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Law and behavioral science: Removing the rationality assumption from law and economics
Abstract
As law and economics turns forty years old, its continued vitality is threatened by its unrealistic core behavioral assumption: that people subject to the law act rationally. Professors Korobkin and Ulen argue that law and economics art reinvigorate itself by replacing the rationality assumption with a more nuanced understanding of human behavior that draws on cognitive psychology, sociology, and other behavioral sciences, thus creating a new, scholarly paradigm called "law, and behavioural science." This article provides an early blueprint for research in this paradigm. The authors first explain the various ways the rationality assumption is used in legal scholarship and why it leads to unsatisfying policy prescriptions. They then systematically examine the empirical evidence inconsistent with the rationality assumption and, drawing on a wide range of substantive areas of law, explain how normative policy conclusions of law and economics will change and improve under the law-and-behavioral-science approach.
... With the recent advancements in AI analytical tools for unstructured textual and audiovisual data, these interview archives can be transformed into invaluable resources for data-driven machine learning investigations, aiding in the measurement of deeper psychological facets, such as personality traits and charisma (Harrison et al., 2019(Harrison et al., , 2020, which offer more information for analysis. Furthermore, the emergence of smart prison systems and judicial frameworks within smart city infrastructures (Simmler et al., 2022) promises to provide a wealth of unstructured data, enabling a more comprehensive assessment of an offender's rehabilitation during incarceration and the associated risks post-release (Korobkin & Ulen, 2000). ...
... While these approaches may seem intuitively compelling, they often reflect an oversimplified and deterministic perspective that contradicts contemporary social science and criminology theories. Historical factors alone are insufficient to predict human actions, a notion that echoes the rationality assumption in classical economics, which sought a formulaic representation of human behavior (Korobkin & Ulen, 2000). This approach is now considered an oversimplification of socio-economic dynamics. ...
The paper addresses some fundamental and hotly debated issues for high-stakes event predictions underpinning the computational approach to social sciences, especially in criminology and criminal justice. We question several prevalent views against machine learning and outline a new paradigm that highlights the promises and promotes the infusion of computational methods and conventional social science approaches.
... Balcetis and Dunning (2006) opine that there is also the possibility of different individuals seeing laws differently based on personal knowledge, beliefs, values, and motivations. Substantial empirical works exist about how motivations make individuals misinterpret laws (Korobkin & Ulen, 2000;Rowell, 2019;Tamanaha, 2018). The fact and people's views about laws have usually been found to be diametrically opposite, resulting in 'legal fantasy' (Rowell, 2019). ...
... The fact and people's views about laws have usually been found to be diametrically opposite, resulting in 'legal fantasy' (Rowell, 2019). They exhibit bounded rationality or willpower against rational self-interest (Korobkin & Ulen, 2000). To avoid such fantasies and irrationalities, which are also prevalent in organizational settings, progressive organizations put in honest efforts to enhance employees' legal knowledge, in general, with particular emphasis on labour laws. ...
Labour legislations provide guidelines to prevent unfair labour practices and organizational injustice. All employment and labour laws propose standards regarding wages, wellbeing, safety, and equitable treatment, which reduces conflicts. However, informational imbalances between employers and employees prevent employees from having adequate knowledge about labour legislation. Consequently, some employers treat employees inconsistently and that could be detrimental to them. A practical solution to this problem is making employees aware of the provisions of labour laws. As an initial step towards this, there is a definite need to assess employees’ awareness regarding labour laws. Nevertheless, there is a lack of a standardized tool to measure the knowledge level of labour legislation, which has impaired empirical examinations. Using randomly collected 346 samples from two different types of industries, the present study constructed and validated a tool to measure labour law knowledge. The study has followed a simple scale development framework consisting of item generation, scale development, and psychometric evaluation. The measurement tool has been developed using exploratory and confirmatory factor analysis. The final questionnaire consists of 17 items under four factors, exhibited significant reliability and validity. The developed tool is expected to fill the gap in the literature and stimulate further empirical research. The study also examined the difference in the knowledge level based on the demographics of the sample. The results show a significant difference between the knowledge levels based on gender, citizenship, type of industry, and qualifications. Future research directions are proposed at the end of the paper, together with the limitations of this study.
... Equation 1 and Pseudocode 3 are provided to capture how this method is implemented precisely. credential = 'medium' if r ≥ 0.5 and exp ≥ 50 and credential = 'low' 'high' if r ≥ 0.8 and exp ≥ 80 and credential = 'medium' credential otherwise (1) where: r = research ability exp = experience 4. Treatment effectiveness calculation (calculate treatment effectivenes): This method calculates the treatment effectiveness that determine the increase in health level and therefore the rating received by the doctor from the patient. Both credential and empathy play a vital role in calculating the treatment effectiveness of the doctor, since both technical knowledge and psychological aspects of the doctor influence the patient's recovery [14]. ...
Conventional economic and socio-behavioural models assume perfect symmetric access to information and rational behaviour among interacting agents in a social system. However, real-world events and observations appear to contradict such assumptions, leading to the possibility of other, more complex interaction rules existing between such agents. We investigate this possibility by creating two different models for a doctor-patient system. One retains the established assumptions, while the other incorporates principles of reflexivity theory and cognitive social structures. In addition, we utilize a microbial genetic algorithm to optimize the behaviour of the physician and patient agents in both models. The differences in results for the two models suggest that social systems may not always exhibit the behaviour or even accomplish the purpose for which they were designed and that modelling the social and cognitive influences in a social system may capture various ways a social agent balances complementary and competing information signals in making choices.
... The decisions concerning disaster preparedness are often not rational and subject to a variety of biases [23]. For that reason, we extend the analysis with behavioral law and economics to investigate anomalies in people's disaster-response decisions, such as the lack of demand for disaster insurance, drawing on theories of individuals' bounded rationality and cognitive biases [24]. ...
This article advocates smart mixes of mechanisms of post-disaster recovery in terms of boosting resilience and sustainability through liability rules, government intervention, insurance, and their combinations. Liability rules can provide compensation to victims and, in theory, also reduce disaster risks, while they have their limits in practice. The government widely intervenes in disaster compensation in many countries, but it faces challenges in how it can intervene fairly and efficiently, whether through informal channels, such as ad hoc charity, or structured approaches, such as compensation funds. As governments may struggle to provide efficient and effective compensation ex post, insurance may offer proactive solutions with models of first-party catastrophe insurance and third-party liability insurance ex ante. Where market failure, liability failure, and government failure may all arise, a smart mix of mechanisms is often preferable from a law and economic perspective, rather than relying solely on one framework. However, upon examining empirical evidence regarding the effectiveness of these instruments in China, the UK, France, Germany, and Turkey, it becomes apparent that a mix of mechanisms is not always applied in an effective manner. Models of mandatory comprehensive disaster insurance, and Public–Private Partnership (PPP), which both receive government intervention as a last resort to the market and liability failures, can reach the goal of more effective compensation for disaster victims, risk prevention and resilience when faced with disaster recovery, and should therefore be substantially implemented beyond the current levels. To be clear, the proposed mix of solutions mainly focuses on legal and economic dimensions which are rather limited, ignoring, for example, building codes for structures and physical interventions.
