part I

CHAPTER 1

 Difference between primary and secondary law.

Characteristics of a legal rule:

- General Problem: Ambiguous
- Stable  Problem: No quick changes
- Prospective (retroactivity only applies in criminal law when it results in a benefit for the subject)
- Clear (If it’s not clear enough, judges come in)
- Congruent (all parties interpret it the same way)

Basic functions of the law:

- Providing legal certainty
- Facilitating planning
- Maintaining order and keeping the peace

Public law (State vs individual): Criminal law, Finance law, public labor law, Administrative law,
Constitutional law.
Private law (Person vs person): Civil law (family law, commercial law), Private Labor law.

COMMON LAW (UK except Scotland, USA except Louisiana, Canada except Quebec, India, Australia)
- It originated in England in 1066 with the king Henry II.
- Precedents: can be binding (from a higher court) or persuasive (from a court at the same level or lower,
used as support for you arguments)
- Until 1535 there were Yearbooks, from then on Reports, which are more organized.
- One of the biggest problems is that bad norms are difficult to change (you might have a bad precedent
from 1800 that’s still used in court)
- Additional sources of law: legislation (e.g: how to become a judge), custom, conventions.

CIVIL LAW (Predominant in Western Europe)

- Has its origin in the codification process occurred in Europe, at the end of the 18th century.
- Influences: Roman law, Canon law, Germanic law, Local regulations.
- It makes very little use of juries, only for very serious cases.

Rule of Law (Estado de derecho): Recognition of fundamental principles and values stressing human
dignity.

SOCIALIST LAW: Originated in 1917, based on codified Marx/Lenin ideology, very punitive. Uses quasi-
jury system (1-3 professional judges and 2-4 people’s assesors).

ISLAMIC LAW (Sharia): Consist of Quran, commentary and case law. Mix between adversarial and
inquisitorial, no precedents, no juries.
 CHAPTER 2: SPANISH POLITICAL AND LEGAL SYSTEM

PARLIAMENT: It’s divided in 2 chambers, who work in plenary sessions and commissions:

 Congress of Deputies (Article 68):

- Role: Invests the prime minister, makes laws, makes budgets, controls the
Government, proposes candidates for other constitutional organs.
- 350 members (2 congressmen per district and the other 248 distributed by Hondt rule,
which over represents big parties. )

 Senate (Article 69):

 266 members with equal distribution of the provinces (Voters vote 3 candidates of their
province, the 4 most voted are elected).

Legal Hierarchy: Constitution  Laws  Regulations Orders.

Distribution of domains between the State and the Autonomous Communities: Can be found in Articles
148 and 149. Autonomous Communities are allowed legislative and executive power (no judicial), and can
organize their own institutions, territory and finances.

Spanish Constitutions: La Pepa, 1812  Republican Constitution 1931 (separation of powers, female
vote, laic state)  Actual, 1978

Constitutional Rights:

 Fundamental (protected since 1978 Constitution): Civil, social, political.

 Non fundamental (not enforceable): General principles of social and economic policy.

Organic Laws: Deal with important matters (e.g. education) and require an absolute majority of the
Congress.

Ordinary Laws: Deal with all the matters not reserved to organic laws and require a simple majority.

Regulations: Lowes status than laws. They develop existent law, regulate unlegislated matters, create or
modify citizen’s rights and duties and organize administration activities. There’s different types: Decrees,
orders, instructions or orders of regulation (circulares).

Customs: Only applicable when there’s no applicable law and is not contrary to morals. When claimed, its
existence, content and scope need to be proven.

General Principles of Law: Basic rules that reflect the convictions of a Community about their organization
(e.g: dignity and respect to the person). They are only applicable in absence of law and custom.

Soft law: Recommendations that parties are “pushed” to comply with (e.g. corporate governance).
 U.S. COMMON LAW

The U.S. Constitution establishes the federal government and enumerates its powers. Powers not given
to the federal government are reserved to the states.

