Game Theory and the Law: Baird, Gertner and Picker

 


Journal of Legal Education

Vol. 45 No. 3 (September, 1995) pp. 465-467

 


Douglas G. Baird, Robert H. Gertner, and Randal C. Picker, Game Theory and the Law. Cambridge, Mass.: Harvard University Press, 1994. Pp. xii + 330.


Reviewed by Andrew P. Morriss, Associate Professor of Law and Associate Professor of Economics at FN1 BG&P go well beyond this simple game and introduce such game theory staples as matching pennies, the stag hunt, beer-quiche, the battle of the sexes, and the Rubinstein bargaining game. Without using any math beyond occasional (and simple) algebra, they successfully explain the basics of game theory: normal and extensive form games, Bayesian equilibrium concepts, backward induction, unraveling, signaling, repeated games, the folk theorems, embedded games, noncooperative bargaining, and nonverifiable information.

They write crisply and concisely. They excel at explaining both the structure of the analysis and the importance of the resulting insights. For example, in their wonderful chapter on "Collective Action, Embedded Games, and the Limits of Simple Models" they make clear the importance of thoroughly understanding the legal background of a problem before undertaking modeling. After an example of a coordination problem, they turn to debtor-lender negotiations for an illustration. A federal statute limits debtholders' ability to renegotiate debt issued by a public debtor in financial distress. Despite the potential for gains from reorganization, individual bondholders will not restructure the debt. They "face a collective action problem. Viewed in isolation, this feature of the law might seem a weakness. Indeed, one can justify the bankruptcy laws and particularly the willingness of bankruptcy judges to confirm prepackaged plans on the ground that they solve this collective action problem" (pages 194 - 95). What is interesting here is not the labeling of the problem. BG&P make a far more interesting observation:

One can argue, however, that the existence of this collective action problem is a good thing. It alters the shape of the other negotiations that the debtor faces and changes the incentives of the debtor and others during the course of the relationship. These effects, of course, could be harmful as well as beneficial, but they need to be taken into account before one can be confident that eliminating this collective action problem is desirable (195).

Game theory excels at highlighting this sort of interconnection, and BG&P make good use of its power in developing their examples.

There are three audiences for a book like this one: law teachers seeking to learn about game theory; law teachers looking for a text for a course on game theory and the law; and nonlawyers searching for new areas of applications for game theory. The book is most successful in addressing the first of these audiences.

A law professor interested in learning enough to follow journal articles that make use of game theory will find this an excellent primer. Anyone familiar with economic reasoning will have little difficulty following BG&P's explanations of game theory concepts. The excellent bibliographic notes at the end of each chapter provide references both to more technical game theory sources and to literature applying the concepts introduced in the chapter. Combined with the thorough index and glossary, these notes enable readers to use the book as a primer or as an introduction to the literature.

The main trouble with the book as a primer is its lack of problems. No matter how many times one reads even the clearest explanation of a technique, reading is not a complete substitute for working problems. Those interested in gaining a thorough understanding of game theory will need to supplement BG&P with another book. Unfortunately many comprehensive game theory texts are dense and forbidding.FN2 But an excellent supplement to BG&P would be Robert Gibbons's Game Theory for Applied Economists.FN3 Although it does not focus on legal examples and does require more mathematical skills than BG&P, it is similarly clear and well written, and it includes a wealth of problems. An additional advantage of this book over competing texts is Gibbons's extensive use of examples from areas of economics besides industrial organization: the book will interest people who do not find antitrust fascinating.

A law teacher could also use BG&P as a text for a class on Law and Game Theory. Why teach such a course? For the same reasons one teaches Law and ________ [name your favorite social science]. (If you aren't convinced of the usefulness of such courses already, I won't try to convince you here. BG&P might convince you, however, for they offer a persuasive defense of modeling techniques throughout the book.) If the goal of Law and Game Theory is simply to show students the usefulness of game theory and convey its basic concepts, this book would be an excellent text. The lucid, nontechnical writing and the many legal examples would make it a wonderful teaching tool. Its main flaw as a teaching tool is, again, the lack of problems (not to mention a set of solutions for the professor!)

Whether one is planning such a course or simply seeking familiarity with game theory, a strength of the book is the wide range of subjects used as examples. In addition to such traditional law-and-economics subjects as torts and antitrust, the book includes contract, labor law, employment law, environmental law, and bankruptcy examples. It will provide useful illustrations for anyone interested in adding some game theory to an existing substantive law course as a perspective. One of the best of these discussions is an extended analysis of Peevyhouse v. Garland Coal and Mining Co.FN4 It begins with the information problems involved in the case and the role of default rules (drawn largely from the 1992 article by Gertner and Ian AyresFN5), showing how legal rules influence the bargaining between parties. BG&P then develop an extended example that not only illustrates the concept of the Rubinstein bargaining game but shows how legal rules can be effectively modeled as exit options in such games.

BG&P also attempt to show "those interested in game theory a fertile and largely unexplored domain in which its tools have many applications" (xi). Here they are less successful. While they carefully use legal examples to illustrate each new concept and include examples from many areas of the law, I doubt whether a nonlawyer would come away from the book understanding the law well enough to apply game theory to it. The law enters into some of the examples primarily as the source of facts that illustrate a problem. Once the analysis is under way, the law vanishes, as in the discussion of General Foods Corp. v. Valley Lea Dairies, Inc.FN6 After relating the essence of the dispute, BG&P note: "Much in this case turned on its peculiar facts" (68). When the reader finally reaches the discussion of the legal rule five pages later, the analysis centers not on the case but on UCC provisions. Simply drawing from the facts of a case to illustrate an example shortchanges the law portion of the book. The title accurately reflects the book's strengths: it's Game Theory and the Law, not Law and Game Theory.

Game Theory and the Law belongs on the shelf of any law teacher interested in law and economics or in understanding strategic behavior. Those already familiar with game theory will benefit from the wide range of examples; those new to game theory will find the book an accessible introduction.

1. G. Steven Bradford, As I Lay Writing; How to Write Law Review Articles for Fun and Profit, 44 J. Legal Educ. 13, 21-22 (1994). Return to Text

2. E.g., Drew Fudenberg & Jean Tirole, Game Theory (Cambridge, Mass., 1991). Return to Text

3. Princeton, 1992. In the interest of full disclosure I should note that Gibbons was one of my dissertation advisers. He also taught the basic game theory class I took in graduate school, using the book manuscript as a text. Return to Text

4. 382 P.2d 109 (Okla. 1962), cert. denied, 375 U.S. 906 (1963). Return to Text

5 Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 Yale L.J. 729 (1992). Return to Text

6. 771 F.2d 1093 (7th Cir. 1985). Return to Text

Copyright 1995 Association of American Law Schools


Copyright 1995-2000, Randal C. Picker