... Another difficulty with the model is that, even if consumers do make rational choices, rational choices are not necessarily healthy choices. Rational decisions are often made using a cost-benefit analysis to achieve the greatest net benefits for whatever values are personal to the individual consumer (Korobkin & Ulen, 2000). In a given context, many ends may be rational in light of personal and market factors but may not necessarily promote healthy diets. ...
This article evaluates the European Union’s efforts to regulate consumer food information with the aim of improving consumer nutrition as part of its broader consumer protection agenda. With nearly a million deaths attributed to unhealthy diets annually, the EU’s New Consumer Agenda, its Farm to Fork Strategy, and Europe’s Beating Cancer Plan all highlight the objective of empowering consumers to make informed, healthy food choices. This underscores the EU’s longstanding emphasis on regulating information to protect consumers, an approach which is even stronger with nutrition more specifically. This article shows that the EU food information law is based on two beliefs. First, consumers are given food information that is sufficient, accurate, non-misleading, clear and easy to understand and they are, therefore, well-informed. Second, well-informed consumers are empowered. This article argues that both of these beliefs are misguided. The current food information rules do not truly inform consumers well and do not, on their own, empower consumers to make healthy dietary decisions. Consequently, this article expresses scepticism about the ability of the current rules to promote improved nutrition. In light of the critiques of the current rules, this article offers suggestions for an improved food information paradigm. In addition to rules that would more effectively inform consumers, such a paradigm would acknowledge the limitations of information to empower healthier food choices and, therefore, give greater weight to more substantive interventions. This would align food law with broader trends in consumer protection law and thereby genuinely promote healthier nutrition.
... To start with an example of research performed to elucidate agents' motives, an experiment conducted by Jolls et al. makes it clear that financial gains are not the only objective involved 36 Landes and Posner (1987, p. 55). 37 Korobkin and Ulen (2000, pp. 1064, 1065. ...
... Odnosi się do analizy rozwoju i ekonomicznych skutków różnych rozwiązań prawnych Balcerowicz, 1993 Jest oparta na teorii racjonalnego wyboru podejścia do prawa, opisuje sposoby jego tworzenia i wpływ prawa na postępowanie ludzi Kerkmeester, 2000 Analizuje i bada się w niej to, w jaki sposób prawo wpływa na zachowania Korobkin i Ulen, 2000 Służy przewidywaniu konsekwencji wpływu ustanowionych sankcji prawnych na zachowania ludzi Cooter i Ulen, 2003 Dotyczy zagadnień związanych z wpływem systemów prawnych na efektywność alokacyjną, z warunkami koniecznymi do wyłaniania się i rozwoju efektywnego systemu prawa oraz z tym, w jaki sposób można wprowadzić efektywny system prawa Schafer i Ott, 2004 Stosuje się w niej koncepcję homo oeconomicus i koncepcję racjonalnego wyboru do analizy zachowań podmiotów prawa, z użyciem teorii ekonomii i metod ekonometrycznych służących badaniu powstawania, struktury, procesów i wpływu prawa oraz instytucji prawnych na życie gospodarczo-społeczne Nowak-Gruca, 2013 Umożliwia predykcję efektów tworzonego i stosowanego prawa na zachowania ludzi Nieborak, 2016 Źródła: (Rowley, 1989, s. 125;Kerkmeester, 2000, s. 384;Brion, 2000, s W przytoczonych definicjach przejawiają się dwa aspekty: zachowań ludzkich (czyli celu prawa) oraz efektywności (jako ekonomicznej miary skuteczności prawa). Zbiór definicji ekonomicznej analizy prawa odnoszących się do stosowanej przez nią metody badawczej zaprezentowano w tabeli 9. Tabela 9. Wybrane definicje ekonomicznej analizy odnoszące się do stosowanej metody badawczej ...
Problematyka prawa bilansowego i jego interpretacji jest przedmiotem szerokiego zainteresowania środowiska naukowego. Monografia również mierzy się z tą tematyką, jednak odmiennie niż dotychczasowe publikacje cechuje się innowacyjnym podejściem do prawa bilansowego – nie ze strony jego interpretacji, a z punktu widzenia jego jakości i efektywności. Celem regulacji prawa bilansowego winno być bowiem dostarczanie użytecznych informacji do podejmowania decyzji gospodarczych przy jednoczesnym zapewnieniu bezpieczeństwa obrotu gospodarczego. Autor, posługując się ekonomiczną analizą prawa, przedstawia narzędzie możliwe do zastosowania przez badaczy i praktyków. Opisane podejście do badania problemów oceny skutków regulacji rachunkowości to nowa droga w poszukiwaniu metody doskonalenia prawa bilansowego, która dotychczas nie była przedmiotem tak szerokiego opracowania. Interdyscyplinarne walory książki sprawiają, że może być ona przydatna nie tylko dla badaczy z zakresu rachunkowości, ale również dla szerokiego grona osób, które na co dzień mierzą się z problemami prawa bilansowego: księgowych, prawników, pracowników sektora finansowego, legislatorów.
... The new field was officially recognized after the publication of the two seminal articles by Jolls, Sunstein and Thaler (1998) and Ulen and Korobkin (2000), i.e., 'A Behavioral Approach to Law and Economics' and 'Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics,', respectively. 65 Even if the work (for example, the so called 'endowment effect') by Thaler 66 , who was a behavioral-economist, was extremely relevant to the rise of BLE as an independent discipline, the intellectual forefathers of BLE were Tversky and Kahneman, with their research on heuristics and biases. If we now apply the Calabresian 'reasoning' to BLE, using the insight offered by the Theory of Sets, we can easily argue the following: -BLE is the intersection of the three different abovementioned sets (fields of studysee the gray area in figure 7), i.e., economics, psychology and law; -on the basis of the theory of sets, if we apply the so called 'associative law' (see the Appendix, where it is stated that given three sets A, B and C, we can take the intersection of any two of them and the resulting intersection with the third set), we obtain -the set BLE is the intersection between the law and economics set (that is itself the intersection of the sets Economics and Law) and the psychology set. ...
