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Publication Types
Categories
Louis Kaplow, Competition Policy and Price Fixing (Princeton Univ. Press 2013).
Categories:
Corporate Law & Securities
Sub-Categories:
Antitrust & Competition Law
Type: Book
Abstract
Throughout the world, the rule against price fixing is competition law's most important and least controversial prohibition. Yet there is far less consensus than meets the eye on what constitutes price fixing, and prevalent understandings conflict with the teachings of oligopoly theory that supposedly underlie modern competition policy. Competition Policy and Price Fixing provides the needed analytical foundation. It offers a fresh, in-depth exploration of competition law's horizontal agreement requirement, presents a systematic analysis of how best to address the problem of coordinated oligopolistic price elevation, and compares the resulting direct approach to the orthodox prohibition. In doing so, Louis Kaplow elaborates the relevant benefits and costs of potential solutions, investigates how coordinated price elevation is best detected in light of the error costs associated with different types of proof, and examines appropriate sanctions. Existing literature devotes remarkably little attention to these key subjects and instead concerns itself with limiting penalties to certain sorts of interfirm communications. Challenging conventional wisdom, Kaplow shows how this circumscribed view is less well grounded in the statutes, principles, and precedents of competition law than is a more direct, functional proscription. More important, by comparison to the communications-based prohibition, he explains how the direct approach targets situations that involve both greater social harm and less risk of chilling desirable behavior--and is also easier to apply.
Louis Kaplow, The Theory of Taxation and Public Economics (Princeton Univ. Press 2008).
Categories:
Disciplinary Perspectives & Law
,
Taxation
Sub-Categories:
Law & Economics
,
Tax Policy
Type: Book
Abstract
The Theory of Taxation and Public Economics presents a unified conceptual framework for analyzing taxation--the first to be systematically developed in several decades. An original treatment of the subject rather than a textbook synthesis, the book contains new analysis that generates novel results, including some that overturn long-standing conventional wisdom. This fresh approach should change thinking, research, and teaching for decades to come. Building on the work of James Mirrlees, Anthony Atkinson and Joseph Stiglitz, and subsequent researchers, and in the spirit of classics by A. C. Pigou, William Vickrey, and Richard Musgrave, this book steps back from particular lines of inquiry to consider the field as a whole, including the relationships among different fiscal instruments. Louis Kaplow puts forward a framework that makes it possible to rigorously examine both distributive and distortionary effects of particular policies despite their complex interactions with others. To do so, various reforms--ranging from commodity or estate and gift taxation to regulation and public goods provision--are combined with a distributively offsetting adjustment to the income tax. The resulting distribution-neutral reform package holds much constant while leaving in play the distinctive effects of the policy instrument under consideration. By applying this common methodology to disparate subjects, The Theory of Taxation and Public Economics produces significant cross-fertilization and yields solutions to previously intractable problems.
Louis Kaplow & Steven M. Shavell, Fairness versus Welfare, 114 Harv. L. Rev. 961 (2001).
Categories:
Legal Profession
,
Civil Practice & Procedure
,
Banking & Finance
,
Criminal Law & Procedure
,
Disciplinary Perspectives & Law
,
Discrimination & Civil Rights
Sub-Categories:
Contracts
,
Criminal Justice & Law Enforcement
,
Sentencing & Punishment
,
Torts
,
Litigation & Settlement
,
Law & Public Policy
,
Law & Economics
,
Legal & Political Theory
Type: Article
Abstract
The thesis of this Article is that the assessment of legal policies should depend exclusively on their effects on individuals'welfare. In particular, in the evaluation of legal policies, no independent weight should be accorded to conceptions of fairness, such as corrective justice and desert in punishment. (However, the logic leading to this conclusion does not apply to concern about equity in the distribution of income, which is often discussed under the rubric of fairness.) Our analysis begins with the argument that, when the choice of legal rules is based even in part on notions of fairness, individuals tend to be made worse off. Indeed, if any notion of fairness is ascribed evaluative weight, everyone will necessarily be made worse off in some situations. Moreover, when we examine principles of fairness and the literature that advances them, we find it difficult to identify reasons that, on reflection, justify granting importance to these principles at the expense of individuals' well-being. Nevertheless, policy analysts and the population at large obviously find notions of fairness appealing. We conjecture that the notions' attractiveness is rooted in several factors. Namely, individuals who believe in ideas of fairness tend to behave better toward others; the notions may serve as proxy goals for instrumental objectives; and individuals may have a taste for satisfaction of the notions. Furthermore, each of these factors is a reason that notions of fairness are relevant under a welfare-oriented normative approach to social decision making. As we explain, however, none of these factors warrants treating notions of fairness as independent evaluative principles. We develop our thesis through consideration of specific conceptions of fairness that are employed in major areas of the law: torts, contracts, legal procedure, and law enforcement. We also discuss the implications of our analysis for our primary audience, legal academics and other legal policy analysts, as well as for government officials, notably, legislators, regulators, and judges.
Louis Kaplow, Market Power and Income Taxation (Harv. L. Sch. John M. Olin Ctr. Discussion Paper No. 994, NBER Working Paper No. w25578, Mar. 6, 2019).
Categories:
Taxation
,
Corporate Law & Securities
,
Disciplinary Perspectives & Law
,
Banking & Finance
Sub-Categories:
Financial Markets & Institutions
,
Economics
,
Antitrust & Competition Law
,
Law & Economics
,
Tax Policy
,
Taxation - Personal Income
Type: Other
Abstract
Does significant market power or the presence of large rents affect optimal income taxation, calling for greater redistribution due to tainted gains? Or perhaps less because of an additional wedge that distorts labor effort? Do concerns about inequality have implications for antitrust, regulation, trade, and other policies that influence market power, which contributes to inequality? This article addresses these questions in a model with heterogeneous abilities and hence a concern for distribution, markups, multiple sectors, ownership that is a function of income, allowance for any share of profits to be recoveries of investments (including rent-seeking efforts), endogenous labor supply, and a nonlinear income tax. In this model, proportional markups with no profit dissipation have no effect on the economy, and a policy that reduces a nonproportional markup raises (lowers) welfare when it is higher (lower) than a weighted average of other markups. With proportional (partial or full) profit dissipation, proportional markups are equivalent to a downward shift of the distribution of abilities, and the welfare effect of correcting nonproportional markups associated with nonproportional profit dissipation now depends also on the degree of dissipation and how that is affected by the policy. In all cases, optimal policies maximize consumer plus producer surplus, without regard to a policy’s distributive effects on consumers and profits or how markups and income taxation distort labor effort.
Louis Kaplow, On the Design of Legal Rules: Balancing Versus Structured Decision Procedures, 132 Harv. L. Rev. 992 (2019).
Categories:
Government & Politics
,
Civil Practice & Procedure
Sub-Categories:
Practice & Procedure
,
Dispute Resolution
,
Litigation & Settlement
,
Judges & Jurisprudence
,
Supreme Court of the United States
,
Courts
Type: Article
Abstract
Important doctrines in diverse areas of law employ structured decision procedures requiring, in rough terms, that the plaintiff first make some demonstration of harm; if but only if that is done, the defendant must make some showing of benefit; and if but only if that occurs, balancing is performed. This Article compares such protocols to unconstrained balancing and finds them to be inferior with respect to the quality of final decisions: they sometimes fail to impose liability even though the harm is greater than the benefit, and they sometimes impose liability even though the benefit exceeds the harm. The Article also develops the principles of optimal information (evidence) collection and shows how structured decision procedures violate every core lesson and presuppose distinctions that often are incoherent or impractical to implement. The analysis addresses concerns about balancing that may motivate structured protocols, how less restrictive alternatives should be assessed, and the extent to which legal proceedings are conducted in conformity with either approach, as well as how they might be reformed.
Louis Kaplow, Balancing Versus Structured Decision Procedures: Antitrust, Title VII Disparate Impact, and Constitutional Law Strict Scrutiny, 167 U. Pa. L. Rev. (forthcoming 2019).
Categories:
Constitutional Law
,
Discrimination & Civil Rights
,
Disciplinary Perspectives & Law
,
Civil Practice & Procedure
,
Corporate Law & Securities
Sub-Categories:
Antitrust & Competition Law
,
Mergers & Acquisitions
,
Litigation & Settlement
,
Civil Rights
,
Legal Theory & Philosophy
,
Law & Economics
Type: Article
Abstract
Important doctrines in diverse areas of law employ structured decision procedures requiring, in rough terms, that the plaintiff first make some demonstration of harm; if but only if that is done, the defendant must make some showing of benefit; and if but only if that occurs, balancing is performed. In-depth analysis of such protocols reveals them to be inferior to unconstrained balancing with respect to the quality of final decisions and the guidance they provide for the collection of information and, accordingly, the conduct of adjudication. This article applies this analysis to the rule of reason and merger regulation under antitrust law, Title VII disparate impact law, and the practices of strict scrutiny and proportionality analysis in constitutional law. Longstanding controversies are addressed and unappreciated deficiencies are discovered. In all three domains, existing law is cast in a substantially different light, both descriptively and normatively. Legal rules, adjudication, information, balancing, rule of reason, mergers, disparate impact, Title VII, strict scrutiny, proportionality analysis.
Louis Kaplow, Price-Fixing Policy, 61 Int’l J. Indus. Org. 749 (2018).
Categories:
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Antitrust & Competition Law
,
Law & Economics
Type: Article
Abstract
The prohibition against price fixing is competition law's most important and least controversial provision. Yet there is far less consensus than meets the eye on what constitutes price fixing, and prevalent understandings cannot be reconciled with principles of oligopoly theory. This article (1) presents a fundamental reconceptualization of our understanding of horizontal agreements, (2) develops a systematic analysis of price-fixing policy that focuses on its deterrence benefits and chilling costs, and (3) compares this direct approach to commentators’ favored formulations that typically involve some sort of formalistic communications-based prohibition. By targeting a subset of means rather than the illicit ends, conventional formulations tend to impose liability in cases with lower deterrence benefits and greater chilling costs than those reached under a direct approach and to incur greater administrative costs as well.
Louis Kaplow, Recoupment, Market Power, and Predatory Pricing, 82 Antitrust L.J. 167 (2018).
Categories:
Corporate Law & Securities
Sub-Categories:
Antitrust & Competition Law
Type: Article
Abstract
Recoupment inquiries play an important role in predatory pricing cases. Nevertheless, their place in antitrust analysis is unclear and potentially problematic in ways that are not fully appreciated. Does a recoupment requirement define, augment, or replace the preexisting monopoly power requirement that involves similar analysis? How can a recoupment test be inserted in sequential assessments of alleged predatory pricing when all of the steps are intertwined with the others, including those deemed to come later? Why is a plaintiff permitted to show either that recoupment was ex ante plausible or that sufficient ex post profit recovery occurred, rather than requiring one in particular, or both? This article addresses these questions by examining the underlying purposes of recoupment assessments and predatory pricing inquiries more broadly. As will become evident, much of the analysis is relevant not just to predatory pricing but to other forms of anticompetitive conduct as well.
Louis Kaplow, Optimal Design of Private Litigation, J. Pub. Econ., Nov. 2017, at 64.
