Faculty Bibliography
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...In this Article, I analyze the theoretically optimal use of nonmonetary sanctions as a deterrent, and I then examine their actual domain of use and the major principles and doctrines of the criminal law. ... Otherwise, there would be an opportunity to lower social costs while continuing to deter the same number of parties by simultaneously reducing the nonmonetary sanction and increasing the monetary sanction. ... The initial three factors are important because they bear on the possibility that the monetary sanction needed to deter will exceed a party's assets, and thus that he could not be deterred by threat of a monetary sanction. ... The greater this probability, the higher is the monetary sanction required to deter. ... And since the optimal sanction rises with the expected private benefits -- because parties become harder to deter -- an increase in expected harm will tend indirectly to increase the optimal sanction. ... The possible desirability of punishment of attempts according to deterrence theory does not imply that there is any advantage in punishing attempts in the way the criminal law does, namely, less severely than acts that result in harm. ... Let b be the private benefit a party would derive from committing a harmful act, where 0 <= b <= mean-b, and let h >= 0 be the harm that the act would cause; thus, a party is identified by the pair (b,h). ...
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Situations in which there is uncertainty over the cause of harm are studied (e.g., was the lung cancer due to normal exposure to medical x-radiation, to smoking, to exposure to carcinogens discharged by a chemical plant?); and the effects on incentives to reduce risk of various ways of treating such uncertainty under the liability system are identified using a theoretical model of the occurrence of harm. The main points are these. Use of a threshold probabilit' of causation (e.g., 50%) as a criterion for determining liability may adversely affect behavior: parties might face a diminished burden of liability (if their probability of causation systematically fell below the threshold) and thus do too little to reduce risk; or they might face an extra burden (if their probability were systematically above the threshold), and thus do too much. Second, the best all or nothing criterion for determining liability (a criterion under which a party is fully liable if at all liable) is different in form from a threshold probability criterion. Third, liability in proportion to the probability of causation is superior to all other criteria and results in socially ideal behavior.These points are demonstrated and analyzed in two types of case: where the uncertainty involves a party versus natural or "background" factors; and where it involves which party among several was the author of harm. The importance of the points is shown to depend on the type of case, and as well on the form of liability (strict liability or the negligence rule).The interpretation of the analysis and important qualifications to it are discussed in a concluding section.
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Liability in tort and the regulation of safety are considered as means of controlling accident risks using the instrumentalist, economic method of analysis.Four general determinants of the relative social desirability of liability and regulation are first identified--differences in knowledge about risky activities as between a social authority and private parties; the possibility that parties would not be able to pay fully for harm done; the chance that they would not face suit for harm done; and administrative costs. On the basis of analysis of these determinants, it is suggested that the choices observed to be made between liability and regulation are, when broadly viewed, socially rational: Notably, activities that create the risk of the typical tort and that are little regulated characteristically display features leading us to say that they ought to be controlled mainly by liability. And activities that are much regulated -- especially ones involving significant hazards to health or to the environment -- ought to be directly constrained in important ways, taking into account their usual features.
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This paper examines the use of fines and imprisonment to deter individuals from engaging in harmful activities. These sanctions are analyzed separately as well as together, first for identical risk-neutral individuals and then for two groups of risk-neutral individuals who differ by wealth. When fines are used alone and individuals are identical, the optimal fine and probability of apprehension are such that there is some ‘underdeterrence’. If individuals differ by wealth, then the optimal fine for the high wealth group exceeds the fine for the low wealth group. When imprisonment is used alone and individuals are identical, the optimal imprisonment term and probability may be such that there is either underdeterrence or overdeterrence. If individuals differ by wealth, the optimal imprisonment term for the high wealth group may be longer or shorter than the term for the low wealth group. When fines and imprisonment are used together, it is desirable to use the fine to its maximum feasible extent before possibly supplementing it with an imprisonment term. The effects of risk aversion of these results are also discussed.
