• 07 October 2009

Identifying Intense Preferences

Daphna Lewinsohn-Zamir - Hebrew University of Jerusalem

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Our preferences vary in intensity.  Some are relatively strong, while others are comparatively weak.  Information regarding the strength—rather than just the content—of preferences is often essential, for both efficiency and fairness reasons.  The goal of efficiency maximization requires the allocation of goods to those who value them most.  Accordingly, when regulators, judges or other decision—makers allocate entitlements among competing parties—be it property, babies for adoption or seminar paper topics-they need to compare the intensity of the preferences for these entitlements.  Fairness considerations likewise necessitate such an inquiry.  Absent good justifications to the contrary, it seems unfair to grant an entitlement to a person who is comparatively indifferent to receiving it, rather than to one who intensely desires it.  Moreover, even when no direct competition over a resource is involved, ignoring the possibility of intense preferences might lead to inefficient and unjust results.  Rules that are perfectly suitable for cases of “ordinary” or average preference-intensity may be inappropriate for situations where exceptionally strong preferences exist.  By identifying the latter situations and according them different treatment, we improve the efficiency and fairness of legal rules.  For instance, market-value may be a reasonable compensation measure for most owners of lost or damaged property.  Yet, it will systematically under-compensate owners with unique, subjective valuation of their property, causing demoralization and inefficiency in the long-run.  For all these reasons, we frequently engage in judgments and comparisons of preference-intensities.

The identification of intense preferences is clearly crucial when a market for the relevant entitlement does not exist or when there is a significant risk of market failure.  In such cases, we cannot rest assured that voluntary transactions would eventually transfer goods to those who desire them most.  Identification is important, however, also in circumstances where functioning markets exist.  Rules directly addressing the needs of individuals with strong preferences can economize on transaction costs and increase the resultant efficiency gains, while simultaneously avoiding the market’s inherent bias against those unable to pay.

The detection of intense preferences is a difficult task.  For example, people asked to verbally state the strength of their preferences may lie in order to improve their position.  The Law-and-Economics literature has largely focused on a narrow, though important, aspect of this identification issue.  Much attention has been devoted to the case of owners’ subjectively high valuation of land, primarily in the context of compensation for takings.  It was proposed, for instance, that compensation be determined according to owners’ self-valuations (declared either in advance, before any conflict has arisen, or after the government considers expropriation of the property).  Such devices as basing property taxes on self-assessments and requiring future sale prices to at least equal self-declared values would achieve truthfulness.  Alternatively, owners selling their property below their former evaluation would have to pay the difference to the government or to their favored charity.  This literature can be characterized by three features: It requires case-by-case inquires, involves monetary payments, and employs sanctions to ensure people’s truthfulness.

This Article argues that the land-valuation problem is but a specific manifestation of a much broader concern.  The need to identify intense preferences may arise in all fields of law and with respect to all types of entitlement.  More importantly, additional and fundamentally different methods can be used to discover strong preferences.  For example, identifiers can be generalized rather than case-specific, thus dispensing with the need for ad-hoc examination of individual cases.  That is to say, we can generalize about circumstances in which intense preferences are likely to exist and incorporate the relevant proxies—such as use value, possession, or declining marginal utility—into the legal rules themselves.  Furthermore, identifiers may entail burdens in-kind rather than monetary costs, thereby reducing a bias in favor of the rich.  Thus, instead of detecting strong preferences via individuals’ willingness to pay, we may reveal them through their readiness to sacrifice time, effort, or honor.  Finally, identifiers may adopt non-penalizing—instead of penalizing—approaches.  Detection of intense preferences can sometimes be achieved without taxing the subjective, unique utility that people obtain from entitlements.  Individuals need not hand over some (or all) of this special value as proof that strong preferences indeed exist.

The goal of the Article is twofold.  First, it demonstrates how legal rules can, and do, employ generalized and non-penalizing (“GNP”) devices to identify intense preferences.  Second, it argues for the superiority of GNP identifiers over other identification methods.

The major feature of GNP identifiers is that they do not tax, neither in money nor in kind, the exceptional utility that some individuals derive from entitlements.  GNP devices are based on observations, experience, or studies of human nature and behavior.  They represent judgments about what most people would feel or prefer in certain scenarios.  This type of identifier has not received systematic theoretical treatment and has not been sufficiently utilized in practice.  Prime examples of non-penalizing proxies for strong preferences are the following:

  • Use value vs. exchange value: Preferences regarding property are likely to be more intense when an individual holds the property for her own (and continuous) use than when she holds it for exchange or when she subsequently chooses to part with it, for instance, by sale. It is possible to locate circumstances in which use value exists and to protect owners against involuntary injury to this value.
  • Possession: Possession is often a good proxy for intense preferences. Therefore, by limiting the exercise of certain rights to possessors, one assures that only people with strong preferences are entitled to use them.
  • Declining marginal utility: According to this well-known economic rule, the amount of extra utility enjoyed from every additional unit of a good usually declines as a person consumes more of the good. Thus, when allocating goods between individuals, we may sometimes reasonably assume that the incremental utility from having the good would be larger for persons with fewer units of the good.
  • Redemption: Rights of redemption detect strong preferences because they are rights that only, or mostly, people with intense preferences would use. The actual redemption of an asset both identifies the strong preference and fulfills it.
  • Reasons: Requiring individuals to provide reasons for their preferences may help assess both the intensity and authenticity of the preferences.

