Presentation at the University of Hamburg (February 6, 2015)

1. Transaction costs as obstacles
to ADR
Aristides N. Hatzis
Associate Professor
Philosophy of Law & Theory of Institutions
University of Athens
Universität Hamburg
February 6, 2015

2. Rising cost of litigation / Backlogged dockets

6. Lack of Expertise

7. Molière, Les Fourberies de Scapin (1671)
Acte II, Scène V
Eh! Monsieur, de quoi parlez-vous là, et à quoi vous résolvez-vous?
Jetez les yeux sur les détours de la justice; voyez combien d'appels
et de degrés de juridiction, combien de procédures
embarrassantes, combien d'animaux ravissants par les griffes
desquels il vous faudra passer, sergents, procureurs, avocats,
greffiers, substituts, rapporteurs, juges, et leurs clercs. Il n'y a pas
un de tous ces gens-là qui, pour la moindre chose, ne soit capable
de donner un soufflet au meilleur droit du monde. […] Eh!
Monsieur, si vous le pouvez, sauvez-vous de cet enfer-là. C'est être
damné dès ce monde que d'avoir à plaider, et la seule pensée d'un
procès serait capable de me faire fuir jusqu'aux Indes. […] Mais,
pour plaider, il vous faudra de l'argent: il vous en faudra pour
l'exploit; il vous en faudra pour le contrôle; il vous en faudra pour
la procuration, pour la présentation, conseils, productions, et
journées du procureur; il vous en faudra pour les consultations et
plaidoiries des avocats, pour le droit de retirer le sac, et pour les
grosses d'écritures; il vous en faudra pour le rapport des
substituts, pour les épices de conclusion, pour l'enregistrement du
greffier, façon d'appointement, sentences et arrêts, contrôles,
signatures, et expéditions de leurs clercs, sans parler de tous les
présents qu'il vous faudra faire.

8. Bargaining is good
Every bargain, any negotiation that is based
on consent will eventually lead to a mutually
beneficial agreement if there is a surplus to
be divided
Socially beneficial – efficient allocation of
resources (Pareto, Posner/Marshall)
If there is no consent, the result of an
arbitrary decision for transferring resources
will be forced redistribution
Socially costly since the parties will spend
resources to defend/influence the decision

9. Ronald Coase (1910-2013)
The reason why economists
went wrong was that their
theoretical system did not
take into account a factor
which is essential if one
wishes to analyze the effect
of a change in the law on the
allocation of resources. This
missing factor is the
existence of transaction
costs.

11. Shapiro & Pearse (2012)

12. Coase Theorem (the positive version)
The ultimate result (which maximizes the
value of production) is independent of the
legal position if the pricing system is
assumed to work without cost. [...] With
costless market transactions, the decision of
the courts [...] would be without effect on
the allocation of resources.
(Coase 1960)

13. I a “frictionless” world
It doesn’t matter if you go to court
Or if you prefer an ADR method of
resolving a legal dispute
A court decision could be as efficient as
a pre-trial agreement by the parties

14. Coase (1960)
This is of course, a
very unrealistic
assumption.

15. A world that doesn't really exist
When there are no costs of making
transactions, it costs nothing to speed
them up, so that eternity can be
experienced in a split second.
It would not seem worthwhile to
spend much time investigating the
properties of such a world.
Coase (1988)

16. The Cost of Market Transactions
Once the costs of carrying out market
transactions are taken into account, it
is clear that such a rearrangement of rights
will only be undertaken when the increase
in the value of production consequent upon
the rearrangement is greater than the
costs which would be involved in bringing it
about.
S > TC

17. The Problem of Social Cost (1960)
In order to carry out a market transaction, it is
necessary to discover who it is that one wishes to
deal with, to inform people that one wishes to
deal and on what terms, to conduct negotiations
leading up to a bargain, to draw up the contract,
to undertake the inspection needed to make sure
that the terms of the contract are being
observed, and so on.
These operations are often extremely costly,
sufficiently costly at any rate to prevent many
transactions that would be carried out in a world
in which the pricing system worked without cost.

