Spring 2000 final exam (Economic Reasoning and the Law)
Top student answers

Note: These were among the best answers received under examination conditions. They are not model answers, in that they all contain extraneous material as well as omitting useful information. Some even reach incorrect conclusions. However, they all provide intelligent, organized, approaches to the questions.

Question 1: Answer #1

The Missouri Court of Appeals rejected the claim of the goaltender by making implicitly an economic argument. The basic point of the court was that athletes have full information concerning the risks involved in hockey and they are compensated for the risks they take by getting paid a higher amount than if hockey was not dangerous.

The appeals court opinion is consistent with the idea that private parties are best suited to deal with externalities. According to the appeals court, the league and its players have already come to an agreement as to how the rules of the game should be set up and the structure of penalties which efficiently deals with the problem of players intentionally trying to hurt each other.

The court opinion is consistent with the normative Coase theorem that the law should be structured to remove the impediments to private agreements.

In order to see whether this line of reasoning makes sense requires a fuller analysis of the incentives, transactions costs risks, and externalities involved.

The first issue to recognize is that there is an externality. When a player injures another player he does not bear the full cost of the other player's pain. Therefore, without some sort of legal rule limiting this behavior or a private agreement dealing with it there will be too much violence, since injurers derive some pleasure for themselves or the team from injuring an opposing player.

The rules in hockey (I believe) do attempt to deal with the incentives at players by penalizing those who don't abide by the standards. If the penalties were set high enough to offset the externality to the potentially injured players the cost of the violent behavior of the aggressor would be internalized.

At the same time, the potential victim is given incentives to take care because his team is only compensated by playing with an extra man when he is injured by a player who does not abide by the rules. More importantly, the individual potential victim is not directly compensated by the penalty to the other player (in other words he does not receive damages).

The other critical player in the hockey example is the owner. His main incentive is to sell tickets. Fans, for whatever reason like to see violence in the rink. Therefore, the owner has incentive to put together a team of players with a reputation for being violent. On the other hand he does not bear the full cost of fielding a more violent team. He does not bear the cost of physical injury to the other team's players. His only incentive to put out a safe team is that a dirty team will get more penalties, which will make them lose more games.

The current system of punishment (hockey penalties) focuses on the incentives of the players to play safer. This is positive in that they are the actions most closely connected to detrimental activity. But, there are other considerations. As Calabresi would argue, ideally we would like the full cost of violence in hockey to be reflected its price. When people buy tickets to hockey games, the cost to goaltenders getting knocked unconscious is probably not built into the price of the ticket.

Admittedly, the players' higher salaries feed into higher prices, but this is an issue that could only be resolved through empirical analysis.

The owner, while he does not have a close control on violence in hockey as the players, does have the best ability to make prices reflect costs. If the owner is held liable for the injury, he can pass on costs to the fans. This ability to pass prices on may make him the better risk bearer as well. The owner can spread the risk of injury over all his players (pooling the risk). The cost of an accident will likely be smaller relative to his wealth than that of the injured player. Raising prices can also be considered a sort of cheap self-insurance.

The injured goaltender cannot as cheaply insure against the risk. Hockey insurance for hockey players must be available but probably is very expensive in that the insurance plan is unlikely to be able to deal with the moral hazard issues of the players. For example, once a player has insurance he will have an incentive to play more recklessly because he does not bear the full cost of his acts, because premiums probably do not vary with recklessness.

This case sits on the boundary between contract and tort. It is contract because the players agree to play by the rules and to some extent are compensated for their risk. On the other hand, the two hockey players are in some sense strangers. This is critical in that they have no ability to sit down and contract who is liable for what occurs and other potential terms and conditions of an agreement. The transaction costs are too high for each player to sit down with every other player, not to mention the owners.

To some extent an agreement is reached by the players' union and the owners. It is unclear whether the players effectively perceive the risk involved in hockey. Perhaps they overestimate their ability to control the likelihood of themselves getting injured or discount the future too much. The union may be better at dealing with these biases but perhaps they are driven to by being elected and therefore support agreements which fit the individual players biases.

While the agreement reached by the players and owners may not be ideal there is no reason to believe the courts will do better. Do we really want a judge who has never seen a hockey game determining the rules.

More radically, from an economic perspective, we may be concerned about the ability of hockey players to seemingly agree to being injured for cash. Is this something we really want to see in the market.

At first blush, this ruling seems to make the owners better off relative to the players, since the owners don't have to pay liability. This may not be entirely accurate if as previously mentioned, the players have been compensated for the risks they take. In fact the players may prefer activities in the rink being dealt with in the manner set forth by the league. If the players have full information about the risk then perhaps we should defer to their wishes.

As one can see the Appeal Courts decision impact is quite complicated. Providing incentives for players may reduce this for owners. The owners may also be the superior risk bearer. The question remains though how compliant are we that the courts can do better than the players and owners.

