Vol. 5 No. 6 (June, 1995) pp. 179-182
GAME THEORY AND THE LAW by Douglas G. Baird, Robert H. Gertner
and Randal C. Picker. Cambridge, Mass.: Harvard University Press.
330 pp. Cloth $45.00.
Reviewed by Jack Knight, Department of Political Science,
Washington University in St. Louis
GAME THEORY AND THE LAW is an important book. It is important in
the sense that it will serve as a catalyst for an expanded use of
game-theoretic models in the study of law. It will be a book that
people will one day recognize as having had a considerable
influence on its field. And it will receive the praise that
accompanies such influence. Happily, such influence will be
beneficial to the field of law and such praise will be richly
deserved, because GAME THEORY AND THE LAW is an extremely
intelligent and thoughtful text. I recommend it without
reservation to students of law and politics (and to those of law
and economics, for that matter) and, more generally, to students
of game theory and strategic behavior. Baird, Gertner and Picker
set two goals for themselves in writing this book: (1) "to
introduce the formal tools of modern game theory to a wide
audience using a number of classical problems ranging from tort
and contract law to labor law, environmental regulations, and
antitrust" and (2) "to show how modern game theory
allows us to sharpen our intuitions and provides us with new ways
of looking at familiar problems." (p. xi) The authors
achieve both of these goals and more in a very impressive
fashion. Their sophisticated grasp of the intricacies of game
theory as well as of the strategic dimensions of many areas of
the law is manifest throughout the volume. Their analysis is
analytically rigorous, but not mathematically complex. For those
readers who are wary of mathematics for one reason or another, I
can assure you that the authors are able to translate
sophisticated and complex mathematical concepts into fairly
simple ones without failing to communicate the underlying point
of the concept.
More importantly, one of the features of the book that is most
striking (and, for my part, most welcome) is the thoughtful and
sensible manner in which they approach the use of game theory.
Unlike many proponents of game-theoretic analysis, they do not
present it as the only legitimate approach to social-scientific
analysis. The authors present game theory as a powerful tool that
can be used along with other approaches to enhance our
understanding of the role of law in social life. They
straightforwardly acknowledge what many take to be a criticism of
game theory -- that game-theoretic models simplify the reality of
social interactions -- but they assert quite rightly that such
simplification is not a problem as long as we remain clear about
why we are using the model: to compare the possible effects of
different legal rules on those interactions. They suggest that
"[t]he test of a model is whether it can hone our intuition
by illuminating the basic forces that are at work but not plainly
visible when we look at an actual case in all its detail."
(p. 7) They also offer a reasonable response to another oft-cited
criticism of game-theoretic analysis -- the assumption of
maximizing self-interested behavior in writing:
The basic assumption at the heart of this mode of analysis is not
that individuals are self-interested
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profit-maximizers or care only about money, but rather that they
act in a way that is sensible for them given their own tastes and
predilections. This assumption may not always hold in an
individual case, because people at times act in ways that are
inconsistent and self-destructive. In general, however, people
make the best decisions they can, given their beliefs about what
others will do. (p. 11)
They offer solid cautionary advice (especially in an extended
discussion in chapter six) about the care necessary to avoid
using the wrong models to analyze subtle social situations. (How
many of us have wondered whether the world really is one big
Prisoner's Dilemma game?) Finally, throughout their analysis they
maintain a realistic view of the assumptions about the world to
which we commit ourselves when we employ game-theoretic solution
concepts, assumptions that may lead us to draw false inferences
about the effects of legal rules on strategic behavior. In
discussing the move from a less restrictive to a more restrictive
solution concept, the authors note that "we must assume more
about what individuals know and more about how they believe
others will act. The more we have to make such assumptions, the
less certain we can be that our model will accurately predict the
way individuals behave." (p. 13)
Having set forth their understanding of the strengths and
weaknesses of game-theoretic analysis in their early discussion,
Baird, Gertner and Picker proceed in the course of the book to
make a powerful case for the value of the approach. To give an
adequate sense of the sheer breadth of their coverage, I will
merely outline the issues -- both game-theoretic and legal --
that they address in their eight chapters. In the first chapter
they present the basic assumptions of strategic behavior and
introduce static games and their basic solution concepts
(including Nash); they discuss tort laws governing negligence and
the duty of due care. In the second chapter they incorporate time
into the analysis and begin a consideration of extensive form
games (including an exceptionally clear and informative
explication of the subgame perfect solution concept); they
demonstrate the relevance of models of ongoing interactions in
the areas of antitrust law and debtor-creditor relations. In
chapters three and four they introduce the complexity of
incomplete information, the realistic assumption that there is
important information relevant to the social interaction that is
unknown to either one or both of the actors. The authors call
incomplete information "the central problem in game theory
and the law." (p. 2) From a strategic perspective they
develop the issues of unraveling, signaling, screening, the
crucial role of beliefs in games of incomplete information and
the basic incomplete information solution concept, perfect
Bayesian equilibrium, and some of its refinements; from a legal
perspective the authors show how incomplete information
influences the effect of legal rules in such areas as plant
closing laws, parental leave provisions, disclosure laws, inquiry
limits (including a provocative discussion of the
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Americans with Disabilities Act) and various laws that govern
contracts that envision future renegotiations. In chapters five
and six they consider a set of issues related to problems of
collective action and cooperative behavior. The game theoretic
issues included in these chapters include repeated games, the
problem of multiple equilibria, the folk theorem, the effect of
reputation and mechanism design; the legal issues include the
Statute of Frauds and antitrust regulations governing predatory
pricing and tacit collusion. In the last two chapters the authors
introduce distributional considerations including an explication
of non-cooperative bargaining theory (both the classic Rubenstein
model and various models which incorporate assumptions of
incomplete information); then they demonstrate the value of these
models for understanding bankruptcy law (including the provisions
governing automatic stays and the new value exception), labor law
(restrictions on hiring permanent replacement workers) and rules
of civil procedure (including provisions covering pre-trial
discovery procedures and rules dictating the structure of
hearings and trials.)