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
,
Government & Politics
Sub-Categories:
Litigation & Settlement
,
Private Law
,
Law & Economics
,
Courts
Type: Article
Abstract
This article translates and extends Becker (1968) from public law enforcement to private litigation by examining optimal legal system design in a model with private suits, signals of case strength, court error, and two types of primary behavior: harmful acts that may be deterred and benign acts that may be chilled. The instruments examined are filing fees or subsidies that may be imposed on either party, damage awards and payments by unsuccessful plaintiffs (each of which may be decoupled), and the stringency of the evidence threshold (burden of proof). With no constraints, results arbitrarily close to the first best can be implemented. Prior analyses of optimal damage awards, decoupling, and fee shifting are shown to involve special cases. More important, previous results change qualitatively when implicit assumptions are relaxed. For example, introducing a filing fee can make it optimal to minimize what losing plaintiffs pay winning defendants and to reduce the evidence threshold as much as possible — even though the direct effect of these adjustments is to chill desirable behavior, a key feature absent in prior work.
Louis Kaplow, Optimal Multistage Adjudication, 33 J.L. Econ. & Org. 613 (2017).
Categories:
Civil Practice & Procedure
,
Criminal Law & Procedure
,
Disciplinary Perspectives & Law
,
Government & Politics
Sub-Categories:
Jury Trials
,
Litigation & Settlement
,
Law & Economics
,
Courts
Type: Article
Abstract
In many settings, there are preliminary or interim decision points at which legal cases may be terminated: e.g., motions to dismiss and for summary judgment in U.S. civil litigation, grand jury decisions in criminal cases, and agencies’ screening and other exercises of discretion in pursuing investigations. This article analyzes how the decision whether to continue versus terminate should optimally be made when (A) proceeding to the next stage generates further information but at a cost to both the defendant and the government and (B) the prospect of going forward, and ultimately imposing sanctions, deters harmful acts and also chills desirable behavior. This subject involves a mechanism design analogue to the standard value of information problem, one that proves to be qualitatively different and notably more complex. Numerous factors enter into the optimal decision rule – some expected, some subtle, and some counterintuitive. The optimal rule for initial or intermediate stages is also qualitatively different from that for assigning liability at the final stage of adjudication.
Louis Kaplow & Scott Duke Kominers, Who Will Vote Quadratically? Voter Turnout and Votes Cast Under Quadratic Voting, 172 Public Choice 125 (2017).
Categories:
Government & Politics
Sub-Categories:
Elections & Voting
Type: Article
Abstract
Who will vote quadratically in large-N elections under quadratic voting (QV)? First, who will vote? Although the core QV literature assumes that everyone votes, turnout is endogenous. Drawing on other work, we consider the representativeness of endogenously determined turnout under QV. Second, who will vote quadratically? Conditional on turning out, we examine reasons that, in large-N elections, the number of votes that an individual casts may deviate substantially from that under pure, rational QV equilibrium play. Because turnout itself is driven by other factors, the same determinants may influence how voters who do turn out choose the quantity of votes to cast. Independently, the number of votes actually cast may deviate dramatically from pure QV predictions because of the complex and refined nature of equilibrium play. Most plausibly, voting behavior and outcomes would be determined predominately by social and psychological forces, would exhibit few of the features emphasized in the analysis of hyper-rational equilibrium play, and would have consequential properties that require a different research agenda to bring into focus. Some of our analysis also has implications for voting behavior under other procedures, including one person, one vote.
Louis Kaplow, On the Relevance of Market Power, 130 Harv. L. Rev. 1303 (2017).
Categories:
Corporate Law & Securities
Sub-Categories:
Antitrust & Competition Law
Type: Article
Abstract
Market power is the most important determinant of liability in competition law cases throughout the world. Yet fundamental questions on the relevance of market power are underanalyzed, if examined at all: When and why should we inquire into market power? How much should we require? Should market power be viewed as one thing, regardless of the practice under scrutiny and independent of the pertinent anticompetitive and procompetitive explanations for its use? Does each component of market power have the same probative force? Or even influence optimal liability determinations in the same direction? This Article’s ground-up investigation of market power finds that the answers often differ from what is generally believed and sometimes are surprising — notably, higher levels of certain market power measures or particular market power components sometimes disfavor liability. This gulf between conventional wisdom and correct understanding suggests the need to redirect research agendas, agency guidance, and competition law doctrine.
Louis Kaplow, Commentary on Chapter 5, in The Economics of Tax Policy (Alan J. Auerbach & Kent Smetters eds., 2017).
Categories:
Taxation
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Tax Policy
Type: Book
Louis Kaplow, A Distribution-Neutral Perspective on Tax Expenditure Limitations, 31 Tax Pol’y & Econ. 161 (2017).
Categories:
Taxation
Sub-Categories:
Tax Policy
Type: Article
Abstract
A recent wave of literature, partly motivated by presidential campaign tax reform plans, analyzes tax expenditure limitation proposals. These reforms are often advanced not only, or even primarily, because they reduce distortions caused by favoritism for some types of expenditures over others. Largely they are urged for a number of other reasons: on distributive grounds, because the resulting broader base enables lower marginal tax rates and hence less distortion of labor effort and other margins, and to raise revenue without requiring higher marginal tax rates. It is generally recognized that the particular results on these dimensions are heavily dependent on what sorts of rate adjustments are used to return the proceeds to taxpayers. Often, revenue neutrality is assumed. This essay advances a complementary, distribution-neutral perspective on the analysis of tax expenditure limitations. Distribution-neutral implementation provides an illuminating benchmark against which to understand prior analysts’ large number of results and, more importantly, clarifies the analysis, particularly of the distribution-distortion tradeoff. The central lessons contradict the common belief that one can have less distortion of labor supply through lower marginal tax rates while also maintaining or enhancing progressivity.
Howell Jackson, Louis Kaplow, Steven Shavell , W. Kip Viscusi & David Cope, Analytical Methods for Lawyers (Found. Press 3rd ed., 2017).
Categories:
Legal Profession
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Legal Education
Type: Book
Abstract
This law school casebook was developed by a team of professors at Harvard Law School to introduce students with little or no quantitative background to the basic analytical techniques that attorneys need to master to represent their clients effectively. This casebook presents clear explanations of decision analysis, games and information, contracting, accounting, finance, microeconomics, economic analysis of the law, fundamentals of statistics, and multiple regression analysis. References and examples have been thoroughly updated for this 3rd edition, and exposition of a number of key topics has been reworked to reflect insights gained from teaching these topics using the 1st edition to many hundreds of Harvard Law students over the past decade.
Louis Kaplow, The Meaning of Vertical Agreement and the Structure of Competition Law, 80 Antitrust L.J. 563 (2016).
Categories:
Corporate Law & Securities
Sub-Categories:
Antitrust & Competition Law
Type: Article
Abstract
Competition law’s vertical agreement requirement is widely regarded to be perplexing and to offer a fairly limited unilateral action defense. These views prove to be understated. The underlying distinction is incoherent on a number of levels and difficult to reconcile with pertinent statutes, precedent, and practice. The requirement has little nexus with competition policy, and its satisfaction may even be associated with less, not more, anticompetitive danger. Furthermore, reflection on the thinness or nonexistence of the vertical agreement requirement renders problematic a central feature of competition law: the aim to subject myriad everyday actions of countless firms to more lenient scrutiny than that applicable to agreements, which on reflection are ever-present.
Louis Kaplow, Market Definition, Market Power, 43 Int’l J. Indus. Org. 148 (2015).
Categories:
Corporate Law & Securities
,
Banking & Finance
Sub-Categories:
Financial Markets & Institutions
,
Mergers & Acquisitions
,
Antitrust & Competition Law
Type: Article
Abstract
Market definition and market power are central features of competition law and practice but pose serious challenges. On one hand, market definition suffers decisive logical infirmities that render it infeasible, unnecessary, and counterproductive, and the practice of stating market power requirements as market share threshold tests is incoherent as a matter of empirics and policy. On the other hand, market power is often probative of the desirability of liability, yet the typically assumed functional relationship is unexplored and often implausible. These latter deficiencies are addressed through a ground-up analysis of the channels by which market power can be relevant. It is important to explicitly and simultaneously consider both anti-competitive and pro-competitive explanations for challenged practices and to attend to the magnitudes of the social consequences of correct and mistaken imposition of liability in order to identify the various ways and senses in which market power bears on optimal decision-making.
Louis Kaplow, Information and the Aim of Adjudication: Truth or Consequences?, 67 Stan. L. Rev. 1303 (2015).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
Type: Article
Abstract
Adjudication is fundamentally about information, usually concerning individuals' previous or proposed behavior. Legal system design is challenging because information ordinarily is costly and imperfect. This Article analyzes a broad array of system features, asking throughout whether design should aim at the truth or at consequences, how these approaches may differ, and what general lessons may be drawn from the comparison. It will emerge that the differences in approach are often large and their character is sometimes counterintuitive. Accordingly, system engineers concerned with social welfare need to aim explicitly at consequences. This message is not one opposed to truth per se but rather a strong admonition: it is dangerous to be attached to the alluring view that adjudication is primarily about generating results most in accord with the truth of the matter at hand.
Louis Kaplow, Government Policy and Labor Supply with Myopic or Targeted Savings Decisions 29 Tax Pol'y & Econ. 159 (2015).
Categories:
Taxation
,
Labor & Employment
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Behavioral Sciences
,
Retirement Benefits & Social Security
,
Employee Benefits
,
Tax Policy
Type: Article
Abstract
A central justification for social insurance and for other policies aimed at retirement savings is that individuals may fail to make adequate provision during their working years. Much research has focused on myopia and other behavioral limitations. Yet little attention has been devoted to how these infirmities, and government policies to rectify them, influence labor supply. This linkage could be extremely important in light of the large pre-existing distortion due to income and consumption taxation and income-based transfer programs. For example, might myopic individuals, as a first approximation, view payroll taxes and other withholding to fund retirement savings as akin to an income tax, while largely ignoring the distant future retirement benefits that they fund? If so, the distortion of labor supply may be many times higher than otherwise, making savings-promotion policies much more costly than appreciated. Or consider what may be the labor supply implications for an individual who is defaulted into higher savings and, as a consequence, sees concomitantly lower take-home pay. This essay offers a preliminary, conceptual exploration of these questions. In most of the cases considered, savings policies do not act purely like a tax despite individuals’ non-optimizing savings behavior, and in some cases labor supply actually is raised, not lowered, in which event policies that boost savings may be significantly more welfare-enhancing than recognized. Accordingly, there is a compelling need for empirical exploration of the interaction between nonoptimal savings behavior and labor supply.
Louis Kaplow, Myopia and the Effects of Social Security and Capital Taxation on Labor Supply, 68 Nat'l Tax J. 1 (2015).
Categories:
Taxation
,
Labor & Employment
Sub-Categories:
Labor Law
,
Retirement Benefits & Social Security
,
Tax Policy
Type: Article
Abstract
This article analyzes the effect of savings-related policies on labor supply in a model that explicitly incorporates myopic decision-making. Both social security and capital taxation may cause labor supply to rise or fall when individuals are myopic, depending on the curvature of individuals' utility as a function of consumption. Moreover, whatever is the sign of these effects under one assumption about how myopia relates to labor supply decisions, the sign is reversed under the other assumption that is considered. Additionally, some interventions have a first-order effect on labor supply from the outset but others do not, and some labor supply effects rise with the magnitude of the intervention whereas others fall.
Louis Kaplow, Likelihood Ratio Tests and Legal Decision Rules, 16 Am. L. and Econ. Rev. 1 (2014).
Categories:
Disciplinary Perspectives & Law
Sub-Categories:
Empirical Legal Studies
Type: Article
Abstract
Various legal decision-making criteria can be formulated as likelihood ratio tests, wherein liability, prohibition, or other outcomes are associated with evidence strength exceeding a posited threshold. Stating rules in this manner clarifies their nature, facilitates the comparison of conventional and optimal rules as well as the identification of differences between rules across contexts, and provides further illumination in instances in which a decision standard is not truly a likelihood ratio test.
