TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, August 18, 2017

Fennell & McAdams: Inverted Theories

Lee Anne Fennell (Chicago) & Richard H. McAdams (Chicago), Inverted Theories:

This essay makes the case for “inverting” popular versions of certain theories widely used in legal analysis. Inversion begins with the observation that the assumptions underlying a given theory are substantively false. But rather than reject the theory outright, the theory inverter sees something valuable in the structure of the theory’s logic, and looks to extract the implications of the theory given a recognition that the assumptions are false.

An understood example is the Coase Theorem, which in its popular formulation holds that: If transaction costs are zero, an efficient result will always be reached regardless of the initial allocation of entitlements. Because the zero transaction cost assumption is wildly unrealistic — a fact Coase emphasized from the outset — the inverted version of the theory is: Because transaction costs are positive, the initial allocation of entitlements does generally matter to efficiency.

In this essay, we explore the usefulness of a similar inversion of four other theories frequently employed in legal analysis: Robert Nozick’s entitlement theory of distributive justice, the Tiebout Hypothesis, Louis Kaplow and Steven Shavell’s tax and transfer principle of redistribution, and the Prisoners’ Dilemma. In all of these cases, we submit, the better basis for policy is the inverted version of the theory that puts the false assumptions at center stage. We conclude by generalizing the lessons of these four examples and discussing why the implausibly “uninverted” versions of these theories remain popular.

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