Nov. 10, 1994
Vol. 15, No. 6

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    Game Theory and the Law

    Authors use economic philosophy to analyze legal principles When the Federal Communications Commission recently decided to sell radio licenses for new wireless personal-communication systems, it wanted both to maximize its profit and to ensure the most effective distribution of the available frequencies. To do so, it turned to the concepts of game theory, an economic philosophy that focuses on anticipated behavior and the exchange of information.

    Previously used primarily in business and economics, game theory is now being applied to other disciplines. In their new book, Game Theory and the Law, Douglas Baird, the Harry A. Bigelow Professor and Dean of the Law School, Robert Gertner, Associate Professor in the Graduate School of Business, and Randal Picker, Professor in the Law School, offer game theory as a promising tool for making better choices in creating and analyzing the law.

    "It's recognized that the law often merely sets the ground rules for negotiations," Baird said. "Much interaction between individuals in the marketplace and elsewhere takes place in the form of bargaining under the umbrella of the law. To understand how legal rules work, one must also understand the dynamics of bargaining. The formal tools of game theory help us better understand the give-and-take of bargaining."

    Game Theory and the Law applies game theory to issues in several areas of law, including environmental, labor, anti-discrimination and contract law. The authors make the point that a better understanding of how law works can be gained by looking at the consequences that legal rules impose on actions people may or may not take, as well as the consequences of those actions in the absence of any legal rule.

    The authors believe a game theorist's approach to the law can help us create better laws and reach better legal solutions based on the premise that people will behave strategically. One application of game theory to law may be seen, for example, in the case of a pedestrian and a motorist, each of whom must decide what to do without knowing what the other will do. The likelihood of an accident is determined by how carefully the motorist drives and how carefully the pedestrian crosses the street. Each must decide how careful to be without knowing how careful the other will be. Different laws will have different consequences: (1) the motorist will be more careful if the motorist knows the law makes her or him liable for any injuries the pedestrian may suffer in case of an accident, or (2) the pedestrian will be more careful because of statutes allowing for comparative liability, according to which the pedestrian could be held partially responsible for injuries caused. Game theory may help law-makers choose among the different laws possible.

    "Game-theoretic analysis should help law-makers structure more effective rules that anticipate the strategic decisions that individuals will make," said Picker. "Game theory gives us the first rigorous way to think about strategic behavior and build laws based on that behavior in a systematic way."

    The authors see Game Theory and the Law as the first in a new wave of books on law and economics, books that use ideas created by economists to look at legal issues. Game Theory and the Law builds upon earlier work in the field of law and economics by Richard Posner, Senior Lecturer in the Law School, and Ronald Coase, Senior Fellow and the Clifton R. Musser Professor Emeritus in the Law School.

    According to Picker, there has been a recent explosion in the application of game theory over the past 15 years. This was highlighted most recently when the 1994 Nobel Memorial Prize in Economic Sciences was awarded to game-theory economists.

    "Although there has been an overall growth in game theory in economics over the past 15 years, it's in the last five years that we have started to see general treatments of game theory that have made the concept accessible to lay people," Picker said. "As a lawyer, my concern is taking game theory and planting it somewhere practical. That could not have been possible without a body of literature helping to make game theory accessible."

    Game Theory and the Law originated in a joint article on bankruptcy and game theory written by Baird and Picker. The article was well received, and Baird and Picker were invited by Harvard University Press to write a draft for the book. They collaborated with Robert Gertner, who had worked with Picker on a previous paper, and in the summer of 1991 the trio created an outline for the book.

    "The three-way collaboration created a unique combination," said Picker. "Doug Baird is trained as a lawyer, Rob Gertner is trained as an economist and I am trained as both a lawyer and an economist. So in a way, we had two representatives of each discipline, which worked out pretty well."

    According to Picker, the future of game theory looks promising.

    "Having the Nobel prize go to game theorists helps mature the field, and some would say that once a field is mature it's dead, but I really don't think so," he said. "Economists will tell you that a different branch of game theory is starting to emerge. The book uses 'noncooperative game theory,' but there is another aspect of the field, called 'cooperative game theory,' that was important in the past, and that will again become prominent. In applying game theory to law, we've only scratched the surface. We could have done a book twice the size of the current one. The opportunities are tremendous."

    -- Charles Whitt PHOTO: Baird, Picker, Gertner