Question 1: Answer #2

The Court's deference to the hockey league's rules is an application of the basic idea behind the positive claim of the Coase theorem. This model states that there are various institutional responses to the question of the efficient allocation of resources and that , therefore, the core issue of lawmakers and judges must be to examine which of these institutions is best equipped to promote efficiency. Conversely to the model of market failure, Coase identified at least four types of institutions to that end: contracts, the firm, governmental intervention and private regulation under the form of an association, union, etc.

That the court thus chose to defer to a private regulator, in case the hockey league, is not per se appropriate or misplaced, but depends on whether this institution best reaches efficiency, in other words whether it minimized the transaction cost associated with the behavior at hand in this lawsuit. The choice of the hockey league as the institution better able to regulate these activities seems appropriate for the following reasons:

1. It is better than state regulation because the league has arguably a better – inside – knowledge of the costs and benefits associated with the sport; it also have a greater interest in the activities because its profits depend on the popularity of the sport so it is better placed to internalize the cost and benefits of it; it is certainly more flexible than usual state intervention in that the range of measures it can take include suspensions and fines which are more appropriate than criminal sentences for most "rough play" behaviors; and its "case law" will probably be more precise and benefit from more expertise than judicial intervention.

2. It includes much less transaction cost than a contractual solution, which would require each player to contract with every player in the league, imposing a very high cost on the system. The incentives that such a rule will have on the actions connected with hockey would be the following:

a) For the players the optional level of precaution lie when the marginal cost of precaution equals its marginal benefit will take into account the following elements:

(i) Cost of Precaution

First, the players will have to train adequately to able to absorb a certain level of "body checks." The also have the burden of wearing certain level of protecting (masks, helmets, etc.) They will also avoid undertaking certain actions with potential benefits (like scoring a goal or saving one) when the risk associated with it will be too high; which in turn has the cost of making them less "popular" or efficient players because they did not undertake this action.

(ii) Benefits of Precaution

The level of marginal cost to be borne will be measured against the benefit of earning the salary of a professional hockey player and the benefit of bearing a smaller probability of injury which has the effect of both preserving he health in the long run and in the short run, of reducing the number of games missed due to injury (and thus increasing the salary and value of the player: a player less often injured is worth more). The principal incentive of team owners is to find the optimal level of precaution by balancing the cost of a reduction of "spectacular" violent games (which, one may suppose, is a reason why fans love the game) against the benefit of paying small salaries to players if they bear less risk of injuries, they will ask for smaller compensation) and having them less injured. The hockey league also have to balance benefits of a certain limitation of violence (fans also like "real" hockey actions and player — especially the more technical ones — wil probably not accept to play the game without violence restrictions) against the cost, of it (less "spectacular" sport and, hence, less fans and TV-rights income). Finally, families depending on players also have incentives, pretty much aligned with those of the players themselves: benefit from hockey salary vs. risk the sport). The state also arguably has a stake in prohibiting too violent behavior, which would undermine certain general values of the society. It is likely to set minimum standards of conduct even the framework of the game (by criminalizing too violent behavior, beyond the "reasonable" rough play).
Although the court mentions that the league has rules penalizing violent action sand compensating injured players, the main injury is borne by the injured player himself. I believe that the rule is efficient because the injured player is likely to be the better able to bear this risk.

The injury risk is better addressed by the player itself because it depends on its personal physical strength, fitness and ability to avoid and absorb "rough play" actions. It is also better assessed by the "injured" player because the risk of injury will also depend on the position of the player (eg a goalie is probably more vulnerable) and the style of the player (rough player or not).

Hence, the assessment of the probability of injury is better assessed by the player.

2) The damage is also likely to be better assessed by the injured player: the damage will indeed greatly depend upon the level of salary of the player (a ‘star" player is worth more than another).

3) Risk bearing by the injured player will also eliminate moral problems and adverse selection problems. On the other hand, as mentioned earlier, if suspension and fines to the injurer are set at an efficient level by the league, the injurer will also have the right incentives (suspension and fine system is a way of reaching efficiency for both the injurer and the injured player by decoupling from costs to the injurer).

Obviously, the injured player (potentially all players) will have the incentive to buy insurance. The insurance should be priced efficiently by taking into account the special risk factors of each player (if ____), to avoid adverse selection problem and price the premium at optimal level. A trade-off between insurance and moral hazard would also have to be made by the contracting parties.

Such a system will have the likely effect of directing individuals who do not have the sufficient physical capacity of absorbing usual rough play to other activities, because they would otherwise be charged too high insurance premiums compared to their salary for their injury risk would be too high (unless they are especially gifted so that the increased risk of injury is sufficiently offset by a higher salary).