18. Transaction Costs (the narrow version)
Search cost
Information cost
Bargaining cost
Enforcement cost
Monitoring costs

19. TC in the broader sense
From the cost of market transactions
(Coase)
To barriers to transactions (neo-institutional
economics)
To cognitive obstacles in creating
surpluses/increasing social welfare
(behavioral economics)

20. Institutional Obstacles
Administrative costs
Social norms
Inefficient social norms
An adversarial culture
A culture where compromise is considered a sell-out, a
defeat
Absence of efficient social norms
Trust, reputation, business ethics, business practices
Overregulation
Corruption
Social tolerance towards corruption
Rent-seeking

21. The 2011 Legatum Prosperity Index
Very low community engagement and low levels of trust result in
weak social ties in Greece
In a 2009 survey, only 16% of respondents felt they could trust others, and
fewer than 28% had helped a stranger in the month before a 2010
survey, ranking Greece 107th, on the latter variable.
Levels of community engagement are generally low, with only 7% making a
financial donation to charity in that time period, and only 3% volunteering
their time. This places Greece in the lowest two countries of the Index for
these variables.
Social networks are mediocre, as 87% of people feel they can rely on family
and friends in times of need, placing Greece 54th on this variable.
According to the same 2010 survey, just 32% of respondents had visited
a place of worship in the previous seven days, indicating below global
average access to religious networks.
However, a slightly above average marriage rate, of 64%, indicates greater
access to familial networks.

22. Other obstacles
Opportunism
Strategic behavior
Market power / unequal bargaining power
Coordination cost

23. Cognitive TC
Endowment effect: people ascribe more
value to things merely because they own
them
Wealth effect
Overoptimism
Hyberbolic discounting
Inequity aversion
Path-dependency / Herd Behavior
Sunk-cost fallacy
Loss aversion
Cognitive dissonance / Adaptive preferences

24. Cognitive TC
Endowment effect
Wealth effect: people are not interested in
a small surplus in comparison with their
perceived wealth
Overoptimism
Hyberbolic discounting
Inequity aversion
Path-dependency / Herd Behavior
Sunk-cost fallacy
Loss aversion
Cognitive dissonance / Adaptive preferences

25. Cognitive TC
Endowment effect
Wealth effect
Overoptimism: people believe that they
are less at risk of experiencing a negative
event compared to others
Hyberbolic discounting
Inequity aversion
Path-dependency / Herd Behavior
Sunk-cost fallacy
Loss aversion
Cognitive dissonance / Adaptive preferences

26. Cognitive TC
Endowment effect
Wealth effect
Overoptimism
Hyberbolic discounting: people show a
preference for a reward that arrives sooner
rather than later
Inequity aversion
Path-dependency / Herd Behavior
Sunk-cost fallacy
Loss aversion
Cognitive dissonance / Adaptive preferences

27. Cognitive TC
Endowment effect
Wealth effect
Overoptimism
Hyberbolic discounting
Inequity aversion: people prefer an
outcome they see as fair and resist to an
outcome they see as unequal
Path-dependency / Herd Behavior
Sunk-cost fallacy
Loss aversion
Cognitive dissonance / Adaptive preferences

28. Cognitive TC
Endowment effect
Wealth effect
Overoptimism
Hyberbolic discounting
Inequity aversion
Path-dependency / Herd Behavior /
Sunk-cost fallacy: people are influenced by
past decisions, by the decisions of others
Loss aversion
Cognitive dissonance / Adaptive preferences

29. Cognitive TC
Endowment effect
Wealth effect
Overoptimism
Hyberbolic discounting
Inequity aversion
Path-dependency / Herd Behavior
Sunk-cost fallacy
Loss aversion: people strongly prefer to
avoid losses than to acquire gains
Cognitive dissonance / Adaptive preferences:

30. Cognitive TC
Endowment effect
Wealth effect
Overoptimism
Hyberbolic discounting
Inequity aversion
Path-dependency / Herd Behavior / Sunk-cost fallacy
Loss aversion
Cognitive dissonance / Adaptive
preferences: discomfort experienced with
new information that conflicts with existing
beliefs, ideas, or values

31. Thank you!Thank you!
ahatzis@phs.uoa.gr
http://www.phs.uoa.gr/ahatzis