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In the first part of this article, (hypothetical) contracts providing for all possible uncertain contingencies are considered. In the next part, contracts providing for only some contingencies are examined and are shown to be advantageous, due both to difficulties that could arise in making and enforcing contingent terms and to the presence of implicit substitutes for them. In the following, major part of the article, two of these substitutes for contingent terms are analyzed: remedies for breach, and the opportunity for renegotiation; the existence of both is demonstrated to induce parties to behave approximately as they would under detailed contracts.
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Liability and safety regulation are examined as means of controlling risks in a theoretical model of the occurrence of accidents. According to the model, regulation does not result in appropriate reduction of risk -- due to the regulator's lack of knowledge about risk -- nor does liability result in that outcome -- because the incentives it creates are diluted by the chance that parties would not be sued for harm done or would not be able to pay fully for it. Thus, either liability could turn out to be superior to regulation or the reverse could be true. But as is stressed, joint use of the two means of controlling risk is generally socially advantageous, and the characteristics of their optimal joint use are determined.
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The effect of liability rules on accident avoidance is studied in two types of situations in which potential victims and potential injurers act sequentially: those where victims act first and injurers second; and those where the reverse is true. What is of special interest about the working of liability rules in such sequential situations is that the party who acts second behaves in response to the party who acts first, and that the party who acts first takes this into account. The major result shown is that liability rules induce optimal behavior provided that they lead the party who acts second to act optimally if and only if the first party did so. In an important extension of the basic model considered, however, this result may not hold.
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The question is asked how the incentives of private parties to bring suit relate to what would be socially appropriate given the costs of using the legal system; and the answer presented in the model that is examined involves two elements. The first is that as a potential plaintiff takes into account only his own legal expenses in deciding whether to bring suit, the private cost of suit is evidently less than the social cost (which would include the defendant's legal expenses), suggesting a tendency toward excessive litigation, other things equal. But consideration of the second element complicates matters: as the plaintiff takes into account his own expected gains but not the social gains attaching to suit (which in the model is the general effect of suit on potential defendants' behavior), and as these social gains could be either larger or smaller than his gains, there is a tendency in respect to litigation that could either counter or reinforce the previous tendency.
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The question considered in this article is how liability rules and insurance affect incentives to reduce accident risks and the allocation of such risks. This question is examined when liability is strict or based on the negligence rule; and, if first-party and liability insurance are available, when insurers have information about insured parties' behavior and when they do not have such information. The conclusions are in essence that although both of the forms of liability create incentives to take care, they differ in respect to the allocation of risk; that, of course, the presence of insurance markets mitigates this difference and alters incentives to take care; and that despite the latter effect, the sale of insurance is socially desirable.
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This paper examines how the optimal Pigouvian tax should be adjusted to reflect adminisrative costs. Several cases are examined, depending on whether the administrative costs are fixed per firm taxed or are a function of the amount of tax collected, and on whether such costs are borne by the government or by the taxed firm. In some cases the presence of administrative costs leads to an optimal tax greater than the external cost, while in other cases it leads to a tax less than the external cost.
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Will a party who believes that he has a legally admissible claim for money damages decide to bring suit? if so, will he subsequently settle with the opposing party or will he go ahead to trial? These questions are analyzed under four methods for allocating legal costs, namely, under the American system, whereby each side bears its own costs; under the "indemnity" or British system, whereby the losing side bears all costs; under the system favoring the plaintiff whereby the plaintiff pays only his own costs if he loses and nothing otherwise; and under the system favor the defendant, whereby the defendant pays only his own costs if he loses and nothing otherwise. Following the analysis, two brief illustrations are considered and comments are made on the relative social desirability of the methods of allocating legal costs.