I believe that the system of internal regulation of professional hockey is likely to be the most efficient at least in terms of second best, for players, team owners, the league fans and society.

Question 1: Answer #3

The rule of law in McKichan has a number of consequences for incentives to take precaution against injury.

A. Players

Although players are traditionally viewed as, first, athletes and, only second, financially-motivated business actors, professional hockey is a financial enterprise. The purpose of its existence is to make money and return profit for the league and team owners. Hockey uses players as the means for achieving its financial success.

It only follows that the players, on the professional level, use the sport as the means by which to maximize their wealth. After all, players are always free to enjoy the sport outside the realm of any league and without the benefits of handsome compensation. Thus, to the players, the sport, at the professional level, represents an activity that allows them to benefit financially to a greater extent that they would were they to engage in any other activity.

The job of being a hockey player entails its own costs and benefits. The benefits, in addition to monetary compensation, include (sometimes) a lavish lifestyle, possible future fame, public exposure, free time during the off-season, and a range of possible future opportunities. The costs are the training that players must undergo in order to be good enough to play professionally, the opportunity costs of other activites players must give up or miss in order to devote sufficient time to their careers, and, of course, the injuries they sustain in the course of playing.

Another important consideration is the length of player's careers. Hockey players must retire from the sport at a relatively young age, and so their timeline on being able to maximize their earning power is limited to probably 10 years or so.

The reality of the business of hockey is that injuries necessarily occur, due to genuine accidents as well as for the "entertainment" value they provide for the fans. Fighting will make them "stand out," earn them a reputation, and make them, if not into stars, at least more familiar to the fans. This translates into higher name recognition, fame, future opportunities and simply more money in their contracts, as well as ability to remain "in the business" longer.

On the other hand, fighting might cause serious physical harm, so much so that a player's career could end prematurely and in the worst case, a player might be hurt or somehow disabled for the rest of his life.

The court's rule acts so as to make players responsible for the fighting/staying healthy trade-off. Some players might value fighting more b/c they actually enjoy it or b/c they want to stand out. These players will exercise less precaution against injury. Other players might want to stay away from the danger and prefer ‘quieter" careers and better health. The court's rule gives incentives to these players to exercise more caution.

Thus, the court's rule allows for individual players to tailor their level of precaution according to their willingness to engage in dangerous activities.

This rule works well assuming that players who fight are willing participants who make rational decisions to get injured in order to achieve some other goal (i.e. more attention). However, although it is probably true that most players who fight do so because they "like" it and willingly accept the risks, there might be others who become victims of fighting. Thus, while "the fighters" might enjoy and or benefit from this activity, despite its risks of injuries, their behavior imposes an externality on those players who suffer/get injured when they otherwise would not chose to do so.

The court's rule forces the "unwilling" fighters to internalize their injuries, even when imposed by others who end up not fully absorbing the costs of their behavior. However, there is an "assumption of the risk" issue to be raised here. Players certainly are aware of realities of the "business" of hockey and know that playing involves fighting. Those who do not want to fight/get injured cannot avoid the reality of the business. Nonetheless, players' compensation might be said to include a component that is attributable to the risk element. In other words, if the sport needs a certain number of players who are willing to accept the risk and cannot hire enough of those, the salary of the first player who was not otherwise willing to accept the risk will include a risk-compensation component.

Finally, players who really want to avoid getting injured might, in light of court's rule, restrict their activity levels in such ways as to avoid fighting. That is, ideally, there will be fighting just between those players who are willing to get injured. Should there be a mismatch, the rule provides incentives to "hide" or "stay out of the way" so as not to become involved in a fight.

It should be noted that the court limited its ruling to the specific conduct in the case. Based on the facts, it seemed that "the incident" that took place earlier in the game served as some kind of signaling that plaintiff would not be totally opposed to fighting. Under the court's rule, however, there is a possibility that different conduct (i.e. gross negligence or some kind of truly apprehensible behavior) might trigger liability.

B. Team Owners

Team owners view professional hockey as a business to an even greater extent that do players. To be sure, while players entered the sport at a young age and "for the love of the game" (even if later their involvement became financially oriented), team owners enter the business as mature businessmen. They probably do enjoy the game, but the motive behind their involvement is strictly financial.

The benefits to team owners are somewhat similar to that of players: financial security, recognition or fame (although to a lesser extent), and probably a certain "elite" standing in the community. The costs are time and money. Team owners are physically removed from the sport and buy away from all the dangerous action.