This paper reinterprets, differently from the existing literature, the relationship between law and economics not from the point of view of a lawyer-economist but rather from the point of view of an economist-mathematician, and it raises a methodological issue. To do so, some of the elements of the theory of sets are borrowed to argue that behavioral economics, its application to behavioral law and economics, and behavioral economists have generalized the pioneering work of Judge Calabresi, with reference to the famous books ‘Tragic Choices’ and ‘The Future of Law and Economics – Essays in Reform and Recollection’. Even if the usage of the theory of sets made in this paper is intuitive, some of its basics are reviewed in the appendix.
... Considering the evolving critical financial situation and the impending opportunities the Government is creating, construction contracting firms can strategize their future path in several ways. While embarking on a revenue-focussed strategy [13] can be one option, profit margin improvement [14,15] through cost reduction exercises, liquidating long-pending claims, mergers, and acquisitions, among others, can be the other option. While it is not intended to infer that the strategies above are mutually exclusive, the study explores the predominant strategy adopted by construction contracting firms in response to the evolving scenario. ...
The construction industry is the backbone of a nation’s economy. It is a matter of great concern that such an industry suffers from time and cost overruns, especially in these challenging times. Coupled with the overrun issues, the sector is often criticized for lacking adequate quality and quantity of structured secondary data. The emerging technologies in data science and machine intelligence present a unique opportunity to understand the sector better and aid in effective decision-making. To better understand the utility of such technologies, the Management Discussion and Analysis ssections of the annual reports of publicly listed top Indian construction contracting firms are analyzed to identify the presence of ‘strategy themes’ and further map them to the organizations considered. Natural Language Processing (NLP)-based topic modeling algorithms, namely Latent Dirichlet Allocation (LDA) and Non-negative Matrix Factorization (NMF), are used in this study to perform a qualitative content analysis to identify the latent themes. From a methodological standpoint, considering the context of this study, the NMF results are better in accuracy, precision, and recall compared with the LDA. The results show that while most construction contracting firms prioritized a ‘revenue-focused’ strategy to expand their order books, a smaller set of large-sized firms seem to prioritize process improvement to improve their execution productivity and therefore are ‘profit margin improvement focused’ or ‘lean-focussed’ in their approach. Although a proof-of-concept, this study unlocks the immense potential of unsupervised NLP-based topic-modeling tools to understand and infer from unstructured and freely available text data in the public domain to aid sectoral analysis and policymaking.
... However, in real life and markets, prices are set above marginal cost and carry the potential to act as signal for entry to competitors, where post entry prices are brought down to more competitive levels, but many times still exceeding marginal costs, depending on the nature of the markets. Nor do the assumptions (Korobokin and Ulen 2000) regarding rationality and profit (utility) maximisation hold up in closer scrutiny. (Akerlof and Yellen 1985) Excessive pricing categorizes a situation where an undertaking is able to set prolonged supracompetitive prices which either do not act as signal to entry, or are being maintained through some deficiencies in the competitive structure of the market, in-elastic demand on part of consumers and / or price insensitivity. ...
Price gouging of essential items, and the global debate on pricing of vaccines and treatments during the COVID-19 crisis, provide an optimal proxy to revisit the law and economics discourse on excessive pricing as an abuse of dominant position. Beyond a normative soul-searching of the efficiency v fairness debate, this chapter analyses excessive pricing cases during the COVID-19 pandemic in the EU, US, and South Africa. The assertion is made that neoclassical, marginalist, and welfarist law and economics schools will forever be in direct conflict with the black letter law of European Competition Law, which prohibits unfair, excessive pricing, and thus, other law and economics schools such as Keynesian, Behavioural, and Neuro-economics offer far better congruence with the legislative intent and history of Article 102a TFEU.
... Based on the data above, the legislator's heavy fines execution is ineffective without following the rules of the fine, considering perpetrators and criminal acts characteristics. The two offenses are based on rational actors committing narcotics crimes for economic benefits (Posner, 1997;Ulen & Korobkin, 2000). All fines prisoners in the discussed 31 cases of narcotics and corruption opted to serve short prison. ...
This study aims to examine the legislation and execution of fines weight formulation and alternative sanctions for economic crimes offenders using doctrinal and empirical legal research. The results showed that the Economic Laws for natural persons set fines ranging from IDR 5–200 billion. Corporations have unequal fine patterns, hence the maximum fine weight for individuals and corporations violated the principle of punishment proportionality. The implemented fine weight does not follow the rules and is similar for individual and corporate prisoners without adapting the perpetrator’s characteristics and offenses. As a result, fine execution by the public prosecutor was ineffective because inmates prefer to serve short prison sentences than pay state treasury fines. The convicts did not pay the fines and preferred a prison sentence for various reasons ranging from the large fines to economic consideration. Hence, the rules of the fine should focus on the convict’s possibility to pay imposed fines executed by the public prosecutor and consider the nature of the perpetrators and offenses.
... En buena porción del análisis económico del derecho, por ejemplo, se emplea la premisa metodológica de la maximización racional del bienestar, lo cual de ningún modo puede confundirse con una convicción de que los individuos no padecen las limitaciones cognitivas ampliamente estudiadas por la psicología. Incluso desde una aproximación crítica, la afirmación expuesta sobre la teoría económica y su supuesta base en la racionalidad del individuo impresiona como osada, pues asume falsamente que existe una sola visión de lo que sostiene la teoría de la elección racional (Korobkin y Ulen, 2000). ...
Un creciente interés por la psicología aplicada a la regulación se ha traducido en estrategias de regulación por arquitectura o intervenciones sobre la base de nudges. Así, a la ampliamente desarrollada interacción entre economía y derecho, se suma el concurso de la psicología. No obstante, como se expone en el presente trabajo, se requiere un estudio más profundo de los costos y beneficios que implican determinadas intervenciones conductuales. En particular, el juzgamiento de las referencias ajenas y la transparencia del nudge presentan dificultades que todavía no han sido definitivamente resueltas por los entusiastas del Behavioral Law & Economics.
This comprehensive handbook delves into the intricate relationship between artificial intelligence, law, and government regulations in society and business. With a particular focus on consumer-centric issues, chapters analyze the benefits and challenges of the expanding influence of AI systems on consumers, while shedding light on the psychological impact and potential harm posed by AI. Readers will navigate the complexities of tort law and its application to harm caused by AI, explore the legal conundrums arising from consumers utilizing digital delegates as agents, and uncover the innovative ways AI can be harnessed to enforce consumer law. This work is essential reading for anyone seeking to understand the implications of AI on the legal landscape, the future of the consumer marketplace, and the role of consumer law.
