Private Orderings, part 2

By Lisa Bernstein

Last week I started to introduce a recent symposium issue of the Journal of Legal Analysis on Private Orderings that contains papers from a conference sponsored by the Centre for Corporate Reputation at the University of Oxford, Saïd Business School, in September 2014. Here is a description of the remaining papers.

Alan Morrison and William Wilhelm’s Trust, Reputation and Law: The Evolution of Commitment in Investment Banking, develops a taxonomy for classifying various governance mechanisms between the poles of legal and private order. Morrison and Wilhelm then draw on this taxonomy to explore how technological change in the investment-banking industry contributed to changes in the ways that relationships between banks and their clients are governed. They document the shift from governance based on informal understandings backed by implicit reputation-based sanctions toward governance achieved through formal, arms-length, legal constraints. They then explore the challenges posed by this shift for the application of legal doctrines and the choices faced by regulatory policymakers.

Picking up on the theme of how approaches to public law and regulation might be affected by a better understanding of the forces of private order, in Herding Towards Rationality: Following Others to Debias Anticipated Regret, Jennifer Arlen and Stephan Tontrup caution that behavioral law and economics scholars have too quickly encouraged law makers to intervene in private orderings, when the decisions that give rise to these orderings may be affected by cognitive bias. In the real world where people are making decisions that matter to them, argue Arlen and Tontrup, they frequently realize how these biases may affect their decision-making. As a result, they both can, and do, take steps to debias their decisions. To illustrate this process, Arlen and Tontrup present a series of laboratory experiments demonstrating that regret bias (which is at the heart of the status quo bias and endowment effect) can be, and in the experimental context they study is, counteracted by another bias—the so-called herding bias. They conclude that lawmakers must take the interaction among biases and individuals' awareness of the ways these forces might affect their decisions into account before intervening on paternalistic grounds.

Industry and trade associations can work publicly and privately to increase the security of property rights. They can also work publicly and privately to transfer rents from others to themselves. In Business Associations, Lobbying, and Endogenous Institutions, Maria Larrain and Jens Prüfer ask when associations do the former, and when the latter. They note that the marginal returns to increased property right security fall as that security rises: the better the legal structure, the lower the returns to improving it further. They then model the dynamic by which industry and trade associations shift from efforts to increase property rights (good lobbying) to efforts to extract and transfer rents (bad lobbying) as the efficiency of the institutional environment (the strength of property rights) increases. If the state does not adequately secure property rights, associations will themselves try to increase the security of property rights. But as the security of those property rights increases, they will turn instead to rent-seeking.

In Building Legal Order in Ancient Athens, Barry Weingast, Gillian Hadfield, and Frederica Carugati challenge prevailing distinctions between public ordering and private ordering. The article provides a detailed account of how Athens was able to achieve stability, order, and growth– the outcomes usually associated with centralized legal institutions–without creating the types of formal courts, prosecutors, and judges that scholars commonly assume to be necessary to the operation of such institutions. They conclude that an understanding of how order was achieved in ancient Athens suggests that the development of legal order in “weakly centralized developing countries” may turn less on formal legal institutions, and more on decentralized and impersonal institutions that communicate information about how people behave, and therefore create incentives to adhere to social norms.

. . . [Finally,] if the conference yielded any one lesson, it was that the social forces and institutions that make private ordering effective can and do operate in contexts that are not characterized by the conditions that the legal literature commonly associates with their success such as small, geographically concentrated, socially or ethnically homogenous groups. Rather, the effects of social networks, interpersonal relationships, reputation, and private institutions are considerations that need to be routinely taken into account by courts, policymakers, and lawyers drafting contracts if they are to make either profit maximizing, or social welfare maximizing decisions.” Excerpted from “Private Orderings,“ Journal of Legal Analysis (Winter 2015) 7 (2): 247-250. doi: 10.1093/jla/law002.