Louis Kaplow, Market Definition, in The Oxford Handbook of International Antitrust Economics (Roger D. Blair & D. Daniel Sokol eds., 2014).
Categories:
Banking & Finance
,
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Financial Markets & Institutions
,
Economics
,
Antitrust & Competition Law
,
Mergers & Acquisitions
,
Law & Economics
Type: Book
Abstract
Market definition has long held a central place in competition law. This entry surveys recent analytical work that has called the market definition paradigm into question on a number of fronts: whether the process is feasible, whether market share threshold tests are coherent, whether the hypothetical monopolist test in merger guidelines is counterproductive, and whether and when the frequent focus on cross-elasticities is useful.
Louis Kaplow, Multistage Adjudication, 126 Harv. L. Rev. 1179 (2013).
Categories:
Civil Practice & Procedure
Sub-Categories:
Litigation & Settlement
Type: Article
Abstract
Legal proceedings often involve multiple stages: U.S. civil litigation allows motions to dismiss and for summary judgment prior to trial; government agencies as well as prosecutors employ investigative and screening processes before initiating formal adjudication; and many Continental tribunals move forward sequentially. Decisionmaking criteria have proved controversial, as indicated by reactions to the Supreme Court's recent decisions in Twombly and Iqbal and its 1986 summary judgment trilogy, which together implicate the Supreme Court cases most cited by federal courts. Neither jurists nor commentators have articulated coherent, noncircular legal standards, and no attempt has been made to examine systematically how decisions at different procedural stages should ideally be made in light of the legal system's objectives. This Article presents a foundational analysis of the subject. The investigation illuminates central elements of legal system design, recasts existing debates about decision standards, identifies pathways for reform, and provides new perspectives on the nature of facts and evidence and on the relationship between substantive and procedural law.
Louis Kaplow, Market Definition: Impossible and Counterproductive, 79 Antitrust L.J. 361 (2013).
Categories:
Corporate Law & Securities
,
Banking & Finance
Sub-Categories:
Financial Markets & Institutions
,
Mergers & Acquisitions
,
Antitrust & Competition Law
Type: Article
Abstract
In recent articles, I have advanced a number of criticisms of the market definition/redefinition paradigm, chief among them that market definition is impossible and counterproductive. First, there is no valid way to infer market power from market shares in redefined (non-homogeneous-goods) markets. Second, one cannot choose which market definition is superior without already having in hand one’s best estimate of market power, rendering the exercise pointless. Worse, market power inferences in the chosen market are inferior to the best estimate with which one began. After elaborating these points, this Essay applies them to the three main settings in which the hypothetical monopolist test is employed in various jurisdictions’ merger guidelines, showing this test to be counterproductive in every instance. Finally, it addresses reasons that some are nevertheless reluctant to abandon market definition altogether.
Louis Kaplow, Optimal Control of Externalities in the Presence of Income Taxation, 53 Int'l. Econ. Rev. 487 (2012).
Categories:
Taxation
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Tax Policy
Type: Article
Abstract
A substantial literature examines how the Pigouvian directive that marginal taxes should equal marginal external harms needs to be modified in light of the preexisting distortion due to labor income taxation. Additional literature considers distributive concerns. It is demonstrated, however, that simple first-best rules unmodified for labor supply distortion or distribution are correct in the model examined. Specifically, setting all commodity taxes equal to marginal harms (and subsidies equal to marginal benefits) can generate a Pareto improvement, as can a marginal reform toward the first-best. Qualifications and explanations for differences from previous work are also presented.
Louis Kaplow, Burden of Proof, 121 Yale L.J. 738 (2012).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Evidence
,
Practice & Procedure
,
Litigation & Settlement
,
Law & Economics
Type: Article
Abstract
The burden of proof is a central feature of all systems of adjudication, yet one that has been subject to little normative analysis. This Article examines how strong evidence should have to be in order to assign liability when the objective is to maximize social welfare. In basic settings, there is a tradeoff between deterrence benefits and chilling costs, and the optimal proof requirement is determined by factors that are almost entirely distinct from those underlying the preponderance of the evidence rule and other traditional standards. As a consequence, these familiar burden of proof rules have some surprising properties, as do alternative criteria that have been advanced. The Article also considers how setting the proof burden interacts with other features of legal system design: the determination of enforcement effort, the level of sanctions, and the degree of accuracy of adjudication. It compares and contrasts a variety of legal environments and methods of enforcement, explaining how the appropriate proof requirements differ qualitatively across contexts. Most of the questions raised and answers presented differ in kind as well as in result from those in prior literature.
Louis Kaplow, Market Definition Alchemy, 57 Antitrust Bull. 915 (2012).
Categories:
Corporate Law & Securities
Sub-Categories:
Antitrust & Competition Law
Type: Article
Abstract
In a recent series of articles, I argue that the market definition/market share paradigm should be abandoned entirely. Among my central claims are that: (1) as a matter of economic logic, there exists no valid way to infer market power from the market shares in redefined (non-homogeneous-goods) markets — short of entirely reversing the market redefinition; and (2) choosing a best market requires already having in hand one’s best estimate of market power, rendering the exercise pointless — actually worse, since the market power inference from the chosen market is inferior to the estimate with which one began. Not surprisingly, criticisms advanced in this Symposium and elsewhere do not succeed in repealing the laws of logic, any more than medieval alchemists were able to overturn the laws of nature.
Louis Kaplow, On the Optimal Burden of Proof, 119 J. Pol. Econ. 1104 (2011).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Evidence
,
Practice & Procedure
,
Law & Economics
Type: Article
Abstract
The burden of proof, a central feature of adjudication and other decision-making contexts, constitutes an important but largely unappreciated policy instrument. The optimal strength of the burden of proof, as well as optimal enforcement effort and sanctions, involves trading off deterrence and the chilling of desirable behavior, the latter being absent in previous work. The character of the optimum differs markedly from prior results and from conventional understandings of proof burdens. There are important divergences across models in which enforcement involves monitoring, investigation, and auditing. A number of extensions are analyzed, in one instance nullifying key results in prior work.
Louis Kaplow, Targeted Savings and Labor Supply, 18 Int'l. Tax & Pub. Fin. 507 (2011).
Categories:
Labor & Employment
,
Taxation
Sub-Categories:
Retirement Benefits & Social Security
,
Tax Policy
Type: Article
Abstract
Substantial evidence suggests that savings behavior may depart from neoclassical optimization. This article examines the implications of raising the savings rate-whether through social security, retirement plans, or otherwise-for labor supply, where labor supply is determined by behavioral utility functions that reflect the non-neoclassical character of savings behavior. Under one formulation, raising the targeted savings rate increases labor supply regardless of the slope of the labor supply curve; under a second, raising the targeted savings rate has the same effect on labor supply as that of raising the labor income tax rate; and under a third, raising the targeted savings rate has no effect on labor supply. Effects on labor supply are particularly consequential because of the significant preexisting distortion due to labor income taxation.
Abstract
A notable feature and principal virtue of Tax by Design is its system-wide perspective on different elements of the tax system. This review essay builds on this trait and offers a more explicit foundation for the report's general approach, drawing on a distribution-neutral methodology that is developed in other work. This technique is then employed to illuminate and extend Tax by Design's analysis regarding the VAT, environmental taxation, wealth transfer taxation and income transfers.
Abstract
The recently issued revision of the US Horizontal Merger Guidelines, like its predecessors and mirrored by similar guidelines throughout the world, devotes substantial attention to the market definition process and the implications of market shares in the market that is selected. Nevertheless, some controversy concerning the revised Guidelines questions their increased openness toward more direct, economically based methods of predicting the competitive effects of mergers. By contrast, this article suggests that, as a matter of economic logic, the Guidelines revision can only be criticized for its timidity. Indeed, economic principles unambiguously favor elimination of the market definition process altogether.
Louis Kaplow, Market Share Thresholds: On the Conflation of Empirical Assessments and Legal Policy Judgments, 7 J. Competition L. & Econ. 243 (2011).
Categories:
Corporate Law & Securities
Sub-Categories:
Antitrust & Competition Law
Type: Article
Abstract
In competition law, market power requirements are often articulated in terms of market shares. The use of market share thresholds, however, conflates two distinct questions: First, how much market power exists in a given situation? Second, how much market power should the law require? As a consequence, neither question is answered, or even directly illuminated. Furthermore, because market shares are not themselves measures of market power but instead merely a factor that bears on its magnitude in a given setting, they are inapt answers to both inquiries. Their use involves a category mistake. The identified problems are illustrated by unpacking Learned Hand's famous pronouncement in Alcoa of the market shares required for the offense of monopolization, but the core defects characterize all market share declarations.
Louis Kaplow, On the Meaning of Horizontal Agreements in Competition Law, 99 Calif. L. Rev. 683 (2011).
Categories:
Corporate Law & Securities
Sub-Categories:
Antitrust & Competition Law
Type: Article
Abstract
Competition law's prohibition on price fixing and related horizontal agreements is one of its few uncontroversial provisions and is understood to be well grounded in economic principles that are taken to provide the foundation for competition policy. Upon examination, however, commonly offered views of the law's conception of agreement prove to be difficult to articulate in an operational manner, at odds with key aspects of legal doctrine and practice, and unrelated to core elements of modern oligopoly theory. This Article explores these and other features of the agreement requirement and suggests the need for a wholesale rethinking of how competition law should approach the oligopoly problem.
Louis Kaplow, On the Choice of Welfare Standards in Competition Law (Harv. L. & Econ. Discussion Paper No. 693, May 1, 2011).
Categories:
Consumer Finance
,
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Consumer Protection Law
,
Antitrust & Competition Law
,
Law & Economics
Type: Article
Abstract
This article addresses two issues relating to the choice between a consumer welfare and total welfare standard for competition law. First, it considers whether distributive considerations may favor a consumer welfare standard, or at least some underweighting of producer surplus in a total welfare assessment. The argument that focusing on consumer welfare is poorly targeted to general redistributive objectives is correct but not decisive since the distributive incidences of consumer and producer surplus differ significantly. By contrast, the argument that it is more efficient to rely exclusively on the tax and transfer system to achieve general distributive objectives is normatively powerful. Second, the relevance of the preexisting level of price elevation (relative to a competitive, marginal cost benchmark) is found to be quite different under the two standards. For a given additional price increase caused by anticompetitive activity, the marginal sacrifice of consumer welfare is greatest when there is no preexisting elevation and gradually falls as the initial elevation grows. By contrast, the marginal sacrifice of total welfare (deadweight loss) is negligible when there is no preexisting elevation and rises as the initial elevation grows. This difference has implications for competition policy, most directly for that toward horizontal mergers and price-fixing, along with practices that facilitate coordinated price elevation.
Louis Kaplow, Optimal Proof Burdens, Deterrence, and the Chilling of Desirable Behavior, 101 Am. Econ. Rev. 277 (2011).
Categories:
Disciplinary Perspectives & Law
,
Civil Practice & Procedure
Sub-Categories:
Evidence
,
Law & Economics
,
Law & Behavioral Sciences
Type: Article
Abstract
The optimal stringency of the burden of proof is characterized in a model in which relaxing the proof burden enhances deterrence but also chills desirable behavior. The results are strikingly different from those in prior work that uses a simpler model in which individuals only choose whether to commit a harmful act (so only deterrence is at stake). Moreover, the qualitative differences between the optimal rule and the familiar preponderance of the evidence rule----and related rules that look to Bayesian posteriors----are great, much more so than revealed by prior work.
