Law and Econ Final Reflection Paper
From Erick Posner’s Corporate Law, there is no objection whatsoever how the aspect of transaction costs is reflected societal mode of tax collection to finance several goods and services. The organization of voluntary economic activities with regards to transaction costs to justify the reasons why various economic activities are conducted within the purviews of the corporate framework rather than individuals. Accordingly, this brings out so explicitly the theory of collective action outlining the fundamentals of material incentives (Posner 533). In his views about the nature of the firm, the initial stage and framework of production organization is the traditional dimensions of the market together with the aspect of the contract law. The second framework underpins the organizational economics and the master-serval law.
As such, the significance of the initial stage is an aspect of negation within the entrepreneurial frame concerning entering an agreement with the pronouncements of quantity, price, quality, and credit terms, among others. Subsequently, the latter stage creates emphasis on how the remunerations are dispensed and out to steer and direct performance within the workforce (Hansmann 20).
However, each of the two stages posits some fixed costs, with the initial contract defining the details of the supplier’s performance within the contract (Posner 535). Apparently, Posner assumes that such might culminate into protracted negotiations and comprehensive bidding processes. In other words, he sees such lengthy negotiations as reputational signals in the contributions that the organization or norms render to business compliance. His arguments conversely demonstrate that the one with the low discounting rates in such bidding procedures is supposedly a suitable trading partner.
So, in the second stage, the firm should establish incentive mechanics, communication, and information costs. This is because; the social norm and law of such firms would dictate the indirect payment mechanism to their workers, thereby leveraging fewer incentives to reduce the costs.
With his signaling model and explanations, it is understandable why some expensive behavioral patterns such as consumption of high quality and costly goods, gift-lifting, and such as are regarded as norms. It is so because, within the firm, the very behavioral patterns reflect the sacrifice of material riches and the chances of its accumulation. To Posner, individuals who involve in such behaviors are concerned majorly with the future payoffs rather than the bad aspects of exaggeration of discount rates (Hansmann 20). However, various norms, like the corporation within the contract, for some reason or another, is a reflection of trivial costs imposition. So, with his signaling model, the explanations of their conformity are extensively clear.
Some persons might even take part in cheap contracts and actions for the mere fact that their deviancy (deviation from the normal) is perceptually punishable by others. The punishers tend to signal their patterns by taking part in costly contracts or actions to shun others who act in peculiar ways. In other words, Posner suggests that anything costly can activate signals.
Notwithstanding such flexibility, Posner’s attempts to render the entire themes of norms into signaling behavior is at least relevant to his very concepts in corporate law. While elaborating on the various types of firms, he suggests that different challenges regarding partnerships are inevitable because of the need to acquire more capital than workers (Posner 534). Therefore, a firm that is devoid of external capital can be rendered as a partnership but not as a corporation. It is so because corporations fundamentally overcome the challenges of partnerships of raising resources from external sources.
His challenge is founded on the universal view that behavior within settings of collective action is affected by the failure of the theory to assess its repeat actions. In one encounter, best described as ‘one-shot prisoner’s dilemma,’ the maximizers of rational wealth may undergo the self-conquering incentives that Olson and different conventional theorists have posited. However, the situation might turn out quite different in circumstances where there is anticipation of the encounter between these individuals over and over again. In such a situation, every person may think that their decision to ride freely or contribute in a given meeting could impact the probability that the other persons will mimic or emulate that same behavior in their next meeting. In doing so, both of them may decide to forego the short-lived physical advantage of presently having a free ride in the hope that they will enjoy the material benefits with which cooperation throughout future interactions are associated. The systematic development of this insight was made by Robert Axelrod, a political scientist (Posner 533). Axelrod used computer simulations and several other proofs of ingenuity to ascertain that even the maximizers of wealth will resort to a uniform pattern of cooperative behavior if they foresee an indefinitely long series of future encounters with persons they can keep track of and monitor their behavior settings of collective action.
Posner distinctively refines the theory advanced by Axelrod in his report of reputational signaling. Posner assumes that a person will find another person desirable as partners in a beneficial group undertaking as far as perceiving them to have low instead of high discount rates. There is a high likelihood that people who revere future payoffs to the same degree or nearly to the same degree as immediate payoffs will forego the instant benefits of cheating or shirking than those who discount the future in excess. They would probably do this with the expectation of getting the long-term profits related to trading opportunities in the future. In the same vein, an individual will want to acquire a name for subordinating long-term to short-term payoffs through participating in practices that demonstrate with conviction a disposition such as that in the presence of others. As per Posner, a social norm is merely a sequence of behavior that indicates a low instead of a high rate of discount in this way (Cheffins 5). If there is a signal created by, among other things, adding to collective goods of numerous sorts, then the necessity of depending on law- with all its associate pathologies and costs- might be minimized by a robust regime of social norms a problem-solving tool of collective action.
But that is the story as told by Posner. What should be considered then is whether the story is reliable factually or realistic behaviorally. As it is, there seems to be no social science data presented by Posner to back his model of reputational signals in social norms. He openly acknowledges that such data does not exist. Nonetheless, the reader is invited to credit Posner’s account, provisionally at least, based on its ability to develop explanations for a vast scope of easily seeable phenomena as well as to generate hypotheses that can be tested empirically.
Work Cited
Cheffins, Brian R. “Corporate governance since the managerial capitalism era.” Business History Review 89.4 (2015): 717-744.
Hansmann, Henry, and Reinier Kraakman. “The essential role of organizational law.” The Yale Law Journal 110.3 (2000): 387-440.
Posner, Eric A. “Law and social norms: The case of tax compliance.” Virginia Law Review (2000): 1781-1819.
Posner, Richard A. Corporate bankruptcy: economic and legal perspectives. Cambridge University Press, 1996.
Williamson, Oliver E. “The theory of the firm as governance structure: from choice to contract.” Journal of economic perspectives 16.3 (2002): 171-195.