The daycare center, the real estate agent and the bagel: a legal reading of Freakonomics (1st part)

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The tone of Freakonomics is set right from the cover (French edition, Denoël, coll. Impacts, 2006). The potential reader is challenged by a series of questions: “Why do dealers live with their parents? What is more dangerous, a swimming pool or a gun? What do a teacher and a sumo wrestler have in common? Let’s make it clear to our most teasing readers that the last answer is not “they sleep all the time.

So here are the kind of riddles that the science called Freakonomics, a nice word suitcase invented by the authors, composed of freak (wacky) and economics (the economic sciences), proposes to solve. If the object of the study is far-fetched, the authors’ C.V. is not. S. J. Dubner, writer and journalist at the New York Times, lends his pen to S. D. Levitt, professor of economics at the University of Chicago, doctor of MIT, recipient of the prestigious John Bates Clarck Medal, often described as the most prestigious distinction in the discipline after the Nobel Prize in Economics.

The ambition of Freakonomics is to apply econometric and statistical tools, and generally speaking, analytical methods usually used in the field of economics, but in an original way. It is a question of asking unexpected questions, using an angle of attack or a starting point that has been neglected in more academic approaches. The objective is twofold: on the one hand, the demonstration will be entertaining and will attract a vast readership; on the other hand, it may lead to a result that is truly original scientifically – at least that is the authors’ hope. In any case, the first objective has undeniably been achieved, as the book quickly became an international bestseller (several million copies sold, a sequel, and even a film adaptation in 2010).

It so happens that several of the demonstrations presented in the book are likely to challenge the jurist. General theory, criminal law, contract law or the law of evidence are thus solicited. Here, therefore, is a proposal for a legal reading of Freakonomics.

Law and Morality in Israeli Day Care Centers

Freakonomics reports on an experiment conducted in ten daycare centers in Haifa, Israel (p. 33ff.). The problem was that parents were supposed to pick up their children no later than 4 p.m., but were frequently late, forcing staff to stay longer. For the management, this meant extra worries and extra pay for the employees. An economic solution was proposed: make the latecomers pay a fine. The impact was dramatic. Prior to the introduction of fines, each daycare centre was experiencing an average of eight delays per week. As soon as the system of fines came into effect, this number…more than doubled to about 20! It was a complete failure.

The authors note that the amount of the fine was small: a delay of more than ten minutes resulted in a penalty of $3 per child, compared to the $380 already paid monthly to the facility. But one would have imagined that a fine that was too low would only be ineffective… when it is clearly counterproductive! Why is this? Because by doing so, one would “substitute an economic penalty (the $3 fine) for a moral penalty (the supposed guilt of the late parents)” (p. 38). Parents who arrived late under the old system were punished with a frown and, above all, in their own conscience (“I prevented this poor wage earner from going home,” “I didn’t play the game,” etc.). In the new system, there is a “quid pro quo” for delay. The parent considers the crèche service as paid, or the inconvenience caused as compensated. The last stage of the analysis: if the fine is so small, it is, the parents imagine, that the fault committed is of negligible seriousness. The authors demonstrate this: if the fine system is suddenly abolished, the delay rate remains high and does not return to its initial level! Finally, the authors speculate that a high fine would be more effective than a low fine, but that it would probably provoke protests, without necessarily being more effective than the “free” delay system.

The problem of the distinction between law and morality is well known to jurists. It is usually taught that the rules of law, morals, politeness or religion can have many points in common: they are formulated in a general and impersonal way (which makes them “rules”), they can all aim at the organization of a harmonious social life, they can all be formalized (in codes, collections, treaties). The real difference lies in the sanction. Failure to respect morality provokes the torments of conscience; failure to respect religious rules, divine wrath; failure to be polite, social reprobation. The rule of law alone benefits for its sanction from the powerful coercion of the state. The fine due to the crèche constitutes a contractual sanction, comparable to a penal clause. If this contractual debt is not paid, the creditor can turn to the courts, then benefit from the assistance of the police force.