The above identifiers of intense preferences can be found in diverse legal fields and contexts.  They constitute a hidden common denominator of such dissimilar rules as those governing rights of first refusal, takings compensation, damages in contract law, self-help remedies, adoption, bankruptcy exemptions, secured transactions, and conscientious objection.  Current law has not exhausted the potential for crafting GNP identifiers, and additional rules of this kind can be adopted.  The full-length article in the Cornell Law Review offers various examples of such desirable new rules.

This Article further argues that GNP identifiers have various advantages that other techniques for detecting strong preferences lack, either wholly or in part.  The Article compares GNP devices with four alternative methods, all of which are used in practice:

  • Mouth“: Preference-intensity is revealed through people’s verbal statements alone, as in public opinion polls, contingent valuation questionnaires, and quality-adjusted life year surveys.
  • Mouth & Purse“: Strong preferences are identified through verbal statements backed up by monetary sanctions, as employed in self-assessment mechanisms for land valuation.
  • Generalized and Penalizing“: Generalizations regarding cases of strong preferences that utilize people’s readiness to bear in-kind sanctions. For instance, a strong preference for receiving welfare benefits can be conditioned on willingness to go through a grueling and humiliating bureaucratic process.
  • Case-Specific and Penalizing“: Case-by-case detection of intense preferences through individuals’ willingness to incur non-monetary burdens. A prime example is logrolling or vote trading, which identifies strong preferences on a certain issue by readiness to bear the cost of not realizing a weaker preference on another issue.

The Article demonstrates that the GNP technique is, overall, the superior identification method since it is the only one that scores highly on all six parameters of evaluation.  GNP identifiers treat people with dignity and respect and are in no way insulting or humiliating.  They afford equal treatment to individuals’ preferences by not imposing heavier burdens on people with intense preferences (vertical equity) and by treating all individuals with strong preferences equally (horizontal equity).  Furthermore, GNP identifiers are not biased in favor of more affluent people and also reduce the risk of lies.  Finally, the GNP method entails relatively low administrative costs and is capable of dealing with objectionable preference-intensities (such as excessively high intensities of preferences).  The other four methods fail on more than one of these grounds.

For all these reasons, the role played by GNP identifiers should be expanded by the law and rules utilizing them should be adopted whenever possible.  Generalized and Non-Penalizing identifiers are feasible, for example, whenever one can generalize that a certain proxy-such as use value, possession, declining marginal utility or redemption—succeeds in capturing cases in which systematically high preference—intensities are likely to exit.  GNP devices are especially suitable when all one needs is an affirmation that an intense preference exists, or a relatively “rough” comparison between stronger and weaker preferences, rather than an exact quantification of the preferences’ strength.  This may explain why “Mouth & Purse” techniques have been suggested in the literature with respect to compensation for takings of land.  In compensation scenarios, we ideally seek the “magic number,” which represents the individual’s true valuation of an asset or the precise extent of her losses.  Nevertheless, GNP identifiers—which compensate landowners with high subjective valuation by granting them some fixed percentage (e.g., 50%) above market price—may be superior even in this context.  The relative crudeness of such a compensation formula is offset by the many advantages of GNP devices.  Moreover, the significant shortcomings of penalizing identifiers have been ignored or downplayed, while the impressive advantages of GNP identifiers have been overlooked in the theoretical literature.  We should therefore create additional rules that utilize GNP techniques.  In closing, the Article demonstrates that the GNP method’s value is not limited to the detection of high intensity preferences, but can also apply to low intensity preferences.  Proxies for exceptionally low valuation of entitlements can also be incorporated into legal rules.  A good example is the proxy of “non-use,” which is a reliable identifier of weak preferences with respect to trademarks, rent-controlled housing, and servitudes.dingbat

 

Acknowledgments:

Copyright © 2009 Cornel Law Review.

Daphna Lewinsohn-Zamir is Louis Marshall Professor of Environmental Law at Hebrew University of Jerusalem.

Special thanks to Greg Alexander, Hanoch Dagan, Lee Fennell, Robert Ellickson, Amnon Lehavi, Barak Medina, Gideon Parchomovsky, Ariel Porat, Stephanie Stern, Joseph Singer, Doron Teichman, Eyal Zamir and participants in the Property Works in Progress Conference, University of Colorado Law School, and Faculty Workshops at Cornell Law School, Interdisciplinary Center (IDC) Herzliya, and Tel-Aviv University, for very helpful comments and suggestions. Thanks to Yehoyada Mande’el for excellent research assistance.

This Legal Workshop Editorial is based on the following full-length Article:   Daphna Lewinsohn-Zamir, Identifying Intense Preferences, 94 CORNELL L. REV. ___ (2009).


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