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The question is addressed of whether the choice of legal rules ought to be influenced by consideration of their redistributive effects. The difficulty in redistributing income is acknowledged and is assumed to be due solely to the adverse effect of income tax on the incentive to work. An attempt at income redistribution via legal rules would result in the same sort of problem that exists under income tax regulations. If low-income individuals are treated favorably in a legal setting, a disincentive to work would be created analogous to a generous guaranteed minimum under the tax schedule. Despite imperfect ability to redistribute income through taxation, everyone would prefer that legal rules be chosen only on the basis of their efficiency. The specific hypothesis tested supposes that, under a liability rule, some or all individuals are led to exercise an inefficient level of care. By adoption of an efficient liability rule and by appropriate modification of the income tax schedule, everyone can be made better off.
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This article studies rules of "damage measures" that determine how much money must be paid by a party who defaults on a contract to the other party to the contract. The theme of the article is that damage measures serve as a substitute for completely specified contracts. In particular, it is shown that under an incompletely specified contract damage measures can induce parties to behave in a way that approximates what they would have explicitly agreed upon under a fully specified contract. Moreover, it is argued on familiar lines that because it is often costly or impossible to make contractual provisions for contingencies at a very detailed level, there is an evident need for such substitutes for well-specified contingent contracts as are afforded by damage measures.
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The aim of this article is to compare strict liability and negligence rules on the basis of the incentives the provide to "appropriately" reduce accident losses. It will therefore be both convenient and clarifying to abstract from other issues in respect to which the rules could be evaluated. In particular, there will be no concern with the bearing of risk - for parties will be presumed risk neutral - nor with the size of "administrative costs" - for the legal system will be assumed to operate free of such costs - nor with distributional equity - for the welfare criterion will be taken to be the following aggregate: the benefits derived by parties from engaging activities less total accident losses less total accident prevention costs.
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This article studies arrangements concerning the payment of a fee by a principal to his agent. For such an arrangement, or fee schedule, to be Pareto optimal, it must implicitly serve to allocate the risk attaching to the outcome of the agent's activity in a satisfactory way and to create appropriate incentives for the agent in his activity. Pareto-optimal fee schedules are described in two cases: when the principal has knowledge only of the outcome of the agent's activity and when he has as well (possibly imperfect) information about the agent's activity. In each case, characteristics of Pareto-optimal fee schedules are related to the attitudes toward risk of the principal and of the agent.
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The primary purpose of unemployment insurance (U.I.) is no doubt to insure individuals against loss of wage income. However, U.I. is commonly believed to adversely affect job search behavior and to lengthen the duration of unemployment. With these issues in mind, this paper asks how U.I. benefits ought to be paid out over time. Specifically, the paper uses a theoretical model to determine characteristics of the time sequence of benefits that maximizes the expected utility of the unemployed, given that they act in a self-interested way and given the total size of the U.I. budget.
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This paper examines the use of fines and imprisonment to deter individuals from engaging in harmful activities. These sanctions are analyzed separately as well as together, first for identical risk-neutral individuals and then for two groups of risk-neutral individuals who differ by wealth. When fines are used alone and individuals are identical, the optimal fine and probability of apprehension are such that there is some "underdeterrence." If individuals differ by wealth, then the optimal fine for the high wealth group exceeds the fine for the low wealth group. When imprisonment is used alone and individuals are identical, the optimal imprisonment term and probability may be such that there is either underdeterrence or overdeterrence. If individuals differ by wealth, the optimal imprisonment term for the high wealth group may be longer or shorter than the term for the low wealth group. When fines and imprisonment are used together, it is desirable to use the fine to its maximum feasible extent before possibly supplementing it with an imprisonment term. The effects of risk aversion on these results are also discussed.
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The dependence of property values on a schedule of ‘amenities’ is examined in the case of a ‘small’ and ‘open’ city and in the case of a ‘closed’ city. Questions concerned with the predictability and interpretation of changes in equilibrium property values following an improvement in amenities are considered in these cases. The problem of identifying the implicit demand for amenities from a single equilibrium rent schedule is also addressed.
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Meir G. Kohn & Steven Shavell, The Theory of Search, 9 J. Econ. Theory 93 (1974).
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