Louis Kaplow, Discount Rates, Social Judgments, Individuals' Risk Preferences, and Uncertainty, 42 J. Risk & Uncertainty 125 (2011).
Categories:
Disciplinary Perspectives & Law
,
Banking & Finance
Sub-Categories:
Risk Regulation
,
Law & Economics
,
Law & Behavioral Sciences
Type: Article
Abstract
The choice of the proper discount rate is important in the analysis of projects whose costs and benefits extend into the future, a particularly striking feature of policies directed at climate change. Much of the literature, including prominent work by Arrow et al. (1996), Stern (2007, 2008), and Dasgupta (2008), employs a reduced-form approach that conflates social value judgments and individuals' risk preferences, the latter raising an empirical question about choices under uncertainty rather than a matter for ethical reflection. This article offers a simple, explicit decomposition that clarifies the distinction, reveals unappreciated difficulties with the reduced-form approach, and relates them to the literature. In addition, it explores how significant uncertainty about future consumption, another central factor in climate policy assessment, raises further complications regarding the relationship between social judgments and individuals' risk preferences.
Louis Kaplow, An Economic Approach to Price Fixing, 77 Antitrust L.J. 343 (2011).
Categories:
Disciplinary Perspectives & Law
,
Corporate Law & Securities
Sub-Categories:
Antitrust & Competition Law
,
Law & Economics
Type: Article
Abstract
This article examines optimal policy toward coordinated oligopolistic price elevation. First, it analyzes the social welfare implications of enforcement, elaborating the value of deterrence and the nature of possible chilling effects. Then, it explores a variety of means of detection, with particular attention to the sorts of errors that may arise under each. Finally, it examines the level and type of sanctions that should be employed. It emerges that there is remarkably little overlap in content between the present investigation and prior legal policy work on the subject. Some central issues have been ignored while particular resolutions of others have been taken for granted, thereby indicating the need for wholesale reassessment.
Louis Kaplow, Direct Versus Communications-Based Prohibitions on Price Fixing, 3 J. Legal Analysis 449 (2011).
Categories:
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Antitrust & Competition Law
,
Law & Economics
Type: Article
Abstract
This article compares two policies toward coordinated oligopolistic price elevation. Most commentators endorse the view that the law should (and does) prohibit only those price elevations produced by certain sorts of interfirm communications, such as secret price negotiations. In contrast, little attention has been devoted to a more direct approach that encompasses all coordinated price elevations that can be detected and sanctioned effectively. It is demonstrated that the conventional formulation rests on numerous misconceptions, involves complex and costly detection if its logical implications are taken seriously, and tends to target cases with relatively low deterrence benefits and high chilling costs in contrast to those targeted under the direct approach.
Howell E. Jackson, Louis Kaplow, Steven M. Shavell, W. Kip Viscusi & David Cope, Analytical Methods for Lawyers (Found. Press 2nd ed. 2010).
Categories:
Legal Profession
,
Disciplinary Perspectives & Law
Sub-Categories:
Legal Theory & Philosophy
,
Legal Education
Type: Book
Abstract
This law school casebook was developed by a team of professors at Harvard Law School to introduce students with little or no quantitative background to the basic analytical techniques that attorneys need to master to represent their clients effectively. This casebook presents clear explanations of decision analysis, games and information, contracting, accounting, finance, microeconomics, economic analysis of the law, fundamentals of statistics, and multiple regression analysis. References and examples have been thoroughly updated for this 2d edition, and exposition of a number of key topics has been reworked to reflect insights gained from teaching these topics using the 1st edition to many hundreds of Harvard Law students over the past decade.
Louis Kaplow, Why (Ever) Define Markets?, 124 Harv. L. Rev. 437 (2010).
Categories:
Banking & Finance
,
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Financial Markets & Institutions
,
Antitrust & Competition Law
,
Law & Economics
,
Legal Theory & Philosophy
Type: Article
Abstract
Competition law is dominated by the market definition / market share paradigm, under which a relevant market is defined and pertinent market shares therein are examined in order to make inferences about market power. This Article advances the immodest claim that the market definition process is incoherent as a matter of basic economic principles and hence should be abandoned entirely. This conclusion rests on four arguments. First, meaningful inferences of market power in redefined markets cannot be made. Second, the paradigm relies on an unarticulated notion of a standard reference market whose necessity and prior omission signal a serious gap. Third and most important, determining what market definition is best is impossible without first formulating a best estimate of market power, rendering further analysis pointless and possibly leading to erroneous outcomes. Finally, the need to define markets engenders a mistaken focus on cross-elasticities of demand for particular substitutes rather than on the market elasticity of demand, which further reduces the quality of resulting market power inferences. Although the inquiry is conceptual, brief remarks on legal doctrine suggest that creating conformity may not be unduly difficult.
Louis Kaplow, Taxing Leisure Complements, 48 Econ. Inquiry 1065 (2010).
Categories:
Disciplinary Perspectives & Law
,
Taxation
Sub-Categories:
Law & Economics
,
Legal Theory & Philosophy
,
Tax Policy
,
Taxation - Personal Income
,
Taxation - Transactional
Type: Article
Abstract
Ever since Corlett and Hague, it has been understood that it tends to be optimal on second‐best grounds to (relatively) tax complements to leisure and subsidize substitutes because doing so helps to offset the distorting effect of taxation on labor supply. Yet, Atkinson and Stiglitz’s optimal income/commodity tax analysis claims to demonstrate the opposite, and derivations in leading texts on optimal taxation offer opposing conclusions regarding the sign of optimal deviation of commodity taxes from uniformity. It is demonstrated that the optimality of relatively taxing leisure complements is indeed correct, and conflicting results are explained.
Louis Kaplow, Taxes, Permits, and Climate Change (NBER Working Paper No. w16268, Aug. 2010).
Categories:
Environmental Law
,
Taxation
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Climate Change
,
Tax Policy
,
Taxation - Corporate
,
Taxation - Federal
Type: Article
Abstract
This essay revisits the question of instrument choice for the regulation of externalities in the context of climate change. The central point is that the Pigouvian prescription to equate marginal control costs with the expected marginal benefits of damage reduction should guide the design of both carbon taxes and permit schemes. Because expected marginal damage rises nonlinearly, a corresponding nonlinear tax - or an equivalent price implemented through a quantity-adjusted permit scheme - is second best. Also considered are political factors, distinctive features of regulating a stock pollutant, and ex ante distortions due to the anticipation of transition relief (such as by receiving more free permits for greater emissions). Finally, distributive concerns are examined, with emphasis on the conceptual and practical benefits of addressing distributive issues with the tax and transfer system rather through adjustments to regulatory schemes that usually render them less effective.
Louis Kaplow, On the Taxation of Private Transfers (NBER Working Paper No. w15818, Mar. 2010).
Categories:
Disciplinary Perspectives & Law
,
Taxation
Sub-Categories:
Law & Economics
,
Tax Policy
,
Taxation - Federal Estate & Gift
Type: Other
Abstract
This essay considers the appropriate conceptual framework for assessing the taxation of private transfers to individuals. Although it is conventional to emphasize the role of estate and gift taxation or inheritance taxation in redistributing income from the rich to the poor, the revenue effects of transfer taxation, and its distortionary effect on labor supply and savings, it is suggested in line with some recent work that the dominant focus should be on positive and negative externalities attributable to giving. The fundamental reason is that transfer tax reform can be combined with adjustments to other aspects of the fiscal system, notably the income tax, so as to keep constant most effects other than externalities.
Louis Kaplow, Concavity of Utility, Concavity of Welfare, and Redistribution of Income, 17 Int’l Tax & Pub. Fin. 25 (2010).
Categories:
Disciplinary Perspectives & Law
,
Taxation
Sub-Categories:
Law & Economics
,
Taxation - Personal Income
Type: Article
Abstract
The marginal social value of income redistribution is understood to depend on both the concavity of individuals' utility functions and the concavity of the social welfare function. In the pertinent literatures, notably on optimal income taxation and on normative inequality measurement, it seems to be accepted that the role of these two sources of concavity is symmetric with regard to the social concern about inequality in the distribution of income. Direct examination of the question, however, reveals that this is not the case. Concavity of utility has a simple, direct effect on the marginal social value of redistribution, as might be expected, whereas concavity of the social welfare function has a more subtle influence, one that in some cases may not be very significant. The implications of this difference are examined for some standard forms of utility and welfare functions, including particular versions that appear in the optimal income taxation literature.
Louis Kaplow, Elisabeth J. Moyer & David A. Weisbach, The Social Evaluation of Intergenerational Policies and its Application to Integrated Assessment Models of Climate Change, 10 B.E. J. Econ. Analysis & Pol’y 1-34 (2010).
Categories:
Environmental Law
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Climate Change
Type: Article
Abstract
Assessment of climate change policies requires aggregation of costs and benefits over time and across generations, a process ordinarily done through discounting. Choosing the correct discount rate has proved controversial and highly consequential. To clarify past analysis and guide future work, we decompose discounting along two dimensions. First, we distinguish discounting by individuals, an empirical matter that determines their behavior in models, and discounting by an outside evaluator, an ethical matter involving the choice of a social welfare function. Second, for each type of discounting, we distinguish that due to pure time preference from that attributable to curvature of the pertinent function: utility functions (of consumption) for individuals and the social welfare function (of utilities) for the evaluator. We apply our analysis to leading integrated assessment models used to evaluate climate policies. We find that past work often confounds different sources of discounting, and we offer suggestions for avoiding these difficulties. Finally, we relate the standard intergenerational framework that combines considerations of efficiency and distribution to more familiar modes of analysis that assess most policies in terms of efficiency, leaving distributive concerns to the tax and transfer system.
Louis Kaplow, Utility from Accumulation, Proc. Ann. Conf. on Tax'n, 2009, at 189.
Categories:
Taxation
,
Disciplinary Perspectives & Law
,
Property Law
Sub-Categories:
Law & Behavioral Sciences
,
Law & Economics
,
Legal Theory & Philosophy
,
Estates
,
Taxation - Federal Estate & Gift
Type: Article
Abstract
The present investigation incorporates utility from accumulation in an intertemporal model in order to examine effects on consumption, savings, inter vivos gifts and bequests (both to descendants and to charities), and annuitization. It is natural to explore these relationships. Moreover, in these areas there are empirical regularities that seem difficult to explain using conventional models. In choosing between inter vivos gifts and bequests to descendants, individuals seem to do far too little of the former in light of the potential estate tax savings. The magnitude of charitable bequests (versus inter vivos contributions) also seems puzzling in light of tax considerations. The next section presents the model, analyzes individuals' optimizing behavior, and derives results regarding the effects of utility from accumulation. A final section relates these findings to observed behavior.
Louis Kaplow, Optimal Policy with Heterogeneous Preferences, 8 B.E. J. Econ. Analysis & Pol’y art. 40 (2008).
Categories:
Disciplinary Perspectives & Law
,
Discrimination & Civil Rights
,
Taxation
,
Banking & Finance
Sub-Categories:
Economics
,
Investment Products
,
Social Welfare Law
,
Law & Economics
,
Tax Policy
,
Taxation - Personal Income
Type: Article
Abstract
Optimal policy rules—including those regarding income taxation, commodity taxation, public goods, and externalities—are typically derived in models with homogeneous preferences. This article reconsiders many central results for the case in which preferences for commodities, public goods, and externalities are heterogeneous. When preference differences are observable, standard second-best results in basic settings are unaffected, except those for the optimal income tax. Optimal levels of income taxation may be higher, the same, or lower on types who derive more utility from various goods, depending on the nature of preference differences and the concavity of the social welfare function. When preference differences are unobservable, all policy rules may change. The determinants of even the direction of optimal rule adjustments are many and subtle.