The danger of the game, however, is what pays in the hockey business. There are, of course, limitations to that statement. Nonetheless, as the court stated in its opinion, danger is part of the business of hockey. Facing no liability resulting from players' action, owners have very few incentives to take precautions. Assuming players are "fungible" (i.e. fans care more about the entire team than individual players) having a more exciting/dangerous team is better for the owners than having a team with no injuries, as long as injured players can be replaced. The incentives to take precaution are due to such "replacement" costs. Because there is not an unlimited supply of adequate talent, team owners must balance the need for fighting against consequences of injuries. Finally, protecting "Star Players" provides an additional incentive of owners to exercise precaution. When the team's financial success depend not just on entertainment value of fighting/danger but also on attraction of a star player, owners would not want their Stars to get injured. This, in turn, provides incentives for "average" players to become Stars, so as not to have to engage in risky activities during games and be better protected.

The career time-span is also relevant here. Players facing limited careers must either stay injury-free for as long as they can or must choose an appropriate danger level so as to maximize their earning capacity during their limited career. For example, players might want to fight early on when they are still healthy and want to gain some recognition, while older players might want to exercise more precaution so as to stay in the business longer.

Owners, in contrast, face a different career-span. Their career duration depends mostly on financial success on their teams, and so incentives which they have to almost encourage players to fight do not change over time. Neither do incentives to take precaution so as to protect Star/irreplaceable players.

C. Others (referees, team doctors)

Very briefly, it should be mentioned that court's rule also has consequences on incentives of referees and maybe even team doctors to exercise precaution. These "others" are under a contractual duty to observe certain norms. Doctors must keep players healthy and discourage them from injuries, which referees must observe rules of the game. Because "others" are also benefitting financially from professional hockey they might be less inclined to observe their contractual duties so as to make the teams (and eventually themselves) financially better off. This problem could be dealt with by separating compensation from financial success of the sport, so that referees would make same amount of money regardless of how much fighting there was. In fact, they can always lose their job if they do not observe the rules appropriately, thus, incentives to "look the other way" will be reduced.

D. The consequences of court's rule on risk-bearing are such that players must absorb the costs of their behavior. Risk-averse players will decrease the level of their activity, while players who are less-risk-averse will maintain or increase the levels of their activity. Lack of compensation for injury reduces the problem of moral hazard — players will be forced to take adequate precaution in the absence of insurance against danger. Overall, the allocation of resources between hockey and other activities will be optimal, since players will engage in the sport only to the extent they are willing to absorb injuries. When they find that they can get more utility out of doing something else instead of playing hockey & getting injured, they will enter other professions.

There is an issue of who bears insurance costs – players or owners. It seems that the court's rule places the cost on the players. However, such cost are a necessary component of compensation owners pay players- thus, it insurance costs 10, it makes us no difference whether a player makes 90 and owners pay 10 for insurance or if player makes 100 and must bear his own insurance costs. While owners might have better access to insurance, players can solve this problem by organizing & spreading the risk among a larger pool such as a players union.

As for welfare of fans & society it seems at first that they benefit from the court's rule because absence of owner liability means the owner's costs will not the passed on to the public. However, such costs will be passed on eventually because players, bearing more risks, will demand higher salaries, which in turn will raise owners' expenses and cause them to raise prices anyway. In a way, it is fair for the fans to absorb the costs of risk because they are the ones who benefit from fighting as well. Fans like hockey more because it's dangerous, so that danger premiums should be factored into the price of hockey.

E. The court's deference to the league's internal mechanism is appropriate in this case. Court, essentially, faced two choices. It could take a Pigouvian approach and impose state/legal intervention due to existence at some market failure. Several sources of possible market failure are 1) externalities imposed by fighters on others — (players who don't want to fight, their families, medical costs, etc.) 2) monopoly — hockey players are limited to participation in the league and can't just leave and play somewhere else (existence of major & minor leagues weakens monopoly argument). 3) Strategic behavior – some players might act strategically so as to create dangerous situation, thus causing risks to others without themselves getting hurt 4) informational issues as well as bounded rationality — players might not have enough into to make informed decision about risk, they might misperceive risks, due to incomplete heuristics, , they might be limited by "impulse control" problems — choose current gratification without appreciating long-term consequences of their behavior (i.e., getting injured today but being sick the rest of their lives).

Nonetheless, in light of these objections, Coasian approach to interval mechanism dispute resolution seem appropriate. Hockey players are sophisticated actors. They make a lot of money, are able to get legal advice, and are surrounded by people (agent, coaches) who look out for their interests. There is also the Players Union, which in a way acts as players guardian and looks out for their interest. Finally, there is some entertainment component to the business of hockey. This business provides generous financial rewards to its participants and, thus, should not impose the costs of its activities on the legal system. Again, there are, of course, limits to this reasoning & court intervention would certainly be appropriate in many instances (i.e. contract disputes, discrimination, etc.) However, in light of the cost/benefit analysis of the value of fighting in hockey the court's rule (limited to specific conduct in the case) is appropriate.