Recent years have seen the dominance of neoclassical, marginalist and welfarist schools of Competition Law and Economics being challenged more vigor- ously than ever [See two major collecting works in: Fennell and McAdams (2013) and Cappelen and Tungodden (2019)]. Although the core assumptions of the neoclas- sical school regarding overt reliance on rationality and efficiency ever since the inception of the school have been target of much criticism [Flynn (December 1988), pp. 713–43 and Dworkin (1980), pp. 191–226], the latest decades of both research and real life developments have reinvigorated the criticim [An indication is the title of the latest Global Competition Forum, themed “Time for a Reset?”, see here: http://www.oecd.org/competition/globalforum/GFC-2020-agenda-en.pdf, accessed 2020-12-07]. Nowhere is the influence of neoclassical and marginalist economic approaches, in turn underscored by Legal Realism and Legal Positivist approaches, more prevalent, than laws governing economic activities, chief among them antitrust law and policy. The famous “Antitrust Revolution” in the late 70s by the likes of Robert Bork (1978) and Richard Posner (2014) still today dominates mainstream law and economics of not only US Antitrust law, but also of Euro- pean [Bartalevich (2016), pp. 267–83] and global competition law [Stiglitz (2017)]. Leaving behind decades long (and one would say, centuries long) fairness-related approaches to law and economics [Watkins (1922)] (which in this article will be dubbed Kantian although the core philosophy predates Kant by eons), we now also note insights in bounded rationality [Piron and Fernandez (1995)], which further underscore the previous theoretical and philosophical approaches. Using the legal prohibition against “unfair pricing” as an optimal proxy [See e.g. Treaty on the Func- tioning of the European Union Article 102a, prohibiting unfair pricing imposed by a dominant undertaking capable of affecting trade between member states or in substan- tial part of the Union; See also Kianzad and Minssen (2018), pp. 133–48], the present article juxtaposes the neoclassical and marginalist approaches to this area of political economy, by way of using Kantian ethics and Kantian legal philosophy to demon- strate the inaptness of the so-called mainstream Law and Economics approaches to the matter “fairness in law and economics”. A return to Kantian philosophy of law [White (2019), pp. 53–76] and a balanced approach between law and economics disci- plines, more so regarding laws governing economic activity, is forwarded, making the case that whether one is Kantian or Utilitarian in the normative will invariably affect the substantive positive legal and economic analysis. This fact is independent of the claims to “rationality”, “objectivity” or “humanity” and “divinity” made by either approach. Following the introduction framing the “paradox” regarding the return of Kantian, fairness-based approaches to law and economics, the second section depicts the Posnerian attack on Kant construed alongside Wealth Maximisation as an optimal goal of law and economics. The third section describes the supposed division between fairness and welfare, or efficiency, as an optimal goal of law and economics. The fourth section in turn constructs the Kantian comeback. The fifth section concludes.
Recent findings in behavioral economics have shown that an individual may not always act optimally and rationally in their decision-making. However, these findings have come mainly from laboratory conditions, and as such, they need to be verified under real circumstances. This paper examines the presence of heuristics in the environment of fantasy sports. The data come from a fantasy league based on the National Hockey League in the season of 2015–16. Its users come mainly from the Czech Republic. The results show a moderately strong presence of representativeness. Nevertheless, there are also manifestations of not always prioritizing point-maximizing strategies, for example in the higher demand for hockey players of the same nationality as that of the users. However, the main factor influencing the demand is still the athletes’ performance. This study’s findings hold implications for fantasy sports, prompting fantasy sports participants to strategically adjust squad selection. For platforms, it suggests user experience enhancements and algorithmic adjustments to guide optimal decision-making, enriching overall engagement. Additionally, the research contributes to decision-making theory by validating behavioral economics in the real world, emphasizing context-specific biases, and advocating for an integrated understanding of heuristics and rational factors in decision environments.
We explore the implications of unawareness for tort law. We study cases where injurers and victims initially are unaware that some acts can yield harmful consequences, or that some acts or harmful consequences are even possible, but later become aware. We model unawareness by Reverse Bayesianism. We compare the two basic liability rules of Anglo‐American tort law, negligence and strict liability, and argue that negligence has an important advantage over strict liability in a world with unawareness—negligence, through the stipulation of due care standards, spreads awareness about the updated probability of harm.
The proposed research is an attempt to view how internationally recognised principles of sustainable development can be implemented at the corporate level, in particular, how the company’s board of directors should respond to climate and environmental challenges. Specifically, the paper examines the problem of reducing board members' repeated cognitive biases towards such a mainstream governance concept as ESG (Environmental, Social and Corporate Governance). The research focuses on the five most well-known cognitive biases of a board towards ESG, often encountered and described conceptually in behavioural literature: over-optimism, status quo effect, confirmation bias, hyperbolic discounting, and groupthink. Subsequently, the paper draws recommendations for overcoming or mitigating these biases by introducing and describing several debiasing interventions and quality control tools. These tools are conditionally divided into three groups: changing incentives, optimising choice architecture, and debiasing training. The author believes that incorporating behavioural insights into an analysis of the board’s ESG commitment would bring a fresh perspective to this research area, which now is typically dominated by a rational choice framework. The paper combines theoretical analysis of the existing literature in law, behavioural economics and psychology with qualitative research application based on data obtained from first-hand observations, board empirical studies, questionnaires, and focus groups.
Juízes, no seu processo decisório, se sujeitam a inúmeros incentivos advindos dos pares e de suas respectivas instituições. Tais incentivos podem acarretar uma repulsa ao dissenso, induzindo juízes a proferirem decisões autocentradas, pautadas numa série de “cascatas” ou de “heurísticas”. Estas decisões não necessariamente produzirão resultados ruins, mas apresentam riscos relevantes ao processo deliberativo e à legitimidade decisória.
p style="text-align: justify;">The article analyzes the impact of social norms on tax compliance. The author defines social norms as standards of non-legal behavior that have been established in society and assimilated by an individual, which people follow due to the fact that they receive either greater inner satisfaction from actions that they consider correct, or because of approval from others. The author comes to the conclusion that conformity and evaluation by society are a powerful driver of decisions made by taxpayers. A person's social identity is an important factor of tax compliance. In this context, tax liabilities do not exist in a social vacuum. The social, cultural and institutional environment in which a taxpayer lives and works, his interactions with other people and organizations have a significant impact on tax compliance. Therefore, if a taxpayer is convinced that all (or most) people consider it the norm not to pay taxes, he is more likely to do the same. And, on the contrary, if a taxpayer is confident that others, as a rule, faithfully fulfill their tax obligations, they are more likely to comply with tax compliance.</p
Compliance has become key to our contemporary markets, societies, and modes of governance across a variety of public and private domains. While this has stimulated a rich body of empirical and practical expertise on compliance, thus far, there has been no comprehensive understanding of what compliance is or how it influences various fields and sectors. The academic knowledge of compliance has remained siloed along different disciplinary domains, regulatory and legal spheres, and mechanisms and interventions. This handbook bridges these divides to provide the first one-stop overview of what compliance is, how we can best study it, and the core mechanisms that shape it. Written by leading experts, chapters offer perspectives from across law, regulatory studies, management science, criminology, economics, sociology, and psychology. This volume is the definitive and comprehensive account of compliance.
