or more. The graduates themselves will likely be in a position to help with repayment. But Harvard might have known or feared that other schools would chip into its market position by moving first in this direction, and so it chose to unveil a very generous plan that only 5 to 15 universities could match (but see (4) below).

The public relations move should not be underestimated. Harvard is no doubt already under pressure to move from a stated need-based financial aid regime to one that puts more money where it might be most inclined to attract students it wants. The best minority applicants receive increasingly attractive offers from other schools, and the same may be true for athletes Harvard wants. The single tool of a percentage cap on expected contributions from middle –income families is likely to get at many such targets. It is far more palatable, saleable, and legally viable than separate policies regarding minority students and athletes.

University administrators outside of Cambridge tend to respond to every Harvard initiative with “How else should they spend all that money?” But there are many other ways to spend. A better version of (2) might be that a much larger fraction of Harvard families will now feel a direct connection to Harvard’s wealth. This brings me to the intergenerational point. Universities should fear that future alumni will be less generous than their predecessors. The problem is that college admissions is more of a competitive game on both sides of the transaction. Parents (and some students too!) work hard to get in to Harvard, but anyone who is accepted surely has offers from many other schools. A graduate from 1960 who has accumulated great wealth is now very grateful to Harvard for the opportunities and financial aid that education created. But a graduate from 2000 or 2010 might well reason later that theirs was a financial transaction. Harvard gave money but other schools offered money as well, and it is possible that no special gratitude will be felt. I think Harvard might best be seen as making a good investment. It is trying to ensure that a large fraction of graduates will be grateful and will feel that other schools would not, in fact, have provided as much money – or that if they would have it is in part because Harvard forced them to do so.

There is more going on here. An elite university could cut back on the perks of a modern undergraduate education, but thus far all rush to build nice dorms and gyms and junior-year-abroad programs. A middle-class student now at college may well live at a standard higher than previously experienced at home. This new development in “education” is a somewhat different subject, for we should hardly expect Harvard and Yale to be the market leaders in de-frilling the college experience. The mix of graduate and undergraduate students – and financial aid policies – is another part of this subject. In fact, more generous graduate aid has preceded the move in undergraduate financial aid. But for today the news is focused on undergraduate aid and the immediate question is how many schools will respond with similar plans.

Bonuses and Law-Firm Associate Compensation

It is the time of year when some law firms pay out substantial bonuses. The bonuses may be predictable from year to year, or not, and then there may also be "special bonuses" of another $10 - $30,000, so that the overall compensation of a second year associate could end up coming in a mix that is three-fourths "salary," and one-fourth bonus. There is something of a puzzle in this, and then also the pattern of elite firms' matching one another's bonuses, as they do salaries. The associate at Firm A may receive a stated salary of 180K and then be given a bonus of 35K with an extra bonus of 15K. Meanwhile, the associate at cross-town rival B, receives the identical salary, and then the identical bonuses.

There is nothing wrong with the conventional explanations.  The bonus may be a way of showing (or trying to show) appreciation just when the associate needs an extra push to work long hours. It may be a way of keeping associates from departing during a busy season, as they wait until bonuses are paid. The bonus feature may protect the firm (or the associates from layoffs) in the event of a bad year, inasmuch as the bonus need not be paid. Less conventionally, it may (as a colleague of mine suggested today) be a way of helping young spenders hang on to some money at year's end, and indeed the marginal rate of consumption may be a bit lower out of "windfalls." And it may be a way of creating a wedge between those who are part-time or those out on parental leave, who will often not qualify for comparable bonuses. Finally, but surely there are other explanations, associates, like other experimental subjects, may respond better to random rewards than to regular ones (like a schedule of pay linked to hours worked).

The parallel behavior among forms is not difficult to understand, at least at one level. If all firms imitate, then the first mover gains only a small reputational advantage - and at some cost (to all firms). But it is likely that only a set of very profitable firms match the bonus payments. We have a market in which there are perhaps 100 firms paying top wages, and then, 50 firms paying yet higher wages through the bonus system.

Clients are said sometimes to resent or resist the high pay of associates. They are suspicious of high billing rates attached to inexperienced lawyers. It is possible that bonuses are less publicized so that clients do not express concern when that form of compensation rises. It is interesting that associates of British firms are said to be paid less than their U.S. counterparts, even though they are often billed out at higher rates. The wedge between compensation and hourly billing rates could have many sources, including higher real estate costs in London. But it suggests that the market for legal services is somewhat unlinked from the market for associates. The division of rents between firms and associates need not be the same in disparate locations.