Question 2: Answer #1

I believe that the supply of organs would be enhanced by Cohen's plan. First of all, there is currently no value beyond psychic well being to offering your organs up for donation after death. Couple this with the psychic disincentive to even want to think about one's own death (it's really hard to sell life insurance), and the marginal value of election to donate organs approaches nil. Anything that would increase the value of that election would of course increase that number, and that in turn would increase the number of donations. If people could readily get funds for something that they can't now, their wealth would be increased. A greater supply in organs would certainly increase the wealth of those who got them. Unless the moral outrage of those that hate the idea of any market mechanism involved in the organ donee system is greater than the increases in wealth, Cohen's system would be at least Kaldor-Hicks superior to the present system. Pareto superiority is unlikely, because there is no obvious way of compensating the morally outraged (if we even tried, the opportunity for strategic
moralism would go through the roof).

The market may have some problems in being established if the number of preserved organs was too small, thus driving the value of the forward price down--particularly in the case of those that wanted there money up front from a truly forward, non-contingent way. Those that sold contingent contracts that conferred benefits on their descendants rather than trying to capture the value in the here-and-now would likely get better deals, since they would not involve moral hazard. For those that want to get money now would get less because they would lack the necessary incentive to maximize the potential for their organs being successfully used. This could really only be mitigated by monitorring the behavior and organ status of such individuals. For example, rather than giving them a lump sum payment, payments could be tied to required check-ups, and varied as the future value of the organs changed. This would require some wierd calculus a bit different from insurance: the forward here is really not a forward but an option, since if the organs aren't usable, the contract is useless, and option pricing is much more complex than forward pricing, and less subject to actuarial analyses. Furthermore, in insurance pricing is based on the probability of death-the sooner it comes, the more the insurance costs, where is this contract would pay most for the soonest and best (thus the wierdness) deaths. A terminal patient with metastasizing cancer would be a candidate for quick death with bad organs. A test car driver in his prime would be a good candidate for quick death with good organs (except for the higher probability of damage to the organs in death). Still, markets for even more complex commodities exist, and there isn't any reason one couldn't develop here.

One thing that might be bad about the system is the bailee requirement to maintain cadavers and notify designees placed on doctors and hospitals. Certainly, this obligation does represent a reduction in their wealth. However, unlike with the moralist cost, compensation is almost internal to the problem: with more organs available, the hospitals and doctors will receive more income from organ transplants. Of course this might not work perfectly if organ transplantation was handled by a small group of doctors and hospitals that reaped all the benefits leaving the costs spread out over all the doctors. To the extent this plan creates an uncompensated legal obligation, it will clearly have distributional effects.

I have not seen Cohen's defense against the attack that this would cause more suicides and murders. However, I would think that this could be a problem--particularly suicides. In the case of life insurance, benefits are denied for suicide for moral hazard reasons. However, unlike insurance, regardless of how the donee dies the value of his organs being available is realized. Even more dramatically, the likelyhood is that suicide with the actual intent of providing forward value for descedents will on the whole make it the best way to maximize the value of the forward--that is, since suicides can choose the manner and place of their death, they will be able to maximize the chances that their organs are usable. To the extent that social costs (moral or whatever you want) of suicides outweigh their private costs, there is an externality. To the extent that transaction costs make it nearly impossible for side-bargains to level this out (for example, paying a bonus not to suicide would involve the high costs of identifying would-be suicides and avoiding paying strategic fakers where commitment is only demonstrable by doing the very deed you want to avert), this problem is inherent in Cohen's system. However, it is not unaddressable. Here would be a good place to insert a law voiding forward contracts in the case of suicide or homicide on grounds of public policy.

The mismatch between a market mechanism on the supply side and a non-market system on the demand side would result in potentially lesser gains than might otherwise be available from Cohen's system--but I doubt the difference would be very significant. Certainly if the demand side is functionalized through a lottery or a bureaucratic procedure, the funds available for transfer to the supply-side market will result in a lower price than would a full market system. How much this would reduce the number of organs donated is a function of the elasticity of supply. Since the most significant cost involved in donating an organ is squeemishness (or perhaps religious considerations), it doesn't seem likely the curve would be uniform. Probably there is a relatively low threshold at which squeemishness would be overcome (say, $50 cash today). Once the demand mechanism generates enough cash to offer that level, the number of donees would increase a whole lot. The more squeemish and the wealthier individuals for whom small amounts of cash mean relatively less might be lost. Those out and out morally opposed to organ transplants presumably wouldn't effect the total supply at all, since they would be very price insensitive. Although the non-market mechanisms may not be the most efficient at hitting the true equilibrium, it doesn't seem too problematic for them to at least get over the bulge. Probably the high moral costs of a demand side organ market would outweigh the benefits of the extra organs donated at the margin due to the greater funds such a market would generate.