UK financial regulators are experimenting with the conversion of rulebook content into machine-readable and executable code. A major driver of these initiatives is the belief that the use of algorithms will eliminate the need for human interpretation as a deliberative process, and that this would be a welcome development because it will improve effectiveness while cutting time and costs for regulators and the industry alike. In this article, I set out to explain why human interpretation should be preserved and further harnessed if data-driven governance is to work at all. To support my thesis, I bring attention to the limited translatability of rulebook content into code, and to the difficulties for machines to engage with the full spectrum of tasks of analogical reasoning. I further contend that it would be desirable to preserve human interpretation on procedural grounds pertaining to the legitimacy of financial regulators. I conclude with recommendations about the future design of the financial rulebooks.
Purpose
Judiciary plays a pivotal role in the overall development of a nation's economy and its involvement assures process transparency and impartiality. However, litigation is often expensive, uncertain and prone to delays. Notwithstanding such inherent challenges associated with litigation, it is observed that parties in construction disputes do resort to litigation. This study attempts to understand the potential paths triggering litigation of contractual disputes in construction. While extant researchers have identified focus areas or factors influencing litigation, the underlying paths connecting these focus areas, leading parties to litigation, is explored in this study.
Design/methodology/approach
Considering the framework of Rachlinski's “framing theory of litigation” and the mixed-methods approach (qualitative and quantitative approaches), this study proposes and validates a model that identifies the paths to litigation of contractual disputes in construction.
Findings
The results of in-depth interviews, followed by validation through structural equation modelling (SEM), reveal four critical paths, namely positional focus (PF) – contract and dispute characteristics (CDC) – decision to litigate (DTL), milieu influence (MI) – CDC – DTL, MI-PF-DTL and CDC-DTL.
Practical implications
The identified paths highlight the areas policymakers can consider while developing policy interventions to mitigate litigation.
Originality/value
Researchers have identified factors causing litigation in construction. However, attempts to examine the existence of multi-factor “paths” on the decision to litigate (DTL) have hitherto received a muted response, so this study focuses on identifying the project-level path(s) leading to the litigation of contractual disputes in construction.
From an economic point of view, there is a consensus that sufficient consumer protection cannot be achieved solely through effective competition policy aimed at limiting the abuse of market power to the detriment of consumers. However, the economic justification for an explicit policy of consumer protection is far less uniform. In the past, the standard approach to explain consumer behavior and to justify government consumer protection derived from information economics. However, the fact that consumer protection based solely on information economics has been repeatedly criticized in recent years points to the need for a broader theoretical foundation of consumer protection policy. Against this background, the article aims at broadening the perspective of an economically based consumer policy by resorting to institutional economic as well as behavioral economic considerations, which will be contrasted with each other in their respective insights.
Purpose
Despite the availability of amicable means to resolve construction disputes, litigation remains a mainstream dispute resolution process in some countries. This tendency to litigate (TTL) calls for research to develop appropriate precautions to encourage stakeholders to resolve most commercial disputes through alternate dispute resolution (ADR) techniques. While a claimant's TTL arise from the individual, project and organisation preferences, this study, which can benefit both potential claimants and employers by saving time and money on litigation, identifies a bidder's financial parameters that may increase its litigation propensities, as a first step towards aiding employers to incorporate precautions to discourage such tendencies.
Design/methodology/approach
After the literature review, the theoretical construct proposed by Rachlinski's “framing theory of litigation” (based on Kahneman and Tversky's Prospects Theory) is used to explain organisation-level litigation decision-making. The study sources data from the financial statements of Indian construction/real estate firms, followed by panel regression analysis to test the theoretical construct's validity.
Findings
The results show that the TTL (risk-seeking behaviour) generally increases with a lower value of sales, higher assets and profitability. Interestingly, organisation-level cash flow shows an insignificant influence on litigation tendencies.
Practical implications
Knowing which financial parameters may increase litigation tendencies could help employers evaluate a bidder's propensity to litigate project disputes.
Originality/value
Researchers use financial statements to explore correlations among financial variables. However, in the construction context, there are no empirical studies with data from construction firms to understand potential litigation expenses compared to specific financial ratios.
Social enterprise can be described as a complex and variegated phenomenon marked by different extensions and definitions according to the legal system of reference. This contribution is focused on a specific area of the social enterprise spectrum, that of the hybrid dual-purpose businesses, conceiving social enterprises as private organisations that carry out commercial activities to pursue social and environmental, as well as economic, objectives. In the past few decades, several legal systems have introduced new hybrid entities designed to adequately meet the needs of social entrepreneurs and capable of bringing together social and environmental aims with business approaches. The birth of social enterprise, with the introduction of philanthropic goals into the articles of association’s corporate purpose clause, is particularly difficult to understand through the lenses of the economic analysis of law or the neoclassical economics and its homo economicus paradigm. This study attempts to offer an interpretative key for understanding these hybrid models abandoning the classical homo economicus paradigm to embrace a reading based on behavioural law and economics and the Yale approach to the economic analysis of law, according to which altruism and beneficence should be considered as ends in themselves, as goods desired by people and for which they are willing to pay the price. In this line of reasoning, social enterprises, as a bottom-up phenomenon are the legislator’s policy response to the growing demand for firm altruism emerging from civil society.
Criminal prosecution of monopolistic activities in the form of market cartelization is the most sensitive tool for individuals, which can have both a serious deterrent effect and limit behavior that is beneficial to public welfare. This paper discusses the theoretical aspects of the issue of choosing a regime of antitrust enforcement in connection with the design of amendments and enforcement of the norms of Article 178 of the Criminal Code of the Russian Federation, taking into account possible differences between the initialization, conclusion of a cartel agreement and participation in it. The article shows that there are various options for the relationship between the concept of conclusion and participation in the agreement, including anti-competitive one. However, this requires the application of realistic assumptions regarding the behavior of individuals. Practical issues of designing criminal penalties for cartels are considered taking into account various legal concepts, including the form and types of guilt, as well as on the basis of a comparison with other articles of the Criminal Code that punish collective unlawful acts. In connection with the problem of reproduction of an inhospitable tradition, the Russian antitrust identified the risks of imputed imputation (risks of I type errors) and insufficient punishment of the cartel organizer (risks of II type errors) in case of underestimating the importance of economic concepts based on the principle of methodological individualism and the assumption of bounded rationality of individuals.