The rules of Law and morality are thus quite distinct. To judges of the merits who would render a decision on the grounds that it is “just”, the Cour de cassation would reply that “equity is not a source of Law” (e.g. Cass. soc., 13 Feb. 2007, appeal no. 05-41055, unpublished). But if the rules of law, morality and even religion are quite distinct and independent of each other, they often push the individual in the same direction (“thou shalt not kill”). It even happens that the rule of law may voluntarily, from time to time, choose to rely on a notion of morality (among many examples, article 1134 of the Civil Code and the execution of contracts “in good faith”; article 1135 and “equity” as a complement to the stipulated obligations). With the experience of the Israeli day-care center, Freakonomics reminds us that the relationship between law and morality is not confined to the two registers of independence and collaboration: one must add to this the struggle, the exclusion of one by the other. Bringing in law can mean bringing out morality. Systems of sanctions do not necessarily accumulate, but can be chased away, and one can ultimately lose rather than gain in effectiveness. We then recall the words of Dean Jean Carbonnier, in his famous writings on “lawlessness”: “And it would be a fine result if our men of government would agree to take advice from a few maxims, inspired by the hypothesis and yet reasonable, such as ‘Legislate only with trembling,’ or ‘Between two solutions, always prefer the one that demands the least law and leaves the most to morals or morals'” (J. CARBONNIER, Flexible Droit. Pour une sociologie du Droit sans rigueur, LGDJ, 10th ed. 2001, p. 50). And the great author pleads for the insertion of an “article zero” within the Civil Code: “the love of law is reducible in case of excess” (p. 51). In the same way, between private individuals, renouncing the law on certain points and leaving room for morals may prove to be a good calculation: such could be the lesson of the Israeli daycare case.

The real estate agent, gravedigger of contractual solidarity?

Every jurist has read or heard one day this quotation from René Demogue, according to which the contract is not the result of a balance of power, where each tries to wrest from the other a more interesting consideration, but on the contrary “a small society where each must work for a common goal which is the sum of the individual goals pursued” (R. DEMOGUE, Traité des obligations en général, t. 6, 1931, n° 3). From this idea was to emerge a current of thought, which finds extensions even in contemporary doctrine, and which is called “contractual solidarity”.

But excessive optimism is generally tempered by explaining that there are several categories of contracts. Exchange contracts” are zero-sum games, that is to say that what one party wins, the other loses; the archetypal example is the sale; one should not expect that between the parties to such a contract, fraternal feelings and a desire to make the interests of one’s partner triumph will arise spontaneously. But there are also “organization contracts”, of which the company or association are the best examples, and whose very principle implies the sharing of common interests: the game is a positive-sum game, where everyone can win and is encouraged to collaborate. Finally, a third category would be halfway between the preceding ones: the “contract of common interest” or “contract of cooperation” which, without going so far as to present an ideal convergence of interests like the partnership contract, would leave some room for ideas of contractual solidarity: each, in pursuing his own interest, will simultaneously defend the interest of the other (on all these categories, V. e.g. F. TERRE, P. SIMLER and Y. LEQUETTE, Les obligations, Dalloz, 10 th ed. 2009, n° 41 et seq. ; n° 78).

The mandate to sell a given property to a professional in the sector, with the collection of a commission proportional to the sale price, theoretically constitutes a good example of a “cooperation contract”. Freakonomics, however, dismantles this idea (p. 21 ff.). Situated, of course, in the context of the American system, the book explains that the commission, usually 6%, is commonly divided between the seller’s agent and the buyer’s agent. Then the seller’s agent pays half of his 3% to his agency, and thus personally retains 1.5%. Thus, if he manages to sell a house for an additional 10,000 dollars, the net gain for the seller is 9400 dollars, but the agent’s personal gain is… 150 dollars. The authors’ intuition is that it will sometimes be possible to sell a house for $310,000 rather than $300,000, provided that the property is left for sale longer, that some steps are taken, that additional ads are placed in magazines… all efforts that the agent may not want to make for $150. He will want to achieve an optimal ratio between the time spent on the file and the remuneration received.

To validate their intuition, the authors had the excellent idea of comparing the statistics concerning sales by real estate agents on behalf of clients with those concerning agents selling their own property. The result is that the agent leaves his own property on average 10 days longer on the market, and obtains a price 3% higher, or the famous 10,000 dollars more if we take the example of a house at 300,000 dollars. What he wouldn’t do for you, he would do for him!

Should we see this as a defeat of contractual solidarity? Not necessarily. It is certainly proof that each contractor will spontaneously pursue his personal interest, and only him. But one can aim for a minimum consideration of the interests of the contractual partner as an ideal, which one must seek to impose in French law, if necessary with authority. Freakonomics explains that if the agent can make people believe that he is proposing the best selling price in the seller’s interest, when in reality he is proposing the best for himself, it is because he benefits from an asymmetry of information: the customer does not know the market, and is obliged to trust an “expert”. But the existence of information asymmetries is not just an economist’s concern: it is the whole point of the vigorous development of information obligations and advisory duties in French contract law. More generally, the obligation to perform the contract in good faith is obviously the privileged instrument of the contractual solidarist, well aware of human nature, but desirous of not always giving free rein to the pursuit of selfish interests.