Cohen's argument is undoubtably attractive. It avoids some and runs in to others of the critiques levelled against the market in babies. Bounded rationality seems not to be problem insofar that there is no chance that the contractee will have underestimated his willingness to fulfill the contract at the time of execution (no pun intended). On the other hand, to the extent that a market in organs would morally offend, we do face a cost--but the worst aspect of the market when applied to other areas--that the rich get first choice--is not directly implicated in Cohen's plan. Nevertheless, an extreme liberal position would reject the solution as reducing the wealth of individuals without their consent. Of course, most liberals could have less trouble with it. For example, Rawls ex ante maximin approach would probably accept it as it is likely that a person in dire need of an organ is in a worse shape than a moralist whose welfare is reduced by the solution. Likewise, I do not see a significant paternalist objection as one would be hard pressed even with objective preferences to see why someone with some money and a forward on their organs after death is worse off than someone with neither.

The problem of commodification might rise two problems, one that I find trivial and the other much less so. First, to the extent that the commodification of organ donation lessons the charitiable desire to donate them, the number of overall organs available may go down. But for this to result in a drop in the overall number of organs, the number of non-donee's brought into the market would have to be less than those who would have given on charitible ground are driven out of the market (those whose motives shift from charitible to pecuiniary , and those who still give for charity regardless of the pecuniary opportunity would not effect the total number of organs donated). I find this prospect highly unlikely.

A more significant objection could come from the radical perspective. Commodification of organs might result in a change in social preferences such that the previously undesired market for the sale of organs shifts. The mechanism for this is not at all far-fetched: as people get used to the idea of getting money for forwarding their organs, they will come to feel that they have a right to maximize that amount. Suddenly, there comes a desire to maximize the price and lo and behold, the market on the demand side offers more money than the other mechanisms. If this shift becomes great enough, we have a Kaldor-Hicks efficiency argument for opening that side up too, just as soon as the preferences on one side outweigh the remaining moral objections. Presuming we follow this lead, we make the change. If we then look back at it from the ex ante point of view, our policy resulted in a Kaldor-Hicks inferior outcome (measuring ex ante valuations of the gains from increased organs minus the losses of moral value from both the supply and the demand side markets). But if we look at it from the ex post point of view, we have no such problem because the preferences will have shifted. Thus if the policy change does result in such a preference shift, the whole analysis above this paragraph becomes moot. Without stable preferences, L & E is really at a loss. The radical critique would thus suggest that this legal conflict cannot be resolved by market mechanisms such as Cohen's, but rather only in the sphere of politics and morality. Unfortunately, the radical critique doesn't give much guidance on how to go about this resolution.

Question 2: Answer #2

A) Viewed from within the economic paradigm, would Cohen's proposal have the desirable effects he suggests?

In many respects, the economic theories about property rights indicate that Cohen's proposal would have the effects he suggests. Demsetz's article outlining the relationship between property and economic incentives argues that a system of property rights encourages the efficient use of resources by internalizing externalities -- for example, a system of individual ownership of farming implements in an agricultural setting will give the farmer-owner the necessary incentive to retrieve a tool left out in the rain, despite the immediate cost to him of getting wet and cold, returning to the field to get the tool, etc. In contrast a system of collective ownership would have to depend on community pressures and norms to encourage a person to retrieve the tool in the broader and much more prone to collective action problems. Currently, there are no long-term interests of the community -- a system which is more costly to maintain property rights in body parts in the sense in which property rights are generally understood -- while individuals might have largely unconstrained use and exclusion rights over their body, they do not have transferability rights -- a crucial "stick" in the "bundle" of rights which traditionally make up the concept of ownership (although, technically, procedures for indicating one's wishes for organ donation after death are a kind of transferability right; however, compensation for this transfer in any medium other than personal satisfaction is forbidden). Much of the controversy over egg "donation" in the fertility market derives from this principle and from disagreement over the point at which payment to a donor for services and inconvenience becomes actual purchase of a woman's egg.

Cohen's proposal fits squarely within the Demsetz model -- currently, the lack of remunerative transferability of one's ownership interest in useful organs has resulted in a dramatic disparity between the need/demand for usable organs and the available supply. The sole current incentive of overall social good or the possibility of helping a stranger in need is clearly not sufficient to induce many people to make arrangements for their organs to be donated after their death (although the procudures for doing so are remarkably simple in most states). Furthermore, the current system frequently places great pressure on next-of-kin during a traumatic moment to make a decision which is, for many people, freighted with religious and ethical problems. These decisions, either for or against donation, may not comport with the actual wishes of the donee (this criticism probably more properly belongs in section B, but I note it here now for comparison). Usable organs are a valuable economic resource whose development has thus far fallen far below the output that might be possible if individuals were given truly transferable property rights over their organs, thus creating the possibility of much greater incentives to consider the issue and decide in favor of donation.