This study experimentally investigates the role of the origin of victims' resources on the propensity to settle or litigate a dispute. The analysis focuses on victims’ decision to use a costly and uncertain procedure, that is, litigation, to recover money from offenders and on offenders’ decision to hand over what they have taken before litigation starts. The results suggest that although the share of offenders who return money increases once they learn that the victims have had to work to gain their resources, the threat of a costly dispute is stronger than any consideration about the origin of victims’ resources. In this study, the religiosity and gender of decision makers are included among the control variables because it is traditionally debated how these individual features are able to affect’ individuals’ attitudes in conflicts and their resolutions. In particular, gender seems to play a significant role since the main results are driven by female decision makers.
There is surely room for improvement in commercial contracting practice. The current contracting evolution often leads to a situation where contracts become increasingly and may be needlessly, complex. The paper discusses how complex contracts evolve and how the proposed legal design approach can bring comprehensibility for tackling complexity in contracting. This approach is providing for various benefits and incentives, such as business sustainability, reduced transaction costs, and competitive business advantage. A novel legal quality metric is introduced. This metric will foster the measuring of quality in the legal profession. The metric, comprehensibility, would better serve both lawyers and clients in measuring the true quality of legal services, processes, and products – than the often used, easily misleading metrics such as time spent, cases won, and hours billed. Through this innovative approach to legal quality metrics, the paper will bring further understanding of the impact of comprehensibility in commercial contracting.
This book introduces a critical perspective on public law, the area of law that governs relationships between individuals and the state or its various government institutions and between different government institutions within the state. This perspective originates outside the field of public law—indeed, outside the framework of law entirely. This approach adopts the tools and methods of economics to interpret traditional questions of public law and is thus described as an economic analysis of public law. Because of its focus on the state and decision-making, it can also be characterised as a component of public choice theory. In an analysis of public law, the economic theory of public choice provides valuable insight into collective decision-making processes.
The third quarter of the twentieth century was a golden age for labor in the advanced industrial countries, characterized by rising incomes, relatively egalitarian wage structures, and reasonable levels of job security. The subsequent quarter-century has seen less positive performance along a number of these dimensions. This period has instead been marked by rapid globalization of economic activity that has brought increased insecurity to workers. The contributors to this volume distinguish four explanations for this historic shift. These include 1) rapid development of new technologies; 2) global competition for both business and labor; 3) deregulation of industry with more reliance on markets; and 4) increased immigration of workers, especially unskilled workers, from developing countries. In addition to analyzing the causes of these trends, the contributors also investigate important consequences, ranging from changes in collective bargaining and employment relations to family formation decisions and incarceration policy.
The events that began with the collapse of Enron, WorldCom, Tyco, and Adelphia and continued into the financial crisis of 2008 teach us an important lesson: corporate governance matters. Although it is widely acknowledged that good corporate governance is a linchpin of good corporate performance, how can one improve corporate governance and its impact on corporate and overall economic performance. This book offers a diverse and forward-looking set of approaches from experts, covering the major areas of corporate governance reform and analyzing the full range of issues and concerns. Written to be both theoretically rigorous and grounded in the real world, the book is well suited for practicing lawyers, managers, lawmakers, and analysts, as well as academics conducting research or teaching a wide range of courses in law schools, business schools, and economics departments.
Nudging interventions typically presume some asymmetry of sophistication and power between the choice architect and the nudged. But the nudged need not be relegated to a passive role. We present evidence that individuals have a capacity to counter their biases, and even to use them to their advantage. This capacity for behavioral self‐management (“BSM”) can allow them to act as the choice architects of their future‐self. In our study, we provide participants with the autonomy to choose among a variety of loss‐ and gain‐framed contracts that govern the terms under which they perform a real effort task. The results show that subjects strategically harness their own loss aversion to counter their present bias and significantly improve their performance. The loss‐framed contracts give individuals a tool they can use to self‐nudge. This possibility of self‐nudging should widen our perspective on biases. Biases can cause cognitive error and dampen motivation, but they can also be a valuable tool for individual decision making. And giving subjects the autonomy to choose their favored contract adds to the effectiveness of their BSM strategy. We show that subjects' experience self‐determination utility separate from performance benefits driven by a better adjustment of work tasks to subjects' production functions. To demonstrate the policy relevance of our results, we expand on an application of BSM strategies to retirement savings plans, which we suggest may lift participation and savings rates at no additional cost.
This article considers a lack of legal literacy as a barrier to access to justice. The article then considers the potential effectiveness of introducing media-based teaching tools to South African society in an attempt to increase the rights awareness of South Africans. In so doing, the article proposes ways in which this improved rights awareness can assist South Africans to engage with the law, their rights, and the judicial system as a whole in a manner which promotes improved access to justice. It considers television-based teaching tools already implemented in the country as well as possible future interventions. It draws on past television-based education initiatives in South Africa in an effort to consider how South Africans engage with television-based teaching tools. It further draws on the open justice principle to argue for the increased broadcasting of legal proceedings. The article then considers television in three other jurisdictions and undertakes an assessment of the effect of television on our cognitive and subliminal engagement with the law. The discussion on other jurisdictions includes how fictional legal programming, syndicated court programmes as well as other forms of "Court TV" have contributed both positively and negatively to the legal consciousness of those societies.
This article considers a lack of legal literacy as a barrier to access to justice. The article then considers the potential effectiveness of introducing media-based teaching tools to South African society in an attempt to increase the rights awareness of South Africans. In so doing, the article proposes ways in which this improved rights awareness can assist South Africans to engage with the law, their rights, and the judicial system as a whole in a manner which promotes improved access to justice. It considers television-based teaching tools already implemented in the country as well as possible future interventions. It draws on past television-based education initiatives in South Africa in an effort to consider how South Africans engage with television-based teaching tools. It further draws on the open justice principle to argue for the increased broadcasting of legal proceedings. The article then considers television in three other jurisdictions and undertakes an assessment of the effect of television on our cognitive and subliminal engagement with the law. The discussion on other jurisdictions includes how fictional legal programming, syndicated court programmes as well as other forms of "Court TV" have contributed both positively and negatively to the legal consciousness of those societies.
Ex post court review of related party transactions (RPTs) is one of the main mechanisms to deal with the problem of value diversion in public companies via self-dealing and is extensively made use of in Delaware and until relatively recently in most continental European countries. Such court review has also become to be known as the ‘fairness test’ whose contours may change depending on the jurisdiction and contexts in which it is applied. This study takes issue with the court review of actualized transactions under certain standards from two different perspectives. Firstly, it is argued that the behavioral insights derived from studies by behavioral economists and psychologists suggest that a legal regime that solely depends on the court review of substantive merits of RPTs without any (strong) procedural safeguard may fail to create a robust regime against value diversion. Secondly, acknowledging that the court review of substantive merits of RPTs may be inevitable in some cases, the study then turns its attention to the fairness test itself that compares the terms of an RPT to an arm’s length transaction, and argues that such an objective test fails to fully prevent value diversion. Accordingly, a recalibration of the test and a new framework are proposed.