Legal Hierarchy: Constitution > Statutes > Regulations > Local law.

Executive orders: They’re issued by the President or Governors and don’t need to be approved.

CHAPTER 3: EU LAW AND MONETARY INTEGRATION

France, Germany Italy, Luxembourg, Belgium and Netherland were the founders of the EU. Spain joined in
1986. Today there’s 28 members.

Treaty of Rome (1957): It created the EEC (European Economic Community) and the EURATOM (atomic
energy association). It established the Freedom of movement and created the custom union and the
European Comission.

European Monetary Sytem (1979): It was an arrangement with the objective of creating a basket of
currencies, preventing inflation movements above 2.25% (6% for Italy). It was a preparation for the
currency union.

Single European Act (1987): Revision of the treaty of Rome. It completed the internal market, with the
motto “one market one money”.

Treaty of Maastrich (1992): It introduced the concept of the three pillars.

- First Pillar: Matters EU could decide, single market (basically today’s EU)
- Second pillar: Common foreign and security policy (cooperation but with sovereignty)
- Third pillar: Police and judicial cooperation in criminal matters.

It also started the preparation for the EURO and introduced the concept of European citizenship.

Treaty of Amsterdam (1997): It had the first social chapter, which was a big step; it created the Central
Bank and it included the 3rd pillar in the European Community. Also, it became obvious the “democratic
deficit” (the Parliament doesn’t create rules) and they started to think of expanding to Eastern Europe.

Treaty of Nice (2001): 10 countries were about to enter the next year and there was a need to
consolidation and reform.

(Romania and Bulgaria entered in 2007 because EU needed cheap labour. Serbia was denied entrance for
having aggressed Bosnia in the war.)

Treaty of Lisbon (2009): Formed by the TEU and the TFEU. It reformulated the failed European
Constitutional Treaty (2004), eliminating the flag, the anthem and the constitution-wording so it could be
accepted. EU became a member of the European Convention of Human Rights (in addition to the
countries independently).

Requirements for entering the EU:

 - Inflation not higher than 1,5% of the average of the 3 best performing countries.
- Deficit lower than 3% and debt lower than 60%.
- 2 years mechanism for new exchange rate.
- Long-term interest: 2% of the lower inflation rate.

Stages of the economic integration:

1. Free Trade Agreement: No tariffs and reduced non-tariffs barriers.

2. Custom Union: Common external tariff.
3. Common Market: Free movement of capital and labour.
4. Economic Union: Common economic policies and institutions.

Fundamental Principles of EU: 1.Non-discrimination, 2.Mutual recognition, 3.EU Legislation.

European Institutions

European Commission (28 members): President, 1st vice president (high representative for foreign affairs
and security) and 6 vice presidents. It represents the EU. It also administers and implements EU
legislation, as well as monitoring its application. It has a monopoly over legislative initiative!!. Meets in
Brussels or Strasbourg.

European Council (30 members): It is composed by the 28 heads of state, the president of the EC and the
president of the Commission. It defines EU’s political direction and priorities. It decides by consensus
(only the heads of state decide).

Council of the European Union (28 members): Its changes its members and the presidency is rotatory,
changing every 6 months. It sits in Belgium. When there’s a matter that needs to be decided, the
ministers of that matter of the 28 countries meet and decide on it.

European Court of Justice: It interprets Community law and ensure members comply with their
obligations. It sits in Luxembourg. It is composed by 3 courts, the most important one being the Court of
Justice which is formed by 28 judges and 11 advocates general (the ones who take the case and go step
by step deciding how thing need to be solved but don’t make the final decision).

European Parliament (751 members): It doesn’t have separation of powers. It sits in Strasbourg

European Central Bank

European Union Powers: They are shared horizontally (among institutions within EU) and vertically
(between EU and member states).