The real problem, within the economic paradigm, of Cohen's propsal is the lack of a market on the demand side. Setting aside the ethical or moral problems with creating such a market, Cohen's proposal for a supply-side-only market means that some sort of bureacracy will have to be created to administer the futures market he proposes - to substitute some other measure of demand for the actual demand of individual "consumers" of the potential organs. Although Cohen allows for the possibility that individual entrepreneurs could purchase the right to future payment, this does not actually solve the problem of manufacturing a measure of demand for the actual organs. Complicate this measure by adding in the element of predicting the future value of and need for a particular organ or set of organs, and you have just the sort of complex calculation that markets are generally good at making and which centralized public institutions have generally proven very bad at making. This decision is complicated even without considering the simultaneous progress of medical research and treatment options, which also are subject to the funding and research decisions made by political institutions. The high transaction costs associated with this substitute for an actual demand mechanism may mean that a financial incentive system would not actually produce more organs than the current system does (because if the organ purchasing which funds the futures market is done by a public agency, the political decisionmaking which allocates the funds may not produce sufficient incentives to encourage participation in the market; low financial incentives would be unlikely to produce the highest quality organs, since wealth is highly correlated with health and the wealthy will likely require higher payments to participate), and might actually produce less, by removing or dramatically de-valuing the current altruistic incentives which drive the organ-donor decision under the current system.

B) Viewed from outside the economic paradigm, would it be socially, politically, or ethically acceptable?

Liberal critique -- liberalism tends to focus on individual rights and to critique economic approaches for not taking seriously the differences between people and for readily accepting a sacrifice of individuals for the collective good. The Cohen system certainly can be compatible with a liberal, rights-based regime. No one is forced to participate in the organ-donor system, although it might be in society's best interests to force such participation (or at least to adopt the European style system where donation is the default in the absence of otherwise expressed preferences). Furthermore, the fact that that demand side is carefully segregated from the supply protects the rights of those who are in need of organs, and doesn't attempt to place a purely economic value on their need (although some might argue that a system like Cohen's would tend inexorably towards an eventual monetarization of need also) is consistent with a liberal critique of many economic models. One critique that might be offered by this viewpoint is that it could tend to reinforce existing disparities in income and social status by valuing the organs of the wealthy higher, since general health and longevity and access to quality medical care is correlated strongly (although imperfectly) with wealth in the U.S. (although actually this is probably more of a communitarian "Spheres of Justice" type critique, than a strictly "liberal" critique).

Paternalist critique -- this view might suggest that it is simply not good for people to be offered money for their organs because they are not capable of evaluating the price offered and comparing it usefully to what would actually be in their best interests. Money is a powerful lure for many people (precisely the reason Cohen proposes paying people for the promise of future donation) and it might be true that the immediate short-term financial benefit would over-ride people's "true" interests. The paternalist critique argues that because of "false consciousness" people are often incapable of knowing or acting in their own best interests, and the fact that they enter into ostensibly voluntary exchanges does not indicate that those transactions are actually the result of free choice. Sometimes it is right/correct/just for elites to make decisions for people; adding financial incentives might totally distort the ability of potential donors to consider their religious or metaphysical beliefs about the body, their desire to participate in a scheme of organ transfer for whatever reason, their ability/motives/desire to act politically to affect the distribution of organs or the provision of medical care more generally. The paternalist critique might not argue for the organ donor system we have now in the U.S. (indeed, the European escheat system seems more in line with this view), but it would caution strongly against the Cohen view that a futures-market incentive system would be ethically acceptable because participation would be purely the result of free choice and voluntary participation after consideration of the price offered.

The communitarian and the sociological critique probably have the most to say about the ethical, moral and political problems with Cohen's proposal -- oh no, out of time --

Question 2: Answer #3

Cohen's argument is, at base, a very liberal critique of the paternalist policy of the government, which prevent people from selling or doing harm/contracting for harm of their own bodies. At the same time, he seems to borrow from the economic assumption of an individual – any individual's – ability to freely and competently enter into exchange about one's own body as well as about other things. In doing so, he blithely ignores one of the most compelling criticisms of the economic approach, namely, that real people are almost never free and equal participants in an exchange because their abilities and desires are framed in a larger social context. Thus, even if economic theory could bolster his claims, it does not follow that his scheme is thereby a good one. Other concerns about why people want what they seek in an exchange – and the personal constraints they bring to that exchange – must help govern the final analysis.

Economic Perspective

At first blush, Cohen's proposal seems to satisfy one of the basis aims of the economic approach in that it relies on market transactions to shift resources away from those who value things at a lower level and toward those who place greater value on them. (It is presumed that whatever the mechanism for distributing the organs, they will be disbursed so that those who need replacements – and who value the organs higher than those who don't need them – will get them. Even if distribution is not on a "neediest first" basis, recipients will still value the organs more than the donor did.)