IInsurance contract law is in a state of flux, having undergone a period of substantial reform. The English and Scottish Law Commissions commenced the period of reform in 2006 and this resulted in two core statutes: the Consumer Insurance (Disclosure and Representations) Act 2012 and the Insurance Act 2015 (‘the 2015 Act’). The former is applicable to consumer insurance, the latter to consumer and non-consumer insurance. The focus of this thesis is on commercial marine insurance contract law and therefore the 2015 Act. Both statutes sought to amend various aspects of the law of insurance, but this thesis is limited to the reforms pertaining to warranties, risk control terms, and contracting out in the 2015 Act. Contemporary scholarship has focused primarily on the substantive changes to the law. This thesis goes further by grounding the substantive law analysis in the context of applied contract theory, specifically the (neo) formalist-contextualist debate. In doing so, it aims to analyse the type of regulation that governs marine insurance and the suitability of such regulation for these types of markets. The (neo) formalist-contextualist debate provides an important framework to analyse the 2015 Act: to determine what type of statutory regulation the 2015 Act is; and to analyse how judges should approach the new 2015 Act. This thesis shows that the 2015 Act reflects ‘contextualist’ tendencies and is a new type of statutory regulation for commercial marine insurance contracts. It further claims that a more suitable framework for the regulation of commercial (marine) insurance contracts would have been a contract law minimalist approach to the design of statutory regulation. It explains why and how judges should adopt a minimalist approach to the interpretation and application of the 2015 Act to contracts between sophisticated parties. This thesis provides an important new normative perspective for the 2015 Act, specifically in relation to commercial marine insurance contracts. It is an original contribution to knowledge both through the research questions posed and answered and, the research methodology employed to do so. Insurance contract law under the 2015 Act is in its early stages of development and this thesis offers a timely contribution to understanding the operation of the Act and its implications for sophisticated markets, such as marine insurance.
Currently the issue of sustainability is at the heart of the debate on corporate governance of business companies. In Europe, an intense activity of revising and updating European rules applicable to financial markets and company law has started. In Italy, such debate became more intense after the legal transplant of the US benefit corporation model in late 2015. The Italian società benefit allows, through a voluntary choice of the founding members or the shareholders’ meeting, to internalise values typical of corporate social responsibility in the articles of association, making them legally binding on the company and the directors. Considering the traditional dichotomy between for-profit entities and non-profit entities, hybrid models such as the benefit corporation appear to struggle in finding an adequate space within capitalist systems and corporate governance theories. This study attempts to offer an interpretative key for understanding these hybrid models, abandoning the classical homo economicus paradigm to embrace a reading based on behavioural law and economics and the Yale approach to economic analysis of law, according to which altruism and beneficence should be considered as ends in themselves, as goods desired by people and for which they are willing to pay a price. In this line of reasoning, benefit corporations and other hybrid models, because of their ability to bring altruistic values into the corporate purpose, departing from shareholder value maximisation as the raison d'être of the corporate form, can be considered as a further manifestation of ‘firm altruism’, given that they are characterised by a deep and lasting impact on the environment and civil society.
We need law and economics to do the scientific measurement necessary for legal design to be seen as on the stage of science. Law and economics—which is the application of economic theory, especially microeconomic theory, to the analysis and the practice of law--is a valid tool and approach to reflect on what should be empirically investigated in the practice of legal design. The neoclassical (mainstream) theoretical foundation of economic analysis of law is, however, at times far from reality as it often predicts uncooperative and even selfish behaviour. In real life people do cooperate, have empathy, emotions and even behave in an altruistic way. For those reasons, behavioural law and economics and conventional wisdom are needed to complement the teachings from standard theory in the field of commercial contracting.
Skeptics of rational choice theory have long predicted that behavioral economics would radically transform the legislation, adjudication, and analysis of law. Using tort law as an exemplar, this Article maps out the narrow set of conditions where substantive law can be modified to accommodate irrational decision-makers. Specifically, this Article demonstrates that if injurers are systematically biased, and the due care standard can be expressed quantitatively, and victims are unable to take meaningful precautions, then imposing punitive damages can induce irrational injurers to exercise efficient precautionary care. In all other cases, it is better that the law adopt a presumption of rationality, regardless whether individuals behave rationally in fact.
In 2004, a Dutch‐Moroccan Islamic extremist in Amsterdam brutally murdered Theo van Gogh, a Dutch filmmaker known for his critique of Islam. Using a difference‐in‐differences approach, we show that, in Amsterdam, the assassination resulted in more than a 19‐percentage‐point increase in the likelihood of prosecution for unrelated violent crimes of male suspects born in Muslim‐majority countries. The effect is detectable during the first month following the murder but dissipates thereafter. We find no evidence of the murder's effect for nonviolent crimes and for violent crimes processed by other Dutch prosecution offices. Our findings are thus not consistent with a purely emotions‐based explanation of the murder's effect. Instead, our results are congruent with both a signaling explanation, whereby career‐motivated prosecutors chose to showcase their toughness, and a behavioral explanation entailing prosecutors' susceptibility to availability heuristic bias. On institutional grounds, we view the latter as more plausible than the former. Our article adds to an emerging literature demonstrating that extraneous events can critically shape criminal justice outcomes.
Tested the influence of hindsight bias (HB), the cognitive difficulty of ignoring a known outcome while recreating a decision, on 76 undergraduates who participated in simulations of a negligence suit. The effectiveness of jury instructions as a debiasing method were also examined. Ss' evaluations in an administrative hearing (choosing precautions for a potential accident) were compared to other Ss' judgments in a mock trial (in which an accident had already occurred). A 2nd hindsight-trial condition added debiasing instructions. Outcome knowledge deeply affected Ss' interpretations of a complex story. A majority of Ss randomly assigned to the hindsight condition judged the choice made by over 75% of the foresight Ss to be negligent. The judicial debiasing instructions failed to reduce HB. HB affected judgments of the events and not the characters involved. (PsycINFO Database Record (c) 2014 APA, all rights reserved)
This Article asks (i) whether tort liability should be imposed on the makers of substances that are legal to sell but that may addict users, if the makers have not warned users of the risk of addiction, and (ii) whether the state should create a standard warning against addiction that the makers of possibly addicting substances must give.