 Executive  Council of the European Union, European Council and European Commission.
 Legislative  European Council and European Parliament. Implementation shared among the
administration of the Member States and the Commission.
 Judicial EU level courts (includes ECJ) and national courts.
In the TFEU, the Commission retained its monopoly over policy initiation in the first pillar but shared the
right with member governments in the second and third pillars.

Euro area (17 members): Its headquarters are in Frankfurt. The president is Mario Draghi. Its primary
objective is to maintain price stability (inflation low, around 2%), but also has as objectives a high level of
employment and a sustainable and non-inflationary growth.

Sources of law

Primary legislation: Treaties. The current ones are the TFEU (originally treaty of Rome), the TEU (originally
treaty of Maastrich) and the EURATOM.)

International Agreements and conventions

Secondary legislation:

- Regulations (equivalent to Spanish law). They apply directly throughout EU and don’t need to be
transposed into national law.
- Directives: They only specify an objective and a deadline, and then the states decide how to
reach it.
- Decisions: They come from a commission and intended only for the countries involved in the
matter.
- Recommendations

General principles of law

FREE MOVEMENT OF GOODS

Dassonville formula: All rules enacted by member states that can obstruct, directly or indirectly, actually
or potentially, intra-Community trade are to be considered as measures having an effect equivalent to
quantitative restrictions.

Cassis Principle of Objective Justification: excuses non-discriminatory rules as long as they are
proportionate and justified.

Exceptions to free movement of goods:

 Public morality, public policy or public security

 Protection of health of humans, animals or plants
 Protection of national treasures with artistic, historic or archaeological value.
 Protection of industrial and commercial property

Is FMG breached in case a Member State prohibits importation of pornographic magazines? No, on the
grounds of public morality,

Is FMG breached in case a state trade association promotes buying national products? Yes (if it were a
private trade it wouldn’t)
Is FMG breached in case a Member State requires all the bicycles on its territory should be in line with that
Member State’s technical provisions? No, on the grounds of public security or the protection of health
and life of humans.

Is FMG breached in case a Member State prohibits Sunday trading? No, on the grounds of public policy.

Is FMG breached in case a Dutch mayor prohibits other EU-nationals from attending coffee-shops? No,
there isn’t any movement of goods.

FREE MOVEMENT OF SERVICES AND FREEDOM OF ESTABLISHMENT

Difference between temporary provision of services and establishment: A person providing a service is not
bound by competences and control of the national authorities of the state where such service is
performed, while the one establishing a company is.

Part ii

Chapter 4 : incentives

 Ex ante vs ex post: Bank robbery, medicine’s trademark, attorney-client privilege.

Judge-learned hand formula: If the cost of precautions exceed the costs of the losses (multiplied by
the probability of the accident happening), you should let the accidents happen.

Kaldor-Hicks efficiency: Maximize the efficiency no matter who holds the wealth. It’s the one we are
using.

 Thinking at the margin: It means looking at the problems not in a total all-or-nothing way but in
incremental terms. When applying it to populations, it means not thinking about how the average
member reacts to legal pressure but about how the most sensitive members react to it.
Example: maybe a tax on cigarettes doesn’t cause a change in what each person does, but maybe it
produces a change in the group by causing a few members, the least dedicate, to switch from
cigarettes to gum.
Legal rules may not cause changes in everyone’s behaviour, but if they cause some shifts at the
margins, we can say they do their job.

 The single owner. It is the idea of picturing all the costs and benefits of the situation, imagining there
was just one owner, and asking what he would do.
Example: One of your neighbour’s oxen comes onto your land and attacks your goat. You have to
choose between shooting the ox or letting your goat die, and you decide to shoot the ox. Do you owe
your neighbour a new ox? Your neighbour can claim tort of conversion (damages), and you can
argument that you had the right to defend your property. In most of the cases the judge will decide
based on the relative values of the animals: if the ox was worth more than your goat you’ll have to
pay, otherwise you won’t. Why? If you were a single owner you would decide to save whichever was
worth more, since the death of each one would be a cost for you. The law tries to simulate the same
outcome as if there was just one owner in order to prevent waste (killing the most valuable animal to
save a less valuable one). In conclusion, since the ox was probably worth more than your goat, you
should have let him kill your goat and then make your neighbour buy you a new one.
 Legal rules try to make people act the way they would if they cared equally about all the costs and
benefits of what they do.

