[MUSIC] Ex Ante and Ex Post mean respectively from before and from after. The Ex Ante and Ex Post perspectives are always defined with regard to some event that might occur or has occurred. For example, think about how you should respond to learning about a cheating spouse. The Ex Ante perspective asks before the cheating has occurred, before the fact, what will be a spouse's best response to cheating? From this perspective, you might be more likely to want to threaten harsh consequences to deter your spouse from cheating. In contrast, the Ex Post perspective asks after the cheating has occurred, after the fact, what is the best response? Ex Post, you might be drawn to less harsh reactions. Since it's no longer possible to deter what already has occurred. Ex Ante, we might want to deter unauthorized immigration with the threat of punishment and deportation. Ex Post, we might prefer a path to citizenship. These perspectives resonate in different ways with our system three core lawmakers, jury's, judges, and legislators. Jury's are placed in the Ex Post position. They are assembled to adjudicate what should happen to litigants after the supposed wrong has occurred. The quality of mercy more often resonates with the Ex Post perspective. In contrast, judges sit and announced rules that govern, as precedent, the future parties, as well as, the current litigants before them. And are more likely to adopt rules that make sense from the Ex Ante perspective. For example, Ward Farnsworth, in talking about the Ex Ante, Ex post distinction, uses an Illinois Supreme Court decision concerning a bank thief, who went into a bank put a gun to the head of an innocent customer and demanded that a bank teller give the thief $5,000, or the thief would kill the customer. The teller refused, the thief, executed the customer, and the customers estate sued the bank. The Ex Post perspective here focuses on the bank's behavior after the threat has been made. To get used to focusing in on the event at issue, you should become comfortable using phrases like Ex Post the threat, was the bank's behavior reasonable? Given that a threat has occurred, Ex Post of the threat it seems unreasonable for the teller as the banks representative to refuse the demand. After all, a life is more valuable, much more valuable than $5,000. But the Illinois Supreme Court, in deciding the case in favor of the bank, took much more of an Ex Ante perspective. Looking at the policy ex Ante, the threat, the court reasoned, quote, in this particular case the result may appear to be harsh and unjust, but for the protection of future business invitees, we cannot afford to extend to the criminal another weapon in his arsenal, unquote. From the Ex Ante perspective, denying liability reduces the criminal arsenal, because future criminals cannot by killing customers threaten to impose liability on banks, if the banks refuse to give the robber money. Denying liability, in this case, might deter future bank robberies, and thus protect future business invitees, that is future customers. Judges are unique in our legal system because their job focuses them to engage in a mixture of Ex Post and Ex Ante decision making, deciding the case before them, as well as, creating precedence that will influence the decision in future disputes. Indeed at times judges will announce rules that apply only to perspective disputes, meaning that they apply one rule to the litigants before them, and a different rule will apply to the future litigants. Legislators and regulators are positioned dominantly to propagate rules that will apply prospectively, and thus naturally are likely to take the Ex Ante perspective. Hence, legislators are keenly to attuned to Ex Ante deterrence arguments. But even here, legislatures might pay attention to how stiff criminal penalties have led to high fiscal and social costs of mass incarceration. And even legislatures might therefore take Ex Post considerations into account, even when choosing prospective rules. In contractual settings there is often more possibility of agreement Ex Ante. The creation of the contract, the next post, its formation. For example, imagine a far fetched hypothetical. You own Walton's Mountain, and have entered into an agreement to sell timber to cut up industries, one of five wood mills. The standard mill contract calls upon you to cut the timber, and float the logs down the river to the mill. You've chosen to contract with Cut Up Industries, even though it is furthest downstream, and therefore harder to get the logs downstream, because it has offered you, by far, the most money for your timber, $10 per cubic foot. At the appointed time, you cut and float the logs downstream, and you tinder the logs to Cut Up Industries. But now Cut Up is saying they don't have to pay you because the sun is in their eyes, quote, unquote. And this somehow makes it more difficult for them to mill your timber. They're only willing to pay you $3 per cubic foot, much lower than any of the other mills offered, and much lower then what Cut Up promised to pay you. But because Cut Up is further downstream than any of the other mills, it's not feasible to take your logs to another mill and you reluctantly accept the $3 but sue Cut Up for breach of contract. Cut Up defends by arguing that the sun was in their eyes, and that made buying your logs impractical. The court, now, needs to decide whether to recognize this crazy sun in the eyes contractual defense. Think about the likely briefs that the court will receive from you, from Cut Up, and from your two respective industry groups. It's easy to imagine that Cut Up will argue in favor of such a defense, and that you will argue against it. After all, there's money on the line, and each of you would prefer to have it. But what about the respective industry groups? What is the Mill Association and the Timber Association likely to argue in their friends of the court amicus briefs? Well, the Timber Association, like you, will argue that this sun in the eyes defense makes no sense. But the