Law and Economics: Intellectual Arbitrage
Law and Economics: Intellectual Arbitrage
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ECONOMICS: INTELLECTUAL
ARBITRAGE
Randal C. Picker*
An arbitrage opportunity is an investment strategy that guarantees a
positive payoff. A simple example of arbitrage is the opportunity to
borrow and lend without cost at two different fixed rates of interest: borrow
at five percent, lend at ten percent, pocket the spread. Another is the
ability to buy stock for ten dollars per share and sell it for twelve dollars.
Arbitrage is the great dream: a sure-fire way of making money. The
1980s saw the rise of arbitragers: individuals and firms devoted to
finding fleeting disparities in prices across markets. Arbitragers jumped in
and eventually brought prices into line.'
However often arbitrage opportunities arise in financial markets,
sure-fire arbitrage opportunities in academia are largely nonexistent.
Nonetheless, put more broadly, intellectual arbitrage2meaning
transplanting ideas from one field to a second field-has become a standard
move for any card-carrying member of the interdisciplinary movement.
In law, intellectual arbitrage has proven, and surely will remain, a
relatively easy route to the academic coin of the realm-namely,
distinguished publications and large numbers of citations. If anything, the
trend seems to be accelerating with the rise of student publications
de* Professor of Law, The University of Chicago. I have benefitted from extensive
discussions with Doug Baird and Rob Gertner. I thank the Sarah Scaife Foundation and the Lynde
& Harry Bradley Foundation for their generous research support.
Some of the material in part II.B of this Essay has been published before in the law school
alumni magazine of the University of Chicago. See Randal C. Picker, Law and EconomicsII:
The Sequel, U. Cm. L. SCH. REC., Spring 1993, at 10. Part of the rest was given as the spring
lecture in our law school's Coase Lecture Series as "An Introduction to Game Theory and the
Law." Much of the analysis contained herein is taken from selected chapters of DOUGLAS G.
BAIRD, ROBERT H. GERTNER & RANDAL C. PICKER, GAME THEORY AND THE LAW
(forthcoming, 1994). This is an example of "leverage," which is deriving the greatest return from a
given amount of equity.
1. For a standard definition, see the description of arbitrage in PHILIP H. DYDVIG &
STEVEN A. Ross, THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS 100-06 (John
Eatwell et al. eds., 1987).
2. The phrase intellectual arbitrage is not mine. I have seen it in print in only one place.
See Michael A. Fitts, Can IgnoranceBe Bliss? Imperfect Information as a Positive Influence in
PoliticalInstitutions, 88 MICH. L. REV. 917, 981 (1990) (describing article as "intellectual
arbitrage between law and political science"). I believe I first heard the term from Richard
Epstein sometime prior to having seen the Fitts article.
voted solely to interdisciplinary work.' Whether this is a good thing can
be questioned4 as the distance between the professorate and
honest-togod attorneys grows each time we say "hermeneutics" or "pareto
improvement" or any of the other now-standard terms that have crossed
over from other disciplines into the legal academic's vocabulary. For the
present purpose of this Symposium on interdisciplinary work, I suspend
judgment on the merits of intellectual arbitrage and instead focus on its
prospects.
Law and economics was an early "law and... ." Its roots run fairly
deep, perhaps as far back as 1932,' though in many ways its beginnings
can be traced to Ronald Coase's The Problem of SocialCost, published in
1960.6 In its statement awarding to Coase the 1991 Bank of Sweden
Prize in Economic Sciences in Memory of Alfred Nobel, the Royal
Swedish Academy of Sciences cited this article as "the impetus for developing
the new discipline of 'law and economics' and, in prolongation, for
renewal of many aspects of legal science."7 Coase's Nobel Prize coincided
with other evidence of the discipline's intellectual maturity. The
American Law and Economics Association held its first annual meeting also in
1991 and has now had three generally well-attended annual meetings.
We now approach the twentieth anniversary of Richard Posner's
Economic Analysis of Law which is in its fourth edition.'
This sounds like maturity-a euphemism for middle-aged
paunchand, perhaps, diminished opportunities. Not so. Indeed, the time seems
right to move from the first-generation of law and economics to the next
generation. What is at stake is what that second generation will look
like. Economics continues to change, in many areas quite rapidly. I am
unaware of any definitive measure of the rate of change (...truncated)