 The Coase Theorem. Think again of situation with a negative externality where the one who causes
doesn’t bear the cost. The idea is that basically, if parties can negotiate with each other, the situation
will resolve itself: if you’re creating more cost for me than benefits for yourself, I can pay you to stop.
The best way to state the Coase theorem (which is complicated) is that in a world with no transaction
costs, the rights of doing something will flow into the hands of whoever will pay the most for it (and
therefore values it the most). The highest bidder will either be assigned the rights by the law, or he will
buy them from whoever they were assigned to. The initial distribution of the rights would determine
the allocation of gains and losses, but it wouldn’t affect the outcome at all.

However, in the real world there are a lot of transaction costs, so in order to simulate the outcome to
which we would arrive if parties could negotiate costless we have:
- Taxation
- Regulations

 The least cost avoider. Basically, whenever there’s an externality, send the bill to whoever could have
avoided it the cheapest.
Example: Think of the case of a Rottweiler that bites a child. There’s someone that could have very
cheaply avoided it, the owner of the Rottweiler, by putting a muzzle on him. Therefore, we give the
owners of Rottweilers strict liability.

 Administrative costs. It consist on thinking not only about how will a legal rule cause people to act, but
about how expensive will be when courts, and the parties to lawsuit, try to apply it.
Example: I run over your dog with my car. Based on the idea of the single owner, I would have to pay
you whatever your dog was worth to you. Courts usually make the driver pay the market price to the
dog owner, although it is obvious, that the dogs are much more valuable for the owners than the
market price. Why is that? Because trying to figure out the subjective value the dog had for you would
have too many administrative costs.

Part III
trust, cooperation and other problems for multiple
players

AGENCY RELATION

Agency problem: How to get the agent to work as hard as if the asset was his.

There can be various types of conflicts of interest in the agency relation:

 Reduced effort on the part of the agent

 Excessive perks consumption (pollution)
  Entretchment (que haya una brecha entre el agente y el principal que les impida comunicarse y
alcanzar decisiones óptimas)
 Risk avoidance (the agent is scared of being fired)

There’s the theory that shirking wouldn’t be a problem if the compensation was high enough, but it is not
always true since there are more factors than come into play such as how much you like the task.

Moral hazard: The agent takes too much risk because he doesn’t bear the consequences of a bad
outcome.

Agency costs: expense of watching the agent (by the principal) + expense of reassuring the principal (by
the agent) + losses that occurs when those efforts fail

Solutions:

 Monitoring. Problem: high costs.

 Contracts. Problem: conflict of interest since the principal wants to tie the agent’s pay to his
results but the agent would rather be paid regardless of it.
 Ownership of the outcome by the worker (the worker buys from the firm his right to the
outcome. Problems: wealth constraint (very common), risk aversion, and the loss of the benefits
of team production.

Although it is reasonable to think that the stockholders interest is the long-term survival of the firm,
scholars usually say that it is only profit, which leads managers to start profit based policies (like not
investing in I+D+i) that can actually not be beneficial for the long-term.

Incentive problems:

 With monitoring: If you announce that you are going to monitor workers randomly and secretly,
you create incentives to work. However, these incentives disappear if you make public who is
going to be monitored.
 With management compensation: You can link it to different things such as share prices, ROA
and ROE, sales of employees, corporate social responsibility etc. and each one will create
different types of incentives.

PRISONER’S DILEMMA

How it can be avoided:

 Repeated transactions
 Trust between the players. The law assures it through the law of contracts.
 Punishment for breaking the agreement. The law assures it through law of torts.

Nash equilibrium: Situation where no other player wants to change his strategy because he’d be worse off
if he made the move.