The cheese bagel, a new indicator of delinquency

The word “bagel” does not appear in the illustrious dictionary of the Académie française. Fortunately, the Larousse indicates that it is a “bread roll of Jewish origin, in the shape of a ring” (Online Dictionary).

Photo of Bagel by Politikaner, Creative Commons license, Wikimedia Commons

Freakonomics suggests to see it as a catch-all (statistic). We are told the sympathetic story of Feldman, who made his fortune touring businesses in the Washington area with his cheesy bagels (p. 67ff.). He would drop off the tasty snacks in the cafeterias, accompanied by a small basket for collecting payments, and indicating the price on a small sign. By trusting his customers to be spontaneously honest and play the game, he did not have to stand next to the products to keep an eye on them, and could continue his tour. As the man kept meticulous accounts in large notebooks kept indefinitely, it is possible to retrieve a history of the “collection rate” by company and by date. Because the volume of data is so large, Levitt says it allows for meaningful statistics on what we might be tempted to call bagel jacking.

The entrepreneur’s experience has led him to consider a rate above 90% as an indicator of an “honest” business; a rate between 80 and 90% as “annoying but acceptable”; a rate below 80% leads him to bang his fist on the table. What do we learn by studying these statistics? That following the September 11th attacks, the number of stolen bagels dropped by 15%. The authors wonder about the interpretation of this figure: should it be interpreted as a “patriotic impulse”, or some “general surge of empathy” (p. 72)? It is then established that small companies (a few dozen employees) are more honest than large ones (several hundred employees). Again, the figure is objective, but the interpretation is necessarily speculative. There would be a “village effect”: in a small community, the thief will be more easily identified, and will suffer more from the damage to his reputation. Perhaps the most amusing information is the following. In some companies, staff categories are separated into different floors, with the core staff located below the executive floor, which in turn is located below the managers, with separate cafeterias. The “bagel test” would tend to show that smaller employees are more honest than executives and managers – when they are obviously poorer. The authors of Freakonomics put forward this hypothesis, although it is not clear whether this is a joke: “their ability to cheat may be precisely what earned them their place as executives” (p. 74).

This is undoubtedly one of the major criticisms that can be leveled at Freakonomics: mixing objective data, which are often of greater or lesser interest in themselves, with somewhat sensationalist interpretations that are necessarily subjective. The passage on the bagel dealer is introduced as follows: “It so happens that Feldman’s fortuitous study gives us a glimpse of a form of cheating that has long haunted researchers: white-collar crime. (Yes, however small, theft from the bagel dealer is a white-collar crime…). Despite all the attention paid to corrupt Enron-type companies, little is known about the details of this delinquency. Why is this? Because there is a lack of data […].

Without being a criminologist, we can find the parenthesis in this tasty quote: a bagel theft is a white-collar crime. The parallel is even explicitly daring with very serious offences. The authors repeatedly mock the famous “folk wisdom” in their book, but they tell us here as she does: “Whoever steals an egg, steals an ox”. However, before moving from stealing the egg to stealing the ox, there are a number of obstacles, not only logistical – such as renting a high-volume commercial vehicle and a hoist – but also psychological. It is easy to convince oneself that one is causing negligible harm to the unfortunate owner of the egg. It will be more complicated with a solid bovine. For those who are more sensitive to legal constraint than to the sirens of conscience – we find a familiar distinction -, it will seem obvious that if all theft is theoretically punished by the same penalty by the Penal Code, it is only a maximum, and the penalty actually pronounced will not be of the same order. The same reasoning and the same qualitative leap separates the bagel from the sophisticated Enron-type accounting fraud. The comparison suggested by Freakonomics is not so much an attempt at humour as an attempt to spice up the demonstration to keep the customer’s attention, at the risk of making the dish somewhat indigestible. The fault is all the more serious since the authors pride themselves on working, in this book, on a fine analysis of the “incentives” that are at the basis of our behavioral decisions: in this respect, the example of the real estate agent was more convincing. Moreover, the basic intuition – that the agent has no incentive to get the best price for the property sold – was corroborated by objective data – those concerning the sale by these agents of their own houses.

So there is chaff in Freakonomics, but there is also good grain. We will continue to verify this in the next part of this article, in which we will finally learn what a sumotori and a teacher have in common.

(This article originally appeared on the CEPRISCA website)

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