Louis Kaplow, Optimal Taxation, in The New Palgrave Dictionary of Economics 4721 (Steven Durlauf & Lawrence Blume eds., 2d ed. 2008).
Categories:
Taxation
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Tax Policy
,
Taxation - Personal Income
Type: Book
Louis Kaplow, Pareto Principle and Competing Principles, in The New Palgrave Dictionary of Economics 4807 (Steven Durlauf & Lawrence Blume eds., 2d ed. 2008).
Categories:
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Law & Behavioral Sciences
Type: Book
Abstract
The Pareto principle, the seemingly incontrovertible dictum that if all individuals prefer some regime to another then so should society, may conflict with competing principles. Arrow's impossibility theorem and Sen's liberal paradox are two notable examples. Subsequent work indicates more broadly that the Pareto principle conflicts with all non-welfarist principles. This essay surveys these results, including various extensions thereof, and offers perspectives on the conflict, drawing on classical and contemporary work in political economy and economic psychology.
Louis Kaplow, Discounting Dollars, Discounting Lives: Intergenerational Distributive Justice and Efficiency, 74 U. Chi. L. Rev. 79 (2007).
Categories:
Disciplinary Perspectives & Law
,
Taxation
,
Property Law
,
Labor & Employment
Sub-Categories:
Law & Economics
,
Retirement Benefits & Social Security
,
Retirement Security
,
Taxation - Personal Income
,
Tax Policy
Type: Presentation
Abstract
The view that intergenerational distributive justice and efficiency should be treated separately is familiar, yet controversial. This article elaborates the often-implicit justifications for separate treatment and provides a more express statement of how and when such treatment is appropriate. Substantial attention is devoted to an approach that holds constant the intra- and intergenerational distribution of well-being, which proves to be a valuable analytical device even for intergenerational policies that are not distribution neutral. Also explored are possible interrelationships between intergenerational distributive justice and efficiency, the choice of interest rate for discounting dollars, and how the present approach relates to those that would employ direct social weights to dollars at different points in time.
Louis Kaplow, Primary Goods, Capabilities, . . . Or Well-Being?, 116 Phil. Rev. 603 (2007).
Categories:
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Legal Theory & Philosophy
Type: Article
Abstract
Theories of distributive justice and of the aggregate social good typically require a method of assessing each individual's situation. Among the common measures are primary goods, capabilities, and well-being. This article advances the argument that approaches that focus on the means of fulfillment, where the means are multi-dimensional, are subject to an objection if advanced as ideal normative theories. In general, it is possible to raise every individual's well-being by deviating from the dictates of means-based theories. This result is problematic not only on welfarist grounds but also if freedom, autonomy, or consent is regarded to be important. It is suggested that means-based theories nevertheless have appeal, but for instrumental, not intrinsic reasons.
Louis Kaplow & Steven Shavell, Moral Rules, the Moral Sentiments, and Behavior: Toward a Theory of an Optimal Moral System, 115 J. Pol. Econ. 494 (2007).
Categories:
Disciplinary Perspectives & Law
Sub-Categories:
Law & Behavioral Sciences
,
Law & Economics
Type: Article
Abstract
How should moral sanctions and moral rewards - the moral sentiments involving feelings of guilt and of virtue - be employed to govern individuals' behavior if the objective is to maximize social welfare? In the model that we examine, guilt is a disincentive to act and virtue is an incentive because we assume that they are negative and positive sources of utility. We also suppose that guilt and virtue are costly to inculcate and are subject to certain constraints on their use. We show that the moral sentiments should be used chiefly to control externalities and further that guilt is best to employ when most harmful acts can successfully be deterred whereas virtue is best when only a few individuals can be induced to behave well. We also contrast the optimal use of guilt and virtue to optimal Pigouvian taxation and discuss extensions of our analysis.
Louis Kaplow, Optimal Income Transfers, 14 Int’l Tax & Pub. Fin. 295 (2007).
Categories:
Discrimination & Civil Rights
,
Taxation
,
Disciplinary Perspectives & Law
,
Government & Politics
Sub-Categories:
Poverty Law
,
Law & Economics
,
Government Benefits
,
Taxation - Personal Income
,
Tax Policy
Type: Article
Abstract
A substantial literature addresses the design of transfer programs and policies, including the negative income tax, other means-tested transfers, the earned income tax credit, categorical assistance, and work inducements. This work is largely independent of that on the optimal nonlinear income tax, yet formulations of such a tax necessarily address how low-income individuals should be treated. This paper draws on the optimal income taxation literature to illuminate the analysis of transfer programs, including the level and shape of marginal tax rates (including phase-outs), the structure of categorical assistance, and the role of work inducements in an optimal income transfer scheme.
Louis Kaplow & Carl Shapiro, Antitrust (NBER Working Paper No. w12867, Harv. L. & Econ. Discussion Paper No. 575, Jan. 2007).
Categories:
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Antitrust & Competition Law
,
Law & Economics
Type: Other
Abstract
This is a survey of the economic principles that underlie antitrust law and how those principles relate to competition policy. We address four core subject areas: market power, collusion, mergers between competitors, and monopolization. In each area, we select the most relevant portions of current economic knowledge and use that knowledge to critically assess central features of antitrust policy. Our objective is to foster the improvement of legal regimes and also to identify topics where further analytical and empirical exploration would be useful.
Louis Kaplow, Taxation, in Handbook of Law and Economics 647 (A. Mitchell Polinsky & Steven Shavell eds., 2007).
Categories:
Taxation
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
Type: Book
Abstract
This Handbook entry presents a conceptual, normative overview of the subject of taxation. It emphasizes the relationships among the main functions of taxation - notably, raising revenue, redistributing income, and correcting externalities - and the mapping between these functions and various forms of taxation. Different types of taxation as well as expenditures on transfers and public goods are each integrated into a common optimal tax framework with the income tax and commodity taxes at the core. Additional topics addressed include a range of dynamic issues, the unit of taxation, tax administration and enforcement, and tax equity.
Louis Kaplow, Taxation and Redistribution: Some Clarifications, 60 Tax L. Rev. 57 (2007).
Categories:
Taxation
Sub-Categories:
Taxation - Personal Income
Type: Article
Louis Kaplow, Public Goods and the Distribution of Income, 50 Eur. Econ. Rev. 1627 (2006).
Categories:
Taxation
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Tax Policy
,
Taxation - Personal Income
Type: Article
Abstract
This article addresses conceptual issues concerning the distributive incidence of public goods. Solutions depend on the specific purposes for asking the question of distributive incidence - notably, assessing the extent to which various public goods should be provided, determining how the provision of public goods affects the desirability of income redistribution, and providing a meaningful description of the distribution of well-being. In the course of the analysis, a simple and intuitive version of the benefit principle of taxation (qualitatively different from those commonly advanced in pertinent literatures) is presented, and some of the problems confronting empirical attempts to measure the distributive incidence of public goods are resolved.
Abstract
Expensive tastes play an important role in contemporary theories of distributive justice. In particular, some suggest that individuals are not entitled to compensation for low well-being that is attributable to expensive tastes that the individuals have freely chosen. The origins of chosen expensive tastes have not been explored, but they should be. First, the reasons that individuals might choose them could bear on how moral analysis should take them into account. Second, the choice of expensive tastes is prima facie irrational, raising the question whether concern about individuals choosing expensive tastes is warranted in the first instance. This essay considers why, if ever, individuals might choose to develop or adopt what may appear to be expensive tastes, and it suggests that the normative implications of the answers may differ from those ordinarily associated with voluntary rational choice.
Louis Kaplow, On the Undesirability of Commodity Taxation Even When Income Taxation is Not Optimal, 90 J. Pub. Econ. 1235 (2006).
Categories:
Taxation
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Taxation - Personal Income
,
Tax Policy
Type: Article
Abstract
An important result due to Atkinson and Stiglitz (1976) [Atkinson, A.B., Stiglitz, J.E., 1976. The design of tax structure: Direct versus indirect taxation. Journal of Public Economics 6, 55–75.] is that differential commodity taxation is not optimal in the presence of an optimal nonlinear income tax (given weak separability of utility between labor and all consumption goods). This article demonstrates that this conclusion holds regardless of whether the income tax is optimal. In particular, given any commodity tax and income tax system, differential commodity taxation can be eliminated in a manner that results in a Pareto improvement. Also, differential commodity taxation can be proportionally reduced so as to generate a Pareto improvement. In addition, for commodity tax reforms that neither eliminate nor proportionally reduce differential taxation, a simple efficiency condition is offered for determining whether a Pareto improvement is possible.
Louis Kaplow, Capital Levies and Transition to a Consumption Tax (NBER Working Paper No. w12259, June 1, 2006).
Categories:
Disciplinary Perspectives & Law
,
Taxation
Sub-Categories:
Law & Economics
,
Tax Policy
,
Taxation - Personal Income
Type: Article
Abstract
The merits of capital levies depend on the likelihood of repetition, the extent of anticipation, and its effects on distribution. The relevance of these features, which in varying degrees is underdeveloped or underappreciated in pertinent literatures, is elaborated and then considered with regard to the problem of transition to a consumption tax. Other transition issues are distinguished, and specific attention is devoted to rate changes under a consumption tax and whether owners of preexisting capital are effectively compensated through higher net-of-tax returns due to repeal of the income tax. The analysis is also related to literature that examines dynamic models of taxation, particularly work simulating consumption tax transitions and assessing the optimality of capital taxation in the long run.
Louis Kaplow, The Value of a Statistical Life and the Coefficient of Relative Risk Aversion, 31 J. Risk & Uncertainty 23 (2005).
Categories:
Disciplinary Perspectives & Law
Sub-Categories:
Law & Behavioral Sciences
,
Law & Economics
,
Empirical Legal Studies
Type: Article
Abstract
Individuals’ risk preferences are estimated and employed in a variety of settings, notably including choices in financial, labor, and product markets. Recent work, especially in financial economics, provides estimates of individuals’ coefficients of relative risk aversion (R’s) in excess of one, and often significantly higher. However, it can be shown that high R’s imply equally high values for the income elasticity of the value of a statistical life. Yet estimates of this elasticity, derived from labor and product markets, are in the range of 0.5 to 0.6. Furthermore, it turns out that even an R below one is difficult to reconcile with these elasticity estimates. Thus, there appears to be an important (additional) anomaly involving individuals’ risk-taking behavior in different market settings.
Louis Kaplow, Why Measure Inequality?, 3 J. Econ. Ineq. 65 (2005).
Categories:
Disciplinary Perspectives & Law
,
Discrimination & Civil Rights
Sub-Categories:
Social Welfare Law
,
Law & Economics
,
Legal Theory & Philosophy
Type: Article
Abstract
A large body of literature is devoted to the measurement of income inequality, yet little attention is given to the question, Why measure inequality? However, the reasons for measurement bear importantly on whether and how measurement should be done. Upon examination, normative measures are found to be of questionable value. Descriptive measures, by contrast, may be useful, but the appropriate measure depends on the field of application rather than on general, a priori principles of the sort that are emphasized in the existing measurement literature. Measures of poverty are also considered, and similar conclusions are reached.
Louis Kaplow, On the (Ir)relevance of Distribution and Labor Supply Distortion to Government Policy, 18 J. Econ. Perspectives 159 (2004).