Practical examples:
  Lawyerly abuses with discovery. The efficient move would be for both parties to ask only for the
necessary info. The opposite situation is for both parties to abuse and ask for all the information
so that the other party wastes time.
 Labor unions. The efficient outcome is for everyone to join the union, but there’s the problem of
free-riding since all the workers benefit from the achievements of the union even if they don’t
belong to it. Solution: there’s an obligatory participation in the unions
 Bankruptcy rules. The efficient outcome is for everyone to receive a proportional part of the
money the firm has left depending on their debts. To ensure that, the distribution “pro rata” is
used.
 Unwanted cooperation. There are some situations when it’s better to maintain the prisoner’s
dilemma, and the law helps us do it. Examples: plea bargaining and antitrust law (safeguards
market competition).
 Tragedy of the commons: Situation in which by doing what’s best for us individually, we actually
hurt everybody in the long run, including us. Corporate Social Responsibility was a first attempt
of a solution in corporate law, but it doesn’t work well because it’s soft law. The new solution is
the UN sustainability plan that wants to force corporations to be sustainable in their activity.

CHICKEN GAME

Two drivers are driving to each other and each one will have to choose between keeping going straight or
twirling. If one twirls and the other doesn’t, the one that has twirled will be called a chicken, but if
nobody twirls they will have an accident.

In this game, the optimal move is to do exactly the opposite of what the other player does.

STAG HUNT

Two men decide to go hunting together. At the beginning of the day, they can decide which tools to take:
the ones for hunting rabbits or the ones for hunting deer. A deer will feed them both for a week but the
two sets of tools are needed for hunting it. A rabbit however can be hunt with only one set of tools, and
feeds the hunter for a day. If one takes the deer’s tools but the other doesn’t, the first one will go home
with his hands empty.

In this game, the optimal move is to do what the other player does. The difference with the prisoner’s
dilemma is that your optimal move depends on the other player, while in the prisoner’s dilemma there’s
a move that’s better for you independently of what the other does.

Another example of stag hunt is the case of a bank who’s doing bad and is close to bankruptcy. If
everyone starts to take their money out, you should take it too (the bank is definitely going to go
bankrupt). However, if you all keep your money in the bank, it might be able to recuperate.

PUBLIC GOODS

Public goods are supplied by the Government because in the private sector they’d be oversupplied or
undersupplied.

For a good to be public it needs to be:

  Non-excludable: Once provided to one consumer, it’s difficult and even impossible to stop others
from enjoying it.
 Non-rival: The amount of the good I enjoy has no effect on the amount of it you enjoy. Example:
music.

The fundamental problem with public goods is the free-riding problem: I’d rather have someone else pay
for it.

Solutions:

 Taxes.
 Libertarians (making people pay for the use of public goods)
 Public subsidy. Example: charities are immune to sues for damages.

Can there be public bads? Yes, for example environmental damage; we all share it and me breathing
polluted air doesn’t make it any less damaging for you.

Part IV
Problems of proof

Different burdens of law:

 Burden of production: If you are suing someone, you have to provide the facts and evidence to
the judge.
 Burden of persuasion: If you are trying to proof your statement, you have to convince/persuade
of what you are saying.
 Presumptions. Example: A father disappeared 7 years ago without any trace. His son wants to
collect his state, but he should have to proof he’s dead. He can’t prove it but he can argue on
the grounds of a legal rule that raises a presumption of death after a disappearance of more
than 5 years (if there were).

Standards:

 More likely than not. Preponderance of evidence. It is a weak standard, it just says that with the
actual circumstances it is likely that something happened, but only a little bit more likely that it
didn’t.
 Clear and convincing proof. It is a bit stronger, the evidence points to what happened (although
you have doubts something).
 Beyond reasonable doubt. You are 95% sure that something happened, for example that
someone is guilty.

A jury should only decide someone’s guilty if they’re convinced beyond reasonable doubt.