Chip Taylor

Cooperation, monitoring, and our tobacco overlords

Way back when big tobacco finalized the master settlement agreement (or whatever they call it) with the states, I couldn't imagine how the tobacco companies could have made such a big mistake. I said, "Don't they know that you should never pay a blackmailer? You'll never get rid of him!"

Boy, did I have a lot to learn. I hadn't yet read Economic Analysis of Property Rights, by Yoram Barzel.

One of Barzel's main concepts is the difference between legal rights and economic rights to property. Legal rights are those the law says you have; economic rights consist of your ability to actually exercise control over the property in question. Economic and legal rights are often incongruent; you may have economic rights in property to which you have no (or at least no clearly delineated) legal rights. For example, a thief steals your bicycle. You still have the legal rights to the bike; the thief is exercising the economic rights.

So, prior to the settlement with the states tobacco companies had legal rights to manufacture and sell cigarettes. But there were other parties -- powerful parties -- that certainly had the power to affect those legal rights. The states were clamoring for reimbursement for Medicaid money spent on cigarette smokers; Congress, in the form of whatever committee Waxman was chairing was making noises about big-time tobacco regulation; the main tobacco executives were called on the Congressional carpet and given a good reaming. Things weren't looking that good for big tobacco.

One option when someone is getting into your pocket by exercising economic rights to your property (or threatening to), is to increase monitoring and enforcement of your legal rights.

In the case of the tobacco companies, they could keep hiring lawyers and defending themselves in court and hiring lobbyists to argue their case in Congress. (And, of course, they still do those things.) But, continually escalating monitoring and enforcement can get expensive very quickly. Furthermore, since the groups they were defending themselves against have a lot of leeway in deciding what the tobacco company's legal rights are in the first place, enhanced monitoring might well be fruitless. Another strategy was called for.

Barzel suggests that in these situations it might be more profitable to renegotiate your relationship with the party causing you problems. Redefine the contract, as it were, so that your goals are aligned. If they benefit from your success, then they will be motivated to help you succeed rather than to hurt you.

Thus, the master settlement agreement. The states got rights to a substantial of big tobacco's future income stream. What happens? Well, suddenly the states are interested in protecting that income stream. How do they do that?

They limit the size of appeal bonds that tobacco companies have to post in order to appeal a judgement. First, in response to one particular case. Then, prospectively in a number of states.

They protect big tobacco from competition by little tobacco..

Pretty shrewd guys, those tobacco overlords. I thought they'd never be able to get rid of the states. But it's the states that'll never be able to get rid of tobacco.

I didn't get that until the first appeal bond situation came up; I wasn't shrewd enough to see the possibilities. I've recognized them only in retrospect. Good thing I haven't been trying to make a living as a tobacco overlord.