Perhaps the most compelling explanation for the bonus structure is that it allows, or eventually will allow, differential compensation within a firm, depending on how many hours an associate wishes to work. The initial salary is high enough to signal prestige, but the firm wants associates even if they want to bill "only" 1850 or 2000 hours a year. But of course if the associate is willing, or wants, to work longer hours and bill 2200 or 2500 hours that is all the better - so long as the firm does not lose the excellent lawyers who do not want to work such hours. At some firms bonuses are proportional to hours billed, and I suspect that at other firms they will be soon. The confounding element is that some firms "ruin" the multi-tier system (higher pay for more hours, but it is acceptable to work somewhat fewer hours) by raising the base salary with great fanfare. When Firm A announces that its starting salary has gone up from 145K to 160K, Firm B might wish to say "Well, ours will remain at 145, but we will raise our bonuses so that the hard worker will do as well here as at A - but here there is the option of fewer hours." The problem is that many starting associates will prefer Firm A because the 160 salary is guaranteed even for those who do not work the extra hours. Still, it may be possible over time for Firm B to develop a reputation that it will indeed pay bonuses that enable a two-tier system which, in principle, might be desired by many potential employees.

Gift Giving and other Transfers

As the Holiday season approaches, Consumer Reports has placed advertisements warning consumers of the waste associated with gift cards, a growing and popular means of getting through birthdays, bar-mitzvahs and now, the Christmas season. Retailers (and some banks) love gift cards because a sizeable fraction are lost or allowed to expire, and many go unused while the vendor enjoys the interest. The value of unused cards has been estimated at $8 billion (though that number appears to be a cumulative stock rather than an annual flow), and there are retailers enjoying millions of dollars in annual income because of unused cards. Note that competition does not reduce the price of cards because of a kind of arbitrage and adverse selection; if $95 gave the recipient a card that could be exchanged for $100 worth of goods, then customers ready to make normal cash purchased would buy cards and quickly redeem them.

From the gift giver’s point of view, the primary alternatives to these cards are (1) “real” and let us assume returnable gifts, (2), cash and (3) no gift at all. Joel Waldfogel’s well-known work on the deadweight loss associated with Christmas has received plenty of attention, and has perhaps encouraged sophisticated readers to prefer gift cards over option (1). I may pretty good at knowing what my kids and their friends will like, and I may even be good enough at this so that gift cards will confer more utility than cash. I may be able to open up a new source of pleasure with a gift. At times, kids know to prefer gift cards over cash, because it removes their parents’ ability to restrict the purchase of video games, for example; at other times, a gift card from Borders, say, simply substitutes for what many parents would gladly provide.

For acquaintances, Waldfogel estimates the deadweight loss, or the extent of the giver’s misestimate, at between 10-33% of the price of the gift. If the rate of gift card disuse is much less than that – and if the cards are used for items that the recipient wants without much additional deadweight loss, then gift cards are pretty good, and the warning from Consumer Reports misses much of their value. Indeed, as a matter of efficiency, we should probably prefer unused gift cards to sweaters that sit in the drawer, because the former is a “mere” wealth transfer, while the latter require energy and other resources to manufacture and distribute. To be sure, if we encourage bridal registries and Christmas wish lists, then we might improve the efficiency of traditional gift giving. But again, these methods do not allow for the fact that a giver might expand a recipient's horizons with a gift; nor do they advance the utility that comes from a pleasant surprise. Waldfogel's analysis and surveys leave the reader with an unfair comparison because many recipients would spend cash in ways they regretted later on. I may value the sweater Aunt Sally gave me at $75, though she spent $100 to acquire it (and the returns process would cost me $26), but had she given me $100 in cash I might have bought a video game that I would report as worth $65 to me in three weeks if Waldfogel would only ask me then what I thought of my homemade purchases.

I would like to see gift cards that increased in value over time. The vendor might be encouraged to reason that it can afford to share (or even exceed) the time value of money because as time ticks by the probability of loss or disuse will also increase. The recipient meanwhile may gain utility because the longer the option period, the more likely the buyer will use the card for something the buyer really wants. The card might also teach something about savings. Unfortunately, it might also teach something about income tax evasion, because in theory a card purchased for $100 that was worth $110 in a year would burden the recipient with $10 of income to report.

Once we see gift cards in this light, we see not only new gifts to give but also new policies for governments and employers. I can set aside $100 now that my intended recipient can cash in for $200 some years from now but use only for education, books, or vacation. The longer the option period, the smaller the deadweight loss is likely to be (and non-use is more of a reverse wealth transfer than an efficiency loss). The benefactor is encouraging a preference, perhaps, but the gift encourages savings, or at least one version of savings.

It was once common to give U.S. Savings bonds as gifts, especially to children, and these matured many years in the future. With that gift, the giver helped to pay for the beneficiary's adult life or education. Such a gift made one feel wealthier, but no one I know jumped for joy when receiving such deferred happiness. It is not just that the gift seemed paternalistic or less utility-enhancing than the cash alternative, because that is true of most non-cash, unrequested gifts. Most gifts, like most government transfers, generate excitement when consumption can be immediate. The recipient shrieks with delight when unwrapping the new bicycle (even though it is a durable good with some pleasure deferred), but is unlikely to do so when unwrapping a promise of a bike to be given in two years.

