Law and Economics: Intellectual Arbitrage

Loyola of Los Angeles Law Review, Sep 2017

By Randal C. Picker, Published on 11/01/93

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Law and Economics: Intellectual Arbitrage

Law and Economics: Intellectual Arbitrage Loyola of Los Angeles Law Review Commons@Loyola 0 Randal C. Picker 0 Law Reviews 0 0 Thi s Symposium is brought to you for free and open access by the Law Reviews at Digital Commons @ Loyola Marymount University and Loyola Law School. It has been accepted for inclusion in Loyola of Los Angeles Law Review by an authorized administrator of Digital 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)


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Randal C. Picker. Law and Economics: Intellectual Arbitrage, Loyola of Los Angeles Law Review, 2018, pp. 127, Volume 27, Issue 1,