Categories:
Disciplinary Perspectives & Law
,
Government & Politics
,
Taxation
Sub-Categories:
Law & Economics
,
Government Benefits
,
Tax Policy
,
Taxation - Personal Income
Type: Article
Abstract
Should the assessment of government policies, such as the provision of public goods and the control of externalities, deviate from first-best principles to account for distributive effects and the distortionary cost of labor income taxation? For example, is the optimal extent of public goods provision smaller than indicated by the Samuelson rule because finance is distortionary? Or should environmental regulations fail to internalize externalities fully if the incidence of the regulations is regressive? It is suggested that these questions are best addressed by considering distribution-neutral implementation, in which budget balance is achieved by choosing an adjustment to the income tax that offsets the distributive impact of the policy in question. In basic cases, both distribution and labor supply distortion are moot because the target policy and the tax adjustment produce offsetting effects on each. Thus, traditional first-best principles provide good benchmarks for policy analysis after all. Moreover, even when actual implementation will not be distribution neutral in aggregate, distribution-neutral policy analysis has many conceptual and practical virtues that render it quite useful to investigators.
Louis Kaplow & Steven Shavell, Reply to Ripstein: Notes on Welfarist Versus Deontological Principles, 20 Econ. & Phil. 209 (2004).
Categories:
Disciplinary Perspectives & Law
,
Legal Profession
Sub-Categories:
Legal Theory & Philosophy
,
Law & Economics
,
Legal Ethics
Type: Article
Abstract
In Fairness versus Welfare (FVW), we advance the thesis that social policies should be assessed entirely with regard to their effects on individuals' well-being. That is, no independent weight should be accorded to notions of fairness such as corrective or retributive justice or other deontological principles. Our claim is based on the demonstration that pursuit of notions of fairness has perverse effects on welfare, on other problematic aspects of the notions, and on a reconciliation of our thesis with the evident appeal of moral intuitions. Here we summarize our three arguments and explain that Professor Ripstein's commentary largely fails to respond to them. (We will pass over some of what he says because it has little to do with our book, and we will not address his rather surprising attacks on our scholarship because the reader can readily verify their inaccuracy.)
Louis Kaplow & Steven Shavell, Any Non‐welfarist Method of Policy Assessment Violates the Pareto Principle: Reply, 112 J. Pol. Econ. 249 (2004).
Categories:
Disciplinary Perspectives & Law
,
Discrimination & Civil Rights
Sub-Categories:
Law & Public Policy
,
Social Welfare Law
,
Law & Economics
,
Legal Theory & Philosophy
Type: Article
Abstract
In our 2001 article in the Journal of Political Economy, we show that any non-welfarist method of policy assessment violates the Pareto principle. In their Comment, Fleurbaey, Tungodden, and Chang question whether our result is fully general without imposing what they regard to be strong assumptions (transitivity and independence). However, as we explain in this Reply, their argument is irrelevant to the thrust of our article. Specifically, their argument concedes that if any particular society uses any non-welfarist principle, there may be a conflict with the Pareto principle. This result means that the vast multitude of principles proposed by policy-makers, philosophers, and others indeed fall within our demonstration.
Howell Jackson, Louis Kaplow, Steven Shavell, W. Kip Viscusi & David Cope, Analytical Methods for Lawyers (Found. Press 2003).
Categories:
Disciplinary Perspectives & Law
,
Legal Profession
Sub-Categories:
Legal Theory & Philosophy
,
Legal Education
Type: Book
Louis Kaplow & Steven M. Shavell, Fairness versus Welfare: Notes on the Pareto principle, preferences, and distributive justice, 32 J. Legal Stud. 331 (2003).
Categories:
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Law & Social Change
Type: Article
Abstract
In Fairness versus Welfare, we advance the thesis that social policies should be assessed entirely on the basis of their effects on individuals’ well‐being. This thesis implies that no independent weight should be accorded to notions of fairness (other than many purely distributive notions). We support our thesis in three ways: by demonstrating how notions of fairness perversely reduce welfare, indeed, sometimes everyone’s well‐being; by revealing numerous other deficiencies in the notions, including their lack of sound rationales; and by providing an account of notions of fairness that explains their intuitive appeal in a manner that reinforces the conclusion that they should not be treated as independent principles in policy assessment. In this essay, we discuss these three themes and comment on issues raised by Richard Craswell, Lewis Kornhauser, and Jeremy Waldron.
Louis Kaplow, Transition Policy: A Conceptual Framework, 13 J. Contemp. Legal Issues 161 (2003).
Categories:
Government & Politics
,
Disciplinary Perspectives & Law
,
Legal Profession
,
Taxation
Sub-Categories:
Legal Theory & Philosophy
,
Law & Economics
,
Congress & Legislation
,
Courts
,
Legal Reform
,
Tax Policy
Type: Article
Abstract
Legal change, whether through legislation, regulation, or court decision, is a common phenomenon, and virtually all reform creates both gains and losses for those who under the prior regime took actions that would have lasting effects. This article offers a conceptual framework for assessing the desirability of different transition policies, ranging from compensation of losses and taxation of gains, grandfathering of pre-enactment investments, and delayed or partial implementation to complete and immediate implementation or even retroactive application. Emphasis is placed on how transitions and various mitigation strategies affect the incentives of and risk borne by private actors as well as on the behavior of government and how it may be affected by transition policy.
Louis Kaplow & Steven Shavell, Human Nature and the Best Consequentialist Moral System (Harv. L. & Econ. Discussion Paper No. 349, Mar. 18, 2002).
Categories:
Disciplinary Perspectives & Law
Sub-Categories:
Law & Behavioral Sciences
,
Legal Theory & Philosophy
Type: Other
Abstract
In this article, we ask what system of moral rules would be best from a consequentialist perspective, given certain aspects of human nature. This question is of inherent conceptual interest and is important to explore in order better to understand the moral systems that we observe and to illuminate longstanding debates in moral theory. We make what seem to be plausible assumptions about aspects of human nature and the moral sentiments and then derive conclusions about the optimal consequentialist moral system - concerning which acts should be deemed right and wrong, and to what degree. We suggest that our results have some correspondence with observed moral systems and also help to clarify certain points of disagreement among moral theorists.
Louis Kaplow & Steven Shavell, All Individuals May Be Made Worse Off Under Any Nonwelfarist Principle (Harv. L. & Econ. Discussion Paper No. 350, Feb. 2002).
Categories:
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Legal Theory & Philosophy
Type: Article
Abstract
Nonwelfarist principles - notably, deontological principles - are often advanced to guide moral decisions. The types of choices addressed by such principles typically seem, on their face, to involve conflicts of interests among individuals. Nevertheless, it can be demonstrated that any nonwelfarist principle will, in some circumstances, favor choices that make all individuals worse off. For a variety of reasons, this conclusion has important implications for moral theories that are understood to support nonwelfarist principles.
Louis Kaplow & Steven Shavell, Fairness Versus Welfare (Harvard Univ. Press 2002).
Categories:
Disciplinary Perspectives & Law
,
Discrimination & Civil Rights
Sub-Categories:
Law & Public Policy
,
Social Welfare Law
,
Legal Theory & Philosophy
Type: Book
Abstract
By what criteria should public policy be evaluated? Fairness and justice? Or the welfare of individuals? Debate over this fundamental question has spanned the ages. Fairness versus Welfare poses a bold challenge to contemporary moral philosophy by showing that most moral principles conflict more sharply with welfare than is generally recognized. In particular, the authors demonstrate that all principles that are not based exclusively on welfare will sometimes favor policies under which literally everyone would be worse off. The book draws on the work of moral philosophers, economists, evolutionary and cognitive psychologists, and legal academics to scrutinize a number of particular subjects that have engaged legal scholars and moral philosophers. How can the deeply problematic nature of all nonwelfarist principles be reconciled with our moral instincts and intuitions that support them? The authors offer a fascinating explanation of the origins of our moral instincts and intuitions, developing ideas originally advanced by Hume and Sidgwick and more recently explored by psychologists and evolutionary theorists. Their analysis indicates that most moral principles that seem appealing, upon examination, have a functional explanation, one that does not justify their being accorded independent weight in the assessment of public policy. Fairness versus Welfare has profound implications for the theory and practice of policy analysis and has already generated considerable debate in academia.
Louis Kaplow & Steven M. Shavell, On the Superiority of Corrective Taxes to Quantity Regulation, 4 Am. L. & Econ. Rev. 1 (2002).
Categories:
Disciplinary Perspectives & Law
,
Taxation
Sub-Categories:
Law & Economics
,
Tax Policy
Type: Article
Abstract
The traditional view of economists has been that corrective taxes are superior to direct" regulation of harmful externalities when the state's information about control costs is incomplete. " In recent years, however, many economists seem to have adopted the view that either corrective" taxes or quantity regulation could be superior to the other. One argument for this view with Weitzman (1974), holds only if the state is constrained to use a fixed tax rate (a linear tax" schedule) even when harm is nonlinear. Corrective taxes are indeed superior to quantity" regulation if -- as seems more plausible -- the state can impose a nonlinear tax equal to the" schedule of harm or can adjust the tax rate upon learning that it diverges from marginal harm. " Another argument, associated with Baumol and Oates (1988), is that quantity regulation gains" appeal when the state is uncertain about the harm caused by an externality. In this case however, a corrective tax schedule (equal to the expected harm schedule) is superior to quantity" regulation.
Louis Kaplow & Steven Shavell, Any Non‐welfarist Method of Policy Assessment Violates the Pareto Principle, 109 J. Pol. Econ. 281 (2001).
Categories:
Disciplinary Perspectives & Law
,
Discrimination & Civil Rights
Sub-Categories:
Social Welfare Law
,
Law & Public Policy
,
Law & Economics
,
Legal Theory & Philosophy
Type: Article
Abstract
The public at large, many policymakers, and a number of economists hold views of social welfare that are non‐welfarist. That is, they attach some importance to factors other than the effects of policies on individuals’ utilities. We show, however, that any non‐welfarist method of policy assessment violates the Pareto principle.
Louis Kaplow, A Framework for Assessing Estate and Gift Taxation, in Rethinking Estate and Gift Taxation 154 (William G. Gale, James R. Hines & Joel Slemrod eds., 2001).
Categories:
Taxation
Sub-Categories:
Taxation - Federal Estate & Gift
Type: Article
Abstract
Whether and how estates and gifts should be taxed has long been a controversial subject, and the approach to estate and gift taxation varies among developed countries. Arguments for and against various forms of transfer taxation have focused on concerns about the distribution of income and wealth, intergenerational equity, raising revenue, savings incentives, and other economic and philosophical issues. This essay has two purposes. The first is to examine the conceptual basis for various arguments for and against the current estate and gift tax regime and proposed alternatives. The second is to integrate policy analysis of transfer taxation with that of the rest of the tax system, notably, the income tax. The analysis begins by considering how it would be optimal to tax transfers if they are viewed simply one of many forms of expenditure by donors, and then it explores how the distinctive features of gifts and bequests may alter the conclusions. The importance of different transfer motives is discussed, and the analysis is reconsidered in the light of the importance of human capital in intergenerational transfers; differences between inter vivos transfers and bequests, between gifts to individuals and gifts to charitable institutions, and among gifts to donees having varying relationships to the donor; and the possibility that transfers are not explained by maximizing behavior.
Louis Kaplow & Steven Shavell, Notions of Fairness versus the Pareto Principle: On the Role of Logical Consistency, 110 Yale L.J. 237 (2000).