One lesson to be derived from this is that the way we give gifts is not so different from the way governments bestow benefits to interest groups as well as to beneficiaries of presumed altruism.  We give food stamps (present gift) but we also give public housing (durable good, so there is some deferral) with a presumption that the recipient has the right to remain in the unit. We might often encourage behavior best by giving a completely deferred benefit (that is larger because of deferral), but that is rarely the path law or legislation takes.

If Consumer Reports means to encourage gift cards that do not expire and that do not come with hidden fees, then it is hard to argue with that message. But if they mean to say that conventional gifts are superior, or that cash gifts are to be preferred, then the matter is much more complicated. Gift cards are a compromise between the two (perfectly defensible form of gifts), and the inefficiencies or transfers they generate are not so different from those produced by these other forms of gifts. I hope that when interest-bearing gift cards appear, critics will refrain from complaining too much - without comparing the new gift form to its alternatives.

Comparative Textualism: Land Sabbatical Battles in Israel and American Constitutional Compromises

Few readers of this Blog will have paid much attention to the Israeli Supreme Court’s recent decision disallowing that country’s chief (centralized) rabbinate’s decision to permit local variation in rabbinic councils’ certification of kosher foods, as some of these local councils preferred to be more textualist (and strict) in their understanding of how to abide by the biblical requirement that the holy land be fallow every seventh year (the sabbatical, or “shmita” year). Impermissibly harvested crops would then bring about a refusal to certify foods as kosher. That decision itself seems mysterious to those of us who are accustomed not only to more of a church-state separation, but also to the idea that certification standards should normally proliferate because consumers and producers can then decide on their own courses of action.

An interesting aspect of this far-away dispute is that it demonstrates the unreliability of precedent when there is a confounding text in the background. The law there begins with the biblical text calling for the earth to have a sabbatical year. In that year farming is forbidden and perennial crops are ownerless, with an explicit redistributive nod to poor people who will benefit from the freely available food. But how will the agricultural sector survive this extreme form of crop rotation? One possibility would have been for the lawmakers to interpret the text as requiring each parcel of land to enjoy some sabbatical year, but to permit rotation across the country. Instead, the entire land, within later-defined boundaries, is said to observe the same sabbatical cycle. Modern alternatives or loopholes permit hydroponics, growing crops in trays on tables (not on the “Land”), or transacting with non-Jews. But the most dramatic solution was to permit a form-over-function sale of the land, with the seller working the land as an employee of sorts, with the right or even obligation to buy the land back at the end of the year. This is not a sale-and-leaseback any legal system would accept for tax or criminal law purposes, but it became the dominant means of coping with the text.

One useful and comparativist way to think about this is that a structural argument about the text was allowed to trump a piece of text itself. The structural argument is that the text anticipates an agricultural sector and, for the state to thrive, some solution to the sabbatical prohibition was required. For a long time, only a tiny percentage of lawmakers and consumers found this permissive solution offensive. But affluence makes stricter religiosity possible. Consumers can import produce, and expect contributions or subsidies to prop up farmers who work the land but six of seven years. Sure enough, there is now a substantial movement to reverse the (religious law) precedent and to insist that the sale-and-leaseback accomplishes nothing. Restaurants and other intermediaries are caught in the middle. Law has become a cause of instability. It is possible that the solution was misguided. A more stable equilibrium might have come about through a decision to declare produce farmed in the sabbatical year as ownerless for a brief period of time and then “reclaimed” before sale to the public. Or perhaps the solution should have been to permit export of the otherwise forbidden produce, so that the cost of the text’s prohibition would be limited to the transactions costs of importing and exporting.

In our own legal system we are also accustomed to solutions of uncertain stability that are at odds with, or unanticipated by, our most important text. Roe v Wade’s trimester is one good example, and its stability became an open question after years of apparent precedential force. Dormant Commerce Clause cases may offer another. Various decisions with respect to affirmative action and Equal Opportunity provide other examples. In all these cases, my sense is that once there is serious questioning and “exposure” of the arbitrariness of the first anti-textual solution, we should expect a new (clever or arbitrary) solution, rather than stability based on the text itself or based on broad agreement to abide by the precedent that came to be accepted but then somehow became vulnerable to textual and other objections. Israel’s agricultural sector is too important to be cut down by fierce, minority religious opposition, but the lawmakers will probably need to come up with something new to take the place of, or improve upon, the sale-and-leaseback arrangement. Similarly, the prediction here (to be developed, I hope, in my future work) is that we should expect new means of compromise in the abortion and affirmative action debates. And then these solutions will also have significant but limited lives, for that is the nature of democracy, intense preferences, and the need to pay homage to a founding text.