Wednesday, August 13, 2008

Freak, minus economics

Steven Levitt is freakishly smart. But his reaction to the Coase theorem in action at NYU Law is simply freakish:
Steven LevittClass assignments are made by lottery. There are no waiting lists for classes. This gives students an incentive to sign up for the most popular classes, even if they don’t want to take them. If they win a seat in one of the most sought-after classes, they can work out a deal to sell their seat to another student. . . .

In the end, the students willing to pay the most for classes are the ones taking them, which is efficient. . . .

Most likely NYU’s response to this publicity will be to change its policies, hopefully to a bidding system that will also lead to an efficient allocation. I would argue, however, that they should maintain the current system as a means of teaching the students about the Coase Theorem in a way they are sure to learn it.
Levitt's suggestion to the contrary, law school class assignments aren't in the class of things, such as babies and organs, that many people would rather not see bought and sold at market. Not even close.

NYU LawThe freakish portion of Levitt's analysis is his suggestion that NYU retain its class registration system as a way to teach students the Coase theorem. As Levitt admits, a simple bidding system — give each student some fixed, manageable number of "points" — would lead to an efficient allocation of classroom seats. In that sort of scheme, students have an incentive to conceal their bids from each other. The absence of bargaining is the allocatively attractive feature.

By contrast, the swapping of classroom seats among NYU students constitutes a transaction cost in its own right. Because students who covet seats need to discover willing "sellers," and because willing sellers need to meet "buyers," NYU Law's hallways experience a lot of hollering. Then haggling.

The resulting exchange of preferences, seats, and valuable consideration comes at substantial cost. Not least among the transaction costs crippling this system is the erosion of goodwill among students — both toward each other and toward their law school's administration. Its romantic portrayal in the law and economics literature notwithstanding, bargaining is hardly an enjoyable, socially constructive exercise. More often than not, it's simply a pain in the rear. Ask anyone who has ever endured a faculty meeting: the emotional and societal cost of haggling is inversely proportional to the value of the matter in dispute. And when a law school or any other entity with the power to dole out pain subjects members of its community to noisome bargaining over something as modest as the marginal value of one class over another, the collective loss in welfare more than outweighs any pedagogical value in giving students the chance to experience the Coase theorem for themselves.

The bottom line? MoneyLaw's own Belle Lettre has the better reaction to a story first broken by the ABA Journal.


Anonymous Dan Cole said...

Jim, surely you could not have meant to assert that students could "experience the Coase Theorem for themselves." The Coase Theorem cannot be "experienced" by anyone because it is based on the counterfactual of a zero transaction costs world. The real world, as Coase took pains to explain, is one of ubiquitous and sometimes quite high transaction costs. Billions of transctions occur every day but not because the Coase Theorem operates; they occur because the gains from trade exceed the costs, including the transaction costs.

Best regards,

Dan Cole

8/22/2008 10:40 AM  

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