Monday, September 18, 2006

JC's Life: A Journey in the Incentives of the Law - Part 1

Welcome to the life of John Cautious (JC for short from now on). JC's business is simple: to prepare and to deliver pizzas (cheese with onions) in the lands of Country. His business is so simple, that he is both the owner and his only worker.

It seems old days when he first started the business and got his first order. The excitement of getting this first order vanished as soon as he handed the pizza to his only possible customer and all the retribution he got was a door shut right in his face. He had no one to complain to, for there was no government or any legal courts at the time in Country.

JC is not perfectly rational, but he has the ability to learn. After that event, he decided to hand in the pizza only after having gotten the money for it. And so he did, but as soon as he got the money he realized that Mr. Customer didn't have anyone to complain either, so JC kept both the money and the pizza and drove away.

At this point in time, JC and Mr. Customer reached a really bad situation: the former wanted the latter's money, and the latter wanted JC's pizzas, but neither trusted each other anymore, so they simply stopped trading.

Both agents dealt with this dilemma for a while until a court of law was created. This court had the duty of enforcing both parties promises: JC's promise to deliver the pizza, and Mr. Customer's promise to pay for it. If one party did not fulfill its part, the court had the power to shoot it to death (nowadays the court has become more mild and does not apply such extreme punishment; the effect, however, is the same: that neither party find it worth to not fulfill its promise).

Fables are told these days in Country on how the court of law was created. Some say that JC and Mr. Customer sat down one day and thought of a way to prevent either party from walking away: allow a unbiased third party to monitor their actions. This fable says that they both helped this third party obtain the gun and the bullet that was to be used in case one of them broke his promise.

This is the nicest fable, however. Another one tells the story of Mr. Customer hiring Mr. Mafia to force JC to deliver free pizzas, and another one says that it was JC who hired Mr. Mafia to get free money from Mr. Customer. In either of these cases it seems that Mr. Mafia realized that he was better off by obtaining money from both -rather than just one- of them and ended up acting impartially.

No matter how the court was created, finally JC and Mr. Customer were able to do some business. The court of law successfully eliminated the individual incentives to behave opportunistically and made everyone better off. Formally, this court was in charge of enforcing the promises made by the parties, or of making a contract out of those those promises.

Delivering pizzas eventually became prolific and JC was able to buy a car for his deliveries. Everything seemed to be working perfectly in Country but now the possibility of hitting Mr. Pedestrian became latent. This added all sorts of complications, which we will check in further detail in the next few parts of this story.

2 Comments:

At 9:42 PM, Blogger Unknown said...

Love it! Is this your analogy? I mean the theory behind the emergence of courts and government of course is not but the delivery is superb.

 
At 12:15 AM, Blogger bcj said...

Thanks. Well, the analogy was actually inspired in an actual legal case (Parker v. Dominos Pizza). This case was on vicarious liability, which I haven't mentioned yet, but I will eventually.

 

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