Faculty Bibliography
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Government relief is offered for a wide range of risks-natural disaster, economic dislocation, sickness, and injury. This article explores the effect of such relief on incentives and the allocation of risk in a model with private insurance. It is shown that government relief is inefficient, even when its level is less than the private insurance coverage that individuals would otherwise have purchased and even when private insurance coverage is incomplete due to problems of moral hazard.
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This paper analyzes the relationship between optimal taxation and optimal tax enforcement. A central question concerns the extent to which revenue should be raised through higher tax rates, which distort behavior, or greater enforcement, which distorts behavior and also entails direct resource costs. In the models examined, some expenditure on enforcement may be optimal despite its resource cost, its distortionary effect, and the availability of other revenue sources having no enforcement costs. Rules for optimal tax rates and enforcement expenditures are derived, which also indicate the marginal cost of government funds and optimal enforcement priorities for a tax collection agency.
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Much legal advice is provided after individuals have committed acts -- when they come before a tribunal -- rather than at the time they decide how to act. This paper considers the effects and social desirability of such legal advice. It is emphasized that legal advice tends to reduce expected sanctions, which may encourage acts subject to sanctions. There is, however, no a priort basis for believing that this is socially undesirable, because, among other reasons, it may be possible to raise the level of sanctions to offset their dilution due to legal advice. In addition, legal advice has no general tendency to improve the effectiveness of the legal system through its influence on the information presented to tribunals.
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Horizontal equity -- the command that equals be treated equally -- has received increased attention, particularly in attempts to measure the desirability of tax reform proposals. This paper questions whether the normative foundations for horizontal equity justify the indexes and approaches that have generally been adopted. It suggests that past attempts to implement horizontal equity are inconsistent with its supposed foundations and that more thorough examination of the concept raises serious doubts as to whether any alternative interpretation of horizontal equity reasonably consistent with common understanding of the concept can be justified.
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Legal advice provided in the course of litigation often concerns the selection of information to present to a tribunal. Professors Kaplow and Shavell examine the effects and social desirability of this kind of advice. They observe that such advice may result in either more or less information reaching the tribunal and that, in either case, it will tend to produce more favorable outcomes for clients. Because individuals will take this effect into account when deciding how to act, the prospect of advice may alter their behavior. The authors explore the factors determining whether the influence on behavior is desirable or detrimental. They emphasize that legal advice supplied during litigation differs significantly from advice given when acts are initially contemplated, because only the latter type of advice generally tends to channel behavior in a socially desirable manner. The authors' analysis raises basic questions about the wisdom of the attorney-client privilege and rules protecting confidentiality in the context of litigation, and it suggests that inquiry into the lawyer's role be recast.
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Most of Professor Strnad's original article was devoted to a lengthy algebraic argument asserting that a cash flow tax, rather than an income tax, implements the Haig-Simons concept of income in a non-general-equilibrium setting. In our reply, we made two points about this argument: (1) Professor Strnad's complex algebraic demonstration amounted to a simple and familiar tautology, and (2) the argument did not support his conclusion because Professor Strnad was not in fact applying the Haig-Simons concept used by tax policy analysts for over fifty years. We therefore called his quite distinct formulation, which is definitionally implemented by a cash flow tax, "Strnad income." Professor Strnad's specification of his concept of income requires that: (1) after-tax net present values equal those in the no-tax world, reduced by the tax rate, and (2) after-tax changes in present value equal those in the no-tax world, reduced by the tax rate.
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All changes in government policy - the passage of legislatior, judicial decisions, administrative rulings, and takings of property - impose gains and losses on those who, prior to the change, had taken actions with long- term consequences. Transition policy concerns whether, to what extent, and in what manner the impacts of policy change upon preexisting investments should be compensated or otherwise mitigated. In this Article, Professor Kaplow analyzes legal transitions from an economic perspective and argues that uncertainty concerning government action is in many respects like other types of uncertainty. Because the market is normally left to strike the appropriate balance between mitigating risk and preserving incentives, relying on the market to address the effects of changes in government policy seems more efficient than the provision of transitional relief by the govern- ment. Current practice provides no relief from some sources of government uncertainty, such as the evolution of common law liability rules, but it does provide widespread transitional relief in connection with takings, tax reform, and deregulation. The Article examines the similarities in the economic impacts of these reforms and explores the extent to which institutional and fairness considerations justify departures from the most economically efficient transition policy.
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Landes and Posner (1981) examined determinants of a firm's demand elasticity and applied economic analysis to market power issues. Market power is influenced by market share, substitutes, output of fringe firms and competitive entry. Courts usually consider these factors intuitively, thus lending support to the concept that market power is not the sole determinant of antitrust liability. Other factors for consideration in antitrust questions are redistribution of income from consumers to dominant firms, firm size, deterrent effect of antitrust actions and the precedent of an antitrust decision. Market power assessments based solely on market share considerations must be adjusted. Landes and Posner suggested market redefinition, but this is a crude tool. Further, use of the market redefinition approach may cause errors by emphasizing substitution possibilities. A better approach would be that of direct adjustment, wherein the inference of market power is directly adjusted downward or upward. Overall, analysis of the market redefinition approach results in different conclusions when considering geographical market definition, substitutes in production, output of fringe firms and consideration of merger cases.
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