Categories:
Disciplinary Perspectives & Law
,
Legal Profession
,
Discrimination & Civil Rights
Sub-Categories:
Social Welfare Law
,
Law & Economics
,
Legal Theory & Philosophy
,
Legal Ethics
Type: Article
Abstract
Most legal academics and policymakers believe that weight should be accorded to conceptions of fairness in evaluating legal policies. In other writings, we have demonstrated that adherence to any notion of fairness will sometimes lead to a conflict with the Pareto principle. That is, to endorse a notion of fairness is to endorse the view that it can be desirable to adopt a legal rule that will reduce the well-being of every person in society. In this comment, we will be arguing that Howard Chang's position in his reply to one of our articles, in which he suggests that it is possible to imagine some notions of fairness under which this conflict does not exist, is tantamount to an abandonment of logical consistency in normative assessment of policy.
Louis Kaplow & Steven Shavell, Should Legal Rules Favor the Poor? Clarifying the Role of Legal Rules and the Income Tax in Redistributing Income, 29 J. Legal Stud. 821 (2000).
Categories:
Taxation
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Taxation - Personal Income
Type: Article
Abstract
In our 1994 article in this Journal, we demonstrated that legal rules should not be adjusted to disfavor the rich and favor the poor in order to redistribute income, because the income tax and transfer system is a more efficient means of redistribution. In this article, we revisit our argument and others that favor relying on the income tax system to redistribute income, and we then focus on qualifications to our argument that we previously offered. In particular, we elaborate on a qualification that is the subject of Chris Sanchirico's article in this issue of the Journal and explain why it has only a tangential bearing on the question whether legal rules should favor the poor and why it is of doubtful practical importance.
Louis Kaplow, Horizontal Equity: New Measures, Unclear Principles (NBER Working Paper No. w7649, Apr. 2000).
Categories:
Taxation
,
Discrimination & Civil Rights
,
Disciplinary Perspectives & Law
Sub-Categories:
Social Welfare Law
,
Law & Economics
,
Tax Policy
Type: Other
Abstract
Alan Auerbach and Kevin Hassett offer a new measure of horizontal equity (HE) that is designed to overcome deficiencies in prior indexes. There is, however, a fundamental problem that their effort shares with their predecessors' attempts: the underlying rationale for pursuing HE at the expense of individuals' well-being is never stated. Moreover, as discussed here, it appears that no plausible rationale can be given because the essence of HE involves giving weight to morally arbitrary factors. Indeed, pursuing HE may even conflict with the Pareto principle. On reflection, it seems that the appeal of HE is specious: HE does not possess intrinsic value, but rather is a rough proxy concept that may signal various ways in which unequal treatment of individuals can lead to a loss in social welfare. Unfortunately, HE indexes are not very useful even with regard to HE's proxy role.
Steven Shavell & Louis Kaplow, Principles of Fairness Versus Human Welfare: On the Evaluation of Legal Policy (Harv. L. Sch. L. & Econ. Res. Paper Series, Discussion Paper No. 277, Mar. 2000).
Categories:
Civil Practice & Procedure
,
Criminal Law & Procedure
,
Disciplinary Perspectives & Law
,
Discrimination & Civil Rights
Sub-Categories:
Sentencing & Punishment
,
Criminal Justice & Law Enforcement
,
Torts
,
Practice & Procedure
,
Social Welfare Law
,
Law & Public Policy
,
Law & Economics
,
Legal Theory & Philosophy
Type: Article
Abstract
Our thesis is that the assessment of a legal policy should depend exclusively on its effects on human welfare, that is, on the well-being of individuals. In particular, no independent evaluative weight should be accorded to notions of fairness, such as corrective justice in tort and desert in punishment. (Concerns about the distribution of income are not, however, subject to our critique.) When the choice of legal rules is influenced by notions of fairness, individuals are often made worse off. Indeed, if the prescriptions of any notion of fairness are followed, it is always possible that everyone will be made worse off. Moreover, when we examine notions of fairness and the literature that advances them, we are unable to identify reasons that, on reflection, justify giving weight to these notions at the expense of individuals' well-being. Nevertheless, notions of fairness are widely felt to be appealing. We suggest that this appeal can largely be explained by three factors: notions of fairness often correspond to social norms that usefully regulate everyday life; notions of fairness may serve as proxy devices for achieving instrumental objectives; and individuals may have a taste for satisfaction of the notions. However, we explain that none of these factors warrants employing notions of fairness as independent evaluative principles in the assessment of legal policy. We develop these arguments through consideration of specific conceptions of fairness that are employed in major areas of law: tort, contract, legal procedure, and law enforcement. We also discuss the implications of our analysis for our primary audience, legal academics and other legal policy analysts, and also for government officials, notably legislators, regulators, and judges.
Louis Kaplow & Steven Shavell, The Conflict Between Notions of Fairness and the Pareto Principle, 1 Am. L. & Econ. Rev. 63 (1999).
Categories:
Disciplinary Perspectives & Law
,
Discrimination & Civil Rights
,
Taxation
Sub-Categories:
Law & Public Policy
,
Social Welfare Law
,
Law & Economics
,
Legal Theory & Philosophy
,
Taxation - Personal Income
Type: Article
Abstract
Most legal academics and policy makers believe that notions of fairness should be accorded positive weight in evaluating legal policies. We explain, however, that ascribing importance to any notion of fairness (other than one concerned solely with the distribution of income) will sometimes lead to a conflict with the Pareto principle. That is, to endorse a notion of fairness is to endorse the view that it can be desirable to adopt a legal rule that will reduce the well-being of every person in society.
Louis Kaplow & Steven Shavell, Any Non-Individualistic Social Welfare Function Violates the Pareto Principle (Nat'l Bureau Econ. Res., Working Paper No. w7051, Mar. 1999).
Categories:
Disciplinary Perspectives & Law
,
Discrimination & Civil Rights
Sub-Categories:
Social Welfare Law
,
Law & Economics
,
Legal Theory & Philosophy
Type: Article
Abstract
The public at large, many policymakers, and some economists hold views of social welfare that attach some importance to factors other than individuals' utilities. This note shows that any such non-individualistic notion of social welfare conflicts with the Pareto principle.
Louis Kaplow, Transfer Motives and Tax Policy (Nat'l Bureau Econ. Res., Working Paper No. w6340, Mar. 1999).
Categories:
Taxation
,
Disciplinary Perspectives & Law
Sub-Categories:
Legal Theory & Philosophy
,
Taxation - Federal Estate & Gift
,
Tax Policy
Type: Article
Abstract
This paper considers the optimal tax treatment of voluntary transfers to individuals in a" framework that integrates redistributive income taxation and estate and gift taxation. Under this" formulation, redistributive considerations become secondary. The optimal tax treatment of" transfers depends upon the differences between expenditures on transfers and ordinary personal" consumption. It turns out that some types of transfers confer a sort of positive externality on" donees, some create tax revenue externalities, and some affect donors' and donees' marginal" utilities of income in a manner relevant to the optimal taxation problem. Different types of" transfers have qualitatively different effects.
Louis Kaplow & Steven Shavell, Economic Analysis of Law (John M. Olin Ctr. L. Econ. & Bus. Discussion Paper No. 251, Nat'l Bureau Econ. Res., Working Paper No. w6960, Feb. 1999).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
,
Criminal Law & Procedure
,
Property Law
Sub-Categories:
Criminal Justice & Law Enforcement
,
Torts
,
Litigation & Settlement
,
Law & Economics
,
Property Rights
Type: Article
Abstract
This is a survey of the field of economic analysis of law, focusing on the work of economists. The survey covers the three central areas of civil law liability for accidents (tort law), property law, and contracts as well as the litigation process and public enforcement of law.
Louis Kaplow, Tax Policy and Gifts, 88 Am. Econ. Rev. 283 (1998).
Categories:
Taxation
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Taxation - Federal Estate & Gift
,
Tax Policy
Type: Article
Louis Kaplow, Tax and Non-Tax Distortions, 68 J. Pub. Econ. 303 (1998).
Categories:
Disciplinary Perspectives & Law
,
Taxation
,
Labor & Employment
Sub-Categories:
Law & Economics
,
Labor Law
,
Taxation - Personal Income
Type: Article
Abstract
Measurements of the distortionary cost of labor income taxation generally assume that there are no other distortions. Browning (1994)identifies many pre-existing distortions, argues that such distortions reduce wages below the social value of labor's marginal product, and concludes that the marginal welfare cost of labor income taxation is substantially higher than suggested by previous estimates. The primary type of distortion Browning analyzes, however, has no direct effect on the marginal distortionary cost of labor income taxation.
Louis Kaplow, Accuracy, Complexity, and the Income Tax, 14 J.L. Econ. & Org. (1998).
Categories:
Disciplinary Perspectives & Law
,
Taxation
Sub-Categories:
Law & Economics
,
Tax Policy
,
Taxation - Personal Income
Type: Article
Abstract
The complexity of the income tax is an unending source of complaint, and compliance costs are estimated to be very large. Yet most recognize that some degree of complexity is necessary if income is to be measured accurately. This article presents a framework for analyzing the value of greater accuracy in income taxation. Formulations for both distributive and incentive benefits of accuracy are offered. In addition, the article takes into account that compliance costs and the effects of complex provisions are endogenous, determined in significant part by taxpayers' information acquisition efforts. The article addresses whether taxpayers have excessive or inadequate incentives to acquire information about taxable income and to challenge tax assessments.
Louis Kaplow, A Note on the Optimal Supply of Public Goods and the Distortionary Cost of Taxation, 51 Nat’l Tax J. 117 (1998).
Categories:
Taxation
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Tax Policy
,
Taxation - Personal Income
Type: Article
Abstract
In a recent article, I demonstrated that, under standard simplifying assumptions, it is possible to finance a public good in a manner such that a Pareto improvement results whenever the simple cost-benefit test is satisfied -- that is, without any adjustment for the "marginal cost of funds." In particular, the method of finance involves adjusting the income tax so that the combined incidence of the tax adjustment and the public good is distribution neutral. One implication of this result is that, if the public good is financed in some other manner, the difference in outcome will be purely redistributive, so that any change in distortionary costs will be accompanied by an opposing change in redistributive benefits. I also showed how this analysis is applicable to determining the optimal level of environmental taxes. Edgar Browning and Liqun Liu have written a critique of my article. It does not, however, disagree with any of these claims. Instead, their argument focuses on how one should interpret the term "distortion." It should not be surprising, however, that under any interpretation of the term -- including their preferred one -- my conclusions about how policy analysis should be conducted continue to be correct.
Lucian A. Bebchuk, Louis Kaplow & Jesse M. Fried, Concentration in the Israeli Economy and Bank Investment in Nonfinancial Companies (Harv. L. Sch. John M. Olin Ctr. Discussion Paper No. 209, Jan. 1997).
