Principal-Agent Problems

As a third example, take principal-agent problems, which arise in most forms of public decisionmaking and in corporations.66 _These

problems come in at least two flavors: the problem of disloyal agents and the problem of misguided but loyal agents. Loyal agents may fail because of calculation disadvantages. Though they are tasked with representing a principal, perhaps a government official representing the public, they miscalculate the principal’s wants. Whether it is a private preference or public norm that is miscalculated depends on whether the principal is private or public, respectively. Disloyal agents, by contrast, may or may not properly calculate the principal’s preferences, but they are distributively impaired. They act at least in part on account of their own preferences in derogation of the principal’s.67 _{For this reason, the problem of disloyal agents is often}

an instance of an arrangement with distributive disadvantage.

Most arguments concerning public and private competency can be translated to a composition of the elements I have identified here. For example, the public owes its advantage in eliminating transaction costs, where it exists, to its resource advantage combined with minimal or nonexistent calculation and distributive disadvantages. The tragedy of the commons presents a case of private distributive disadvantage combined with resource disadvantage. Agency problems result from either distributive disadvantage or calculation disadvantage.

With the tools in hand to analyze choices between public and private institutions, we can proceed to analyze legal systems as primarily ordered by basic institutional choices. These atoms will help us to understand the range of arguments concerning the

66. See, e.g., Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305 (1976),

reprinted in 3 LAW AND ECONOMICS: OTHERAREAS OF PRIVATE AND PUBLICLAW107, 111 (Richard A. Posner & Francesco Parisi eds., 1997) (noting that the principal-agent problem “exists in all organizations and in all cooperative efforts—at every level of management in firms, in universities, in mutual companies, in cooperatives, in governmental authorities and bureaus, in unions, and in relationships normally classified as agency relationships such as are common in the performing arts and the market for real estate”) (citation omitted). 67. Id. at 110 (“If both parties to the relationship are utility maximizers there is good reason to believe that the agent will not always act in the best interests of the principal.”).

classification of law within the resulting taxonomy and the regulation of and within the categories themselves.

IV. IMPLICATIONS

In Part II, I developed a taxonomy of legal systems constructed around discrete divisions of institutional control between the public and private actors. Part III established a language of institutional comparison that can be used to evaluate relative public and private competencies with respect to the basic decisions—lawmaking and enforcement—that underlie legal systems. By changing focus from historical-substantive definitions of legal subjects to functional, institutional ones, the taxonomy makes possible a great many innovations in our study of legal systems. It exposes the relevance of the techniques of the legal process school, and its descendants, for the entirety of legal structure, not just inter-governmental comparisons. In this Part, I begin to explore some of these implications. In particular, there are three types of advancements that I wish to highlight. First, the taxonomy suggests basic principles, or trans- substantive rules, that take on their familiar forms when refracted through the lens of a particular taxonomic category. An example to which I have already alluded, and which I will elaborate below, is the connection between due process and unconscionability, which are particularized expressions of a more basic principle of institutional competency in Constitutional Law. I believe that such basic principles provide a more sensible way to understand our own Constitution and that our focus on particular provisions applicable to historical-substantive, rather than functional, categories has resulted in unnecessary confusion.

The taxonomic categories developed here are highly correlated but not perfectly co-extensive with our law’s historical-substantive categories. Where there is imperfect overlap, there is an opportunity to observe whether the colloquial, substantively defined categories of our law have led us astray. After all, to the extent these categories depart from those of the taxonomy, the categorization is no longer serving the functional purposes discussed here and elides institutional differences between the public and the private. It should therefore come as no surprise that laws in this gap come into tension with a functional understanding of what our law should do. Tort suits for punitive damages and private actions to enforce “criminal” laws are two examples I will explore to illustrate this.

Second, the taxonomy highlights areas of our law that might otherwise seem ad hoc or sui generis. For example, the model explains why the law of charitable trusts appears primarily in the Parens Patriae category. When our legal system is viewed as a

collection of historical-substantive categories, it seems a special case that the state attorney general enforces charitable gifts. The institutional model, however, explains why this is so and gives this area of law a structural role related to the other, more populated categories. The logical, structural map of the taxonomy serves as a reminder of the multitude of options available to us in crafting a legal system.

Finally, the model (a) makes transparent the relevant objects of study within legal systems and the modes of that study and (b) simultaneously exposes the relation between the scholarship of different fields. The taxonomy renders obvious the sorts of questions one would ask and the analysis one would use to compare, for example, property rules and liability rules or criminal law and tort. While the discussion of the first two implications goes a long way toward demonstrating this, I close with a further suggestion of the integrative possibilities of the public/private model. Calabresi and Melamed’s distinction between property rules and liability rules is in fact a structural distinction between public and private control over remedies. This suggests a possible third dimension of our taxonomy, which I begin to explore. The unification of these concepts with the institutional calculus demonstrates further that formerly disparate areas of study can be unified as different applications of the same basic principles.