But even more than through their comprehensiveness, the authors'
case for the value of game theory is made through the creativity
of their analysis. To highlight this creativity, I will briefly
discuss two examples of the significant insights which they
offer. First, as I have previously stated, the problems related
to information are, in the minds of the authors, fundamental to
law. They emphasize the importance of the distinction between
verifiable and nonverifiable information. Through their analysis
of social interactions that are characterized by these different
types of information, they demonstrate one of the major insights
of their analysis: legal rules intended to affect the
communication of private information (that is, information known
to only some of the actors involved in an interaction) will have
different effects depending on whether or not the information is
verifiable (by either the other actors or a court.) An especially
striking feature of this insight is captured in their claim
"[t]o understand the effects of a legal rule, we must pay
attention to the way it affects not only actions that the parties
actually take, but also actions that they would not have taken
even in the absence of a legal rule." (p. 156) Here the
value of the use of game theory is most telling because this
particular insight is explicitly derived from the implications of
the game-theoretic concept of off-the - equilibrium path beliefs
(basically, the idea that people are often affected in how they
will act by their expectations of what those with whom they
interact will do if they themselves were to act differently.)
Through a set of legal examples analyzed by a simple model of
incomplete information, the authors show that the law can
influence behavior by establishing rules that prohibit behavior
that the actors would not do even if the rule was not in place.
For example, in a situation in which employers are known to
discriminate against disabled job applicants, the authors find
that the equilibrium outcome is that disabled applicants
misrepresent their disabilities and thus employers treat all
applicants similarly. When the authors introduce a rule that
prohibits discrimination based on disability, the equilibrium
outcome changes to one in which the disabled workers reveal their
disabilities and the employer adopts a work plan that differs for
disabled and nondisabled workers and which produces a superior
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outcome for both workers and the employer. Thus, a rule that
prohibits an action that the employer would not even take if the
actors were being strategically rational nonetheless produces a
change in behavior that is socially optimal.
Second, the authors show how game-theoretic analysis can provide
insights into how we might make mistakes in our analysis of the
effects of legal rules. Their analysis shows that studies of the
effects of discovery rules on civil litigation will misconstrue
those effects if they focus merely on the cases that go to trial.
The authors demonstrate a selection bias in such a study sample.
By analyzing the strategic effects of discovery rules on
pre-trial negotiations, the authors show that some discovery
rules have the effect of causing those parties who are most
likely to be liable to settle their cases before trial, thus
selecting out those cases most likely to result in a judgment for
the plaintiff. Because of this pre-trial effect, the cases that
do actually go to trial are disproportionately those most likely
to lead to a judgment for defendants (because people who know
that they are not liable are the ones least likely to accept a
settlement offer.) If analysts were to base their investigation
of rules of civil procedure merely on the cases that go to trial
and judgment, they would, on the authors' analysis, fail to
capture important effects of these rules. This selection bias is
clarified by the use of a simple game-theoretic model of
litigation.
These are merely two examples from a wealth of insights offered
by Baird, Gertner and Picker. The persuasiveness of their general
argument for the utility of game theory derives from a
combination of the power of their insights along with the
sensibility of their analysis. The book is written in a clear,
concise and interesting manner. Its bibliographic references
render it a source book for additional research in both game
theory and law. This is a book that should be read by scholars of
law in particular and scholars of political behavior in general.
One of the best compliments that I can give it is that it would
also be a profitable investment for those who focus primarily on
formal models of strategic behavior and games.
Copyright 1995