surprise is that the Mill Association, the association representing other Mills, might very well join them. While some students will think that the Mill Association will always side in litigation with one of their members, the Mill Association has multiple members to worry about. The mills, who want to enter into future milling agreements with timber owners, might not want the court to recognize a sun in the eyes defense. If this defense is inefficient, then the defense might reduce the join gains of trade. It might hurt mill owners. More concretely, timber owners might start demanding that mills pay in advance, and paying in advance, in turn, might subject mills to the risk that the logs floated down streams will be poor quality. The litigants making arguments about a past dispute are naturally in the Ex Post position, and unavoidably in opposition about who should bear the cost of particular risks. But the trade association cares more about the future parties, who are in the Ex Ante position. From the Ex Ante position, parties are much more likely to embrace legal rules that enhance the joint gains of trade. When we talk about what the future parties want, we're essentially taking the Ex Ante perspective. Ex Ante perspectives are particularly prized in laws and economics. One of the worst criticisms a law economic professor can hear is to have someone point out that her analysis failed to consider what is efficient from the Ex Ante perspective. And while law and economics uses the Ex Ante perspective to analyze efficiency, in another lecture, I'll be talking about how John Rawls used a more radical Ex Ante perspective. What is called being behind the veil of ignorance to analyze equity. Let me end with a cautionary tale about thinking from the Ex Ante perspective. Imagine that Professor Heart has just arrived at Truth University for a year long visit. He's out to dinner with Professor Econohead who mentions that she is planning to sell her eight year old family car when the school years begin. She figures she can take it down to the university quad, and quickly be able to sell it to an incoming student with no muss or fuss for $2500, which is $500 less than its Blue Book value. Professor Heart interjects that he is interested in buying the car, and asks if he can have a mechanic inspect the car. Econohead is reluctant. She says, I'll let you borrow the car, but only if you won't tell me if you find anything wrong with it. You don't have to buy it for $2500. Just promise not to tell me why you're not buying it. Professor Heart agrees and takes the car to his mechanic. The next day Professor Heart calls Professor Econohead, and they have the following conversation. Heart, I'm sorry but my mechanic found something with your car. Econohead, don't tell me. Heart, it's a safety problem. Econohead, don't tell me. Heart, well that doesn't seem right, but okay. After this conversation, should Professor Econohead be liable if he sells the car without disclosing the safety problem, and the buyer is subsequently hurt by the latent condition? The answer to this question is a pretty straight forward, yes. You sold a car with knowledge that it might have a safety problem, you're gonna have a liability, but a harder and more interesting problem is to think about the legal responsibility of Professor Heart. Professor Heart promised not to tell if a mechanic found something wrong. How should the law treat the breach of that confidentiality promise? One response is to hold that the non disclosure agreement should be unenforceable as against public policy. Professor Heart should be free to disclose any negative information without risking legal liability. But this result does not help make the world better when judged from the Ex Ante perspective. If the non disclosure agreement, is non-disclosure agreements, which basically said that, remember, Econohead would allow his car to be inspected only if Heart promised not to disclose negative information. If that kind of non disclosure agreement is unenforceable, then Econohead would not have lent her car. She would have simply sold the car to some student on the quad, who would be in the same situation of driving the car, without knowing about the safety defect. It might be wiser to enforce the non disclosure agreement, and to hold Professor Heart liable if he failed to disclose a safety defect. If the mechanic found a safety problem Heart would have to either pay a small amount roughly equal to the cost of repairing the safety problem for breaching the promise of non disclosure, or pay a much larger amount for withholding the valuable safety information. In forcing the non disclosure agreement, might thus induce Heart to disclose and pay Econohead's small damages. Notwithstanding the possibility of liability, Heart might still enter into this kind of agreement. Heart would get the benefit of knowing whether the car was in good condition, and might not face any liability if the mechanic said that the car was fine or only found non safety problems, such as the radio being broken. Ex Ante analysis might suggest that enforcing the non disclosure agreement, and coupling breach damages with higher tort damages for non disclosure of safety concerns, would produce a more efficient and safe equilibrium. But, very few people are willing to go this far in embracing Ex Ante thinking. Absolving the bank for the tellers unwillingness to pay off for a money or her life threat is one thing, but holding someone liable for non disclosure of a safety concern is a bridge too far. Thus, while law and economics people tend to strongly prefer the Ex Ante analysis as a descriptive matter, our legal regime in different context displays a mixture of the Ex Ante and Ex Post analysis in its decision making. Here's a final and much simpler puzzler for you to ponder from the Ex Post and Ex Ante perspective. If the purpose of exams is to get students to study the material, then on the day of the exam, after the studying is done, should professors make exams optional? [MUSIC]