There is, or course, an information (or coordination) problem at the beginning of the program to consider, since the marketplace is likely to be nationwide (or perhaps broader) and it will be hard for sellers to communicate their willingness to sell to potential designees. But if the goods are sufficiently valuable, and I believe we can assume they are, then there are a number of mechanisms by which this information exchange could occur, which should be minimally costly once it is established. Stigler notes that there is a strong tendency toward monopoly in the provision of information about goods, because such information can be time consuming/costly to acquire and update independently of how it is used. This might suggest the rise of a secondary market for donor information which imposes a cost on the donor market itself; however, uncentralized or unverifiable information imposes its own costs on consumers. Whatever the mechanism, the transaction costs for information exchange is not zero but is likely to foster the organ market's growth and thus lead to some overall social gain anyway.

The real problem here is the likelihood that the "designees" in Cohen's plan will become more like organ brokers and thus be able to raise the prices of organs through a black market which sidesteps the distributive mechanism. Actually, the donors themselves could do the same thing, which is where Cohen's plan truly falters: although he recognized the ethical and economic necessity of keeping the market on the supply side only, its is hard to envision sellers without buyers. The fiction of designees is too transparent to prop up his proposal. Because "donors" are assumed to be rational and self-interested, the vast majority of them will turn to a designee for payment in this life, for body parts in the next. (Many AIDS on HIV patients have done just that: cashed in on their life insurance policies to spend today what would have gone to their beneficiaries tomorrow.) The designee is thus in the position of selling not her own but someone else's body parts, quite possibly directly to the consumer. If the distributive scheme is democratic, or merit-based, on need-based, or just arbitrary (redheads first!), someone will almost always be willing to pay to get higher up on the list. The objection that buyers will need the aid of a surgeon is not compelling, either, even doctors are assumed to have rational self-interest as a primary motive and can, presumably, be bought for a price. Any black market artificially inflates the price of the goods assuming this price inflation would exceed some socially optimal level, Cohen's system would encourage too many donations because donors would be selling their organs for more then they are actually worth. A black market might also diminish the number of available organs on the legitimate market, forcing more people to turn to the market and overpay (an inefficient result) or suffer and do without goods which they could otherwise afford (an inefficient result). The effect over time would dissolve the distinction between the supply and demand sides of the market, which is not what Cohen advocates.

A further information problem relates to the quality of the goods sold. Because an organ can only be sold once (although the futures are readily exchanged), buyers would want assurances that they were of good quality before agreeing to purchase. Futures in organs are problematic in that their value probably decreases over time (it matters, for instance, how much I drink how good my liver will be; whether I wear sunglasses will affect the quality of my corneas), are not subject to warranties (because they cannot be returned), and create interests in different parts of an interrelated system. None of these consideration is insurmountable (I can have regular physical exams, agree to wear protective eyewear, etc), but all will impose costs on the system. Must I seek permission from future designees if I want elective surgery? If I take up a dangerous hobby, what happens if my organs are damaged? Do I have to repay the money I received for the futures? All of these questions are answerable, but must be considered when the sale occurs or else costly resort to courts to sort out competing interests is likely. All of the transaction costs dilute the value of organs futures, and would mean that at least some rules which would otherwise be efficient (i.e. transfer the organs to a higher-value user) would not occur.

Other Considerations

Cohen's proposal is also susceptible to several other limitations and objections. The issue of false consciousness for organ sellers looms large and is one of the biggest reasons for the structure of current laws prohibiting organ sales. It is possible that, despite what participants think their best interests are, they are wrong either because they lack sufficient information or the proper means to evaluate such information. Specifically, one's social circumstances go a long way in shaping what one does or doesn't want or need. They cannot simply be swept away in the name of an untapped market. Because so much of what one desires is a function of marginal utility, it is not true that Cohen's plan avoids exploitation of the poor. Simply put, poor people will gain relatively more than rich people from the same amount of money from selling organs: they will be disproportionately more likely to sell their organs even though their organs are, objectively, worth no more.

Finally, the sociological and communitarian critiques weigh in here because they demonstrate or argue that people do and should pay attention to social mores in these types of situations. Cohen cannot finesse past the fact that some people will not sell their organs at any price out of moral, religious, or reasoned ethical determinations (such as exploiting the poor). The fact that they do not suggest that society does not ignore the ranks of individuals who suffer without an organ transplant, but rather suggests that society is aware of these and competing interests and has decided against organ selling as a solution. Viewed this way, patients in need of organ donation are not suffering needlessly – they are suffering unavoidably, because to alleviate their pain would involve greater costs, on balance, that permitting them to die. And it is precisely this sort of social cost which economic analysis is ill-equipped to define.