Categories:
Banking & Finance
,
Corporate Law & Securities
,
Disciplinary Perspectives & Law
,
Government & Politics
,
International, Foreign & Comparative Law
Sub-Categories:
Banking
,
Commercial Law
,
Economics
,
Financial Reform
,
Financial Markets & Institutions
,
Business Organizations
,
Antitrust & Competition Law
,
Law & Economics
,
Administrative Law & Agencies
,
Government Accountability
,
Foreign Law
Type: Other
Abstract
In Israel, as in a number of other economies, a few large banks have historically played a major role in the nonfinancial sector. At the end of 1995, the Israeli government appointed the Brodet Committee to examine bank investments in nonfinancial corporations. The Israeli Knesset subsequently adopted the committee's recommendations and imposed major limitations on the role of banks in the nonfinancial sector. These limitations required the two biggest Israeli banks to start selling much of their nonfinancial investments. This paper is based on the research report that we prepared for the Brodet Committee at the request of the Israeli Finance Ministry and Antitrust Authority. We explain why we recommended to the Committee that substantial limitations be imposed on bank investment in nonfinancial companies. We provide a detailed analysis of the effects that bank- conglomerate combinations have in a small economy -- such as Israel's -- that is characterized by a great deal of concentration in both the financial and nonfinancial sectors. In particular, we analyze the effects that bank-conglomerate combinations have on the safety and soundness of banks, on the decisions of the investment funds managed by banks, and on the level of competition in the economy in both the short run and the long run.
Louis Kaplow, Response: The Income Tax Versus the Consumption Tax and the Tax Treatment of Human Capital, 51 Tax L. Rev. 35 (1997).
Categories:
Taxation
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Taxation - Personal Income
,
Tax Policy
Type: Article
Abstract
In two recent articles, I explore the conceptual question of how human capital would be treated under a pure, comprehensive, accrual income tax, pursuing the analogy to accrual treatment of physical and financial capital, which has received much academic attention. My central conclusion is that conventional income tax treatment of human capital -- taxing wages when earned -- is close to the treatment required by a pure consumption tax, whereas accrual income tax treatment would be quite different from that in existing income tax systems. Professor Zelenak's article largely agrees with my central claims. Much of his article is concerned with criticizing me for advocating a consumption tax, which I do not in fact do. Indeed, I castigate the very type of argument he attempts to attribute to me and relies upon in defending his own views. It is also the case that Zelenak's affirmative arguments for the existing hybrid income/consumption tax and his various objections to particular elements of my analysis are largely without foundation.
Louis Kaplow, The Optimal Supply of Public Goods and the Distortionary Cost of Taxation, 49 Nat’l Tax J. 513 (1996).
Categories:
Disciplinary Perspectives & Law
,
Taxation
Sub-Categories:
Law & Economics
,
Tax Policy
,
Taxation - Personal Income
Type: Article
Abstract
The conventional view of economists is that the optimal supply of public goods must directly take into account the cost of financing them with distortionary taxes, notably the income tax. However, this article demonstrates, under standard simplifying assumptions, that it is possible to finance a public good in a manner that results in no additional distortion by using an adjustment to the income tax that offsets the benefits of the public good. In this case, it is optimal to supply the public good whenever the simple cost-benefit test is satisfied. The article also shows that if a different tax adjustment is made, the difference in outcome will be purely redistributive; thus, any change in distortionary costs will be accompanied by an opposing change in redistributive benefits. In this case, the cost-benefit test should be modified to reflect both of these changes. Finally, it is explained that the present analysis is fully applicable to determining the optimal level of environmental taxes.
Louis Kaplow, On the Divergence Between ‘Ideal’ and Conventional Income-Tax Treatment of Human Capital, 86 Am. Econ. Rev. 347 (1996).
Categories:
Disciplinary Perspectives & Law
,
Taxation
Sub-Categories:
Law & Economics
,
Taxation - Personal Income
Type: Article
Abstract
A substantial majority of all capital is human capital, and most revenue from the income tax is from returns on human capital, wage income. Nevertheless, work analyzing the comprehensive, accrual ("ideal") income taxation of capital has focused on physical and financial capital. Applying the learning from this work to human capital suggests that human capital is significantly undertaxed under a conventional income tax, the actual result being close to what would be appropriate under a wage or consumption tax. This undertaxation does not, however, directly alter the marginal return to investments in human capital, although it does affect intertemporal behavior and bear on the interpretation of arguments about whether income is a distributively appealing base for taxation.
Louis Kaplow & Steven Shavell, Accuracy in the Assessment of Damages, 39 J.L. & Econ. 191 (1996).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Torts
,
Law & Economics
,
Legal Theory & Philosophy
Type: Article
Abstract
Assessment of damages is a principal issue in litigation and, in light of this, we consider the social justification for, and the private benefits of, accurate measurement of harm. Greater accuracy induces injurers to exercise levels of precaution that better reflect the magnitude of the harm they are likely to generate, and, relatedly, it stimulates uninformed injurers to learn about risks before acting. However, accuracy in assessment of harm cannot influence the behavior of injurers--and is therefore of no social value--to the degree that they lack knowledge of the harm they might cause when deciding on their precautions. Regardless of the social value of accuracy, litigants generally gain by devoting resources toward proof of damages, leading often to socially excessive private incentives to establish damages.
Louis Kaplow, How Tax Complexity and Enforcement Affect the Equity and Efficiency of the Income Tax, 49 Nat’l Tax J. 135 (1996).
Categories:
Taxation
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Taxation - Personal Income
,
Tax Policy
Type: Article
Abstract
Much criticism of the income tax involves administration: the enormous complexity of the system is responsible for large compliance costs, public and private, and the tax gap is large despite substantial resources devoted to enforcement. The desire for simplification and improved compliance motivates various incremental reforms as well as proposals for fundamental restructuring of the tax system. But evaluation of such changes is difficult because the underlying problems have not been analyzed in terms of the equity and efficiency concerns that animate more familiar assessments of income tax policy. This article provides a framework for a unified analysis, in which the same factors that are used to justify the choice of the tax base and the rate structure are employed to resolve problems involving complexity, compliance costs, and enforcement difficulties.
Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 Harv. L. Rev. 713 (1996).
Categories:
Property Law
,
Disciplinary Perspectives & Law
,
Civil Practice & Procedure
Sub-Categories:
Litigation & Settlement
,
Remedies
,
Law & Economics
,
Property Rights
Type: Article
Abstract
Should property rights be protected absolutely -- by property rules -- or instead by the requirement that infringing parties pay for harm done--that is, by liability rules? In this article, we present a systematic economic analysis of this fundamental question. Our primary object is to explain why liability rules are often employed to protect individuals against harmful externalities (such as pollution and automobile accidents), whereas property rules are generally relied upon to protect individuals from having their possessions taken from them, thereby ensuring a basic incident of ownership. In the course of our analysis, we suggest that a variety of commonly held beliefs about property and liability rules are in error, and we also derive results bearing on legal policy. Notably, we show that, for controlling some important externalities, liability rules (and pollution taxes) are superior to property rules (including many forms of regulation) even when damages must be set using only limited information about harm.
Louis Kaplow, Optimal Distribution and the Family, 98 Scandinavian J. Econ. 75 (1996).
Categories:
Disciplinary Perspectives & Law
,
Labor & Employment
,
Taxation
,
Family Law
Sub-Categories:
Law & Economics
,
Retirement Benefits & Social Security
,
Taxation - Personal Income
Type: Article
Abstract
Income tax burdens, welfare payments, and social security benefits depend on the composition of family units. Substantial controversy exists over the appropriate forms of adjustment, as reflected by the wide variation in methods among programs, across jurisdictions, and over time. In contrast to approaches based on "ability to pay" or equivalence scales, this article uses a utilitarian welfare function to derive the equitable distribution of income for different family configurations. The analysis considers how allocations should depend on family sharing arrangements, economies of scale, altruism among family members, and differences in utility functions among family members.
Louis Kaplow, A Fundamental Objection to Tax Equity Norms: A Call for Utilitarianism, 48 Nat’l Tax J. 497 (1995).
Categories:
Taxation
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Tax Policy
Type: Article
Abstract
Anti-utilitarian norms often are used in assessing tax systems. Two motivations support this practice. First, many believe utilitarianism to be insufficiently egalitarian. Second, utilitarianism does not give independent weight to other equitable principles, notably concerns that reforms may violate horizontal equity or result in rank reversals in the income distribution. This investigation suggests that a policy maker who believes in the Pareto principle -- that any reform preferred by everyone should be adopted - - cannot consistently adhere to any of these anti-utilitarian sentiments. Moreover, the affirmative case for utilitarian tax policy assessment is stronger than is generally appreciated.
Abstract
Altruistically motivated gifts involve a species of consumption externality. Donors obtain an altruistic benefit from the effect of their gifts on donees' utility but do not take into account that the benefit to donees is itself relevant to social welfare. The level of gift-giving thus will be lower than is optimal. A subsidy can correct this problem, while compulsory transfers (assuming the state lacks information about who is altruistic) and bargaining between donors and donees cannot. The rationale for subsidizing gifts offered here does not depend on whether the donee's activity is a public good (as with gifts for medical research) or whether the transfer tends to equalize the wealth of donors and donees — factors emphasized in the exisitng literature on the subject.
Louis Kaplow & Steven Shavell, Comment, Do Liability Rules Facilitate Bargaining? A Reply to Ayres and Talley, 105 Yale L.J. 221 (1995).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
,
Property Law
Sub-Categories:
Litigation & Settlement
,
Torts
,
Law & Economics
,
Legal Theory & Philosophy
Type: Article
Abstract
Arguments that liability rules are preferable to property rules when bargaining is imperfect are flawed because of the uncertain influence of information-forcing on the bargaining process. Examples advanced in support of the preferability of liability rules are based on examples that appear to support the opposite conclusion that property rules will result in better outcomes. Imperfect bargaining is likely to do better under a liability scheme because bargaining may fail and if it fails liability rules are preferable.
Louis Kaplow, A Model of the Optimal Complexity of Legal Rules, 11 J.L. Econ. & Org. 150 (1995).
Categories:
Disciplinary Perspectives & Law
Sub-Categories:
Law & Behavioral Sciences
,
Law & Economics
,
Legal Theory & Philosophy
Type: Article
Abstract
Legal rules often are complex in order to distinguish different types of behavior that may have different consequences. Greater complexity thus allows better control of behavior. But more complex rules are more costly for individuals to understand ex ante and for a court to apply ex post. Also, because of the cost, some individuals will choose not to learn complex rules. This article models the effects of complexity on individuals' decisions to acquire information, choices about whether to act, and reports of their actions to an enforcement authority. It determines when more complex rules improve welfare and how this depends on whether enforcement involves self-reporting of behavior.
Louis Kaplow, Regional Cost-of-Living Adjustments in Tax-Transfer Schemes (NBER Working Paper No. w5008, Feb. 1995).
Categories:
Taxation
,
Labor & Employment
,
Disciplinary Perspectives & Law
,
Discrimination & Civil Rights
Sub-Categories:
Poverty Law
,
Law & Economics
,
Tax Policy
,
Taxation - Federal
,
Taxation - Personal Income
Type: Article
Abstract
The federal income tax and major welfare programs do not take into account significant cost-of-living variations among regions. This article considers what adjustments might be appropriate in light of the distributive purposes of tax and welfare systems and concerns about the efficiency of the interregional allocation of resources. Price index problems, differences in amenities, and heterogeneity of individuals' locational preferences are considered.
Louis Kaplow, Optimal Insurance Contracts When Establishing the Amount of Losses is Costly, 19 Geneva Papers on Risk & Insurance Theory 139 (1994).
Categories:
Banking & Finance
,
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Risk Regulation
,
Insurance Law
,
Law & Economics
Type: Article
Abstract
The problem of establishing the amount of losses covered by public and private insurance is often characterized by asymmetric information, in which the claimant already knows the extent of a loss but this can be demonstrated to the insurer only at a cost. It is shown that a simple arrangement, which provides greater coverage whenever individuals demonstrate unusually high losses, gives claimants an excessive incentive to establish the amount of their losses. This paper determines what insurance claims process, consistent with the form typically employed in existing insurance arrangements, is optimal.