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We are grateful to Richard Posner and Mark Kelman for their detailed comments on our article. Their objections come from opposite directions. Judge Posner complains that behavioral economics is not a "theory" and is in- deed "antitheoretical"'; he invokes "evolutionary considerations" in the interest of providing a unitary account of both rational and "quasi rational" behavior, as well as bounded self-interest. Posner also thinks that rational choice theory can handle many of the problems we describe. By contrast, Professor Kelman wishes that we were less theoretical. Favoring "open- textured interpretivism," he thinks that behavioral economics is in a kind of "dance" with rational choice theory, and that both dancers suffer from "hubris." He suggests that both approaches are mere "interpretive tropes," providing two of many possible understandings of the "inexorably ambiguous" data.
People who hold strong opinions on complex social issues are likely to examine relevant empirical evidence in a biased manner. They are apt to accept "confirming" evidence at face value while subjecting "disconfirming" evidence to critical evaluation, and, as a result, draw undue support for their initial positions from mixed or random empirical findings. Thus, the result of exposing contending factions in a social dispute to an identical body of relevant empirical evidence may be not a narrowing of disagreement but rather an increase in polarization. To test these assumptions, 48 undergraduates supporting and opposing capital punishment were exposed to 2 purported studies, one seemingly confirming and one seemingly disconfirming their existing beliefs about the deterrent efficacy of the death penalty. As predicted, both proponents and opponents of capital punishment rated those results and procedures that confirmed their own beliefs to be the more convincing and probative ones, and they reported corresponding shifts in their beliefs as the various results and procedures were presented. The net effect of such evaluations and opinion shifts was the postulated increase in attitude polarization. (28 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Designing effective marketing programs requires forecasting the choice strategy a consumer will use in a given decision environment. Both simplifying and optimizing considerations may affect the strategy used. This study found individuals' perceptions of different strategies as simplifiers and optimizers varied, with number of options being reviewed operating as a moderator.
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How far should bargain promises be enforced? The bargain principle - a central thesis of traditional contract law - states that, in the absence of a traditional defense relating to the quality of consent, bargain promises should be enforced to their full extent. Professor Eisenberg argues that it is necessary to rethink the place of that principle in contract law. He first shows that the two justifications of the bargain principle, fairness and efficiency, are entirely persuasive in the classic case of a contract that has been made in a perfectly competitive market and that only one party has performed. Professor Eisenberg maintains, however, that the principle of unconscionability often justifies limitations on the bargain principle when the assumption of a perfect market is relaxed. In particular, he sets out four categories of contracts - involving the exploitation by one party of another's distress, transactional incapacity, susceptibility to unfair persuasion, or ignorance about prices - and shows how the bargain principle falters in those cases because its justifications are not met. Finally, he examines wholly executory contracts and demonstrates how the reach of the bargain principle in such cases depends on a sensitive consideration of the types of parties and commodities involved.
The offer/asking price gap-the difference between the price one is willing to pay for an entitlement and the price for which one will sell the same entitlement-has been widely documented by social scientists. The existence of the gap threatens to render traditional cost-benefit analysis indeterminate, since it is not longer clear that what someone is willing to pay for an entitlement represents his economic value for that entitlement. Mr. Korobkin examines the failure of traditional economic analysis to address the entitlement allocation problems created by the offer/asking price gap and criticizes theories that attempt to address these problems with inflexible approaches that assume simple answers to complex empirical questions. He then proposes a 2-step analytical approach to distributing entitlements that allows policymakers to account for the causes of the gap in their analyses, and thus promotes efficient allocative decisionmaking. Finally, Mr. Korobkin demonstrates the effectiveness of this method by describing how it might apply to two current policy issues: environmental preservation and rent control.
Things that may be given away but not sold are market-inalienable. In this Article, Professor Radin explores the significance of market-inalienability and its justifications. The author considers and rejects two archetypes that fail to recognize market-inalienability as a separate category of social interaction. One, universal commodification, holds that everything should in principle be subject to market transfer; the other, universal noncommodification, holds that the market should be abolished. Professor Radin also explores and ultimately rejects attempts based on economic analysis and liberal philosophical doctrines to justify particular distinctions between things that are and things that are not appropriately traded in markets. She then offers an alternative justification for market-inalienability that relates it to an ideal of human flourishing. This theory takes into account both the rhetoric in which we conceive of ourselves and our situation in nonideal circumstances. Professor Radin concludes by demonstrating how the theory might be applied to three contested market-inalienabilities: prostitution, baby-selling, and surrogate motherhood.
This Article argues that the conventional economic understanding of the efficiency of the Hadley rule misses the strategic dimension to contract negotiation. The author offers a critique of the analysis of contract default rules supplied by Ayers & Gertner, Bebchuck & Shavell, and Posner. These scholars argue that the Hadley rule, which denies promisees recovery for undisclosed consequential losses, is desirable on the theory that promisees with high potential consequential losses should disclose that fact to promisors so that promisors will know to take optimal care. The author argues that such an understanding of the Hadley rule fails to capture the bargaining aspect of contract formation. In a world where parties bargain with incomplete information, the promisee has an incentive to understate its value from successful performance, so that the promisor will not demand a high contract price. Similarly, the promisor may wish to understate its breach probability, so that the promisee will be willing to pay more for the contract. Both of these effects make problematic the conventional argument that the Hadley rule can force parties to disclose strategically important private information: in persuading the promisee that the breach probability is low, the promisor ensures that the promisee would not pay much more for additional coverage against consequential loss; for the promisee to reveal that its consequential loss is unusually large would be to concede that it can pay an unusually high price for the contract. The analysis here further suggests that these sorts of strategic obstacles do not afflict bargaining around an expansive default. More generally, the analysis shows how game theoretic analysis of bargaining can significantly enrich and alter both normative and positive economic analysis of law.
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.
Contract law recognizes a number of exceptions to the rule that courts should fully enforce bargains between capable actors. In this article, Professor Eisenberg argues that we can best justify a number of these doctrines by reference to the limits of human cognition. He canvasses recent empirical research on the cognitive limits relevant to contracting and then shows how these discoveries shed light on six areas of contract: liquidated damages, the excuse of express conditions, form contracts, contracts to waive fiduciary obligations, agreements governing thick relationships, and prenuptial agreements. While the limits of cognition do not explain all of contract law, Professor Eisenberg argues, an understanding of the psychological constraints on decisionmaking should play a central role in the development of contract doctrine.
A survey of 137 marriage license applicants and 92 law students showed that both groups had largely incorrect perceptions of the legal terms of the marriage contract as embodied in divorce statutes (DSs), but they had relatively accurate, if sometimes optimistic, perceptions of both the likelihood and the effects of divorce in the population at large. Ss expressed thoroughly idealistic expectations about both the longevity of their own marriages and the consequences should they personally be divorced. Increasing Ss' knowledge of DSs through a course on family law did not diminish this unrealistic optimism. Both groups largely approved of the existing DSs, although there was substantial agreement about a few important respects in which the laws should be changed. (PsycINFO Database Record (c) 2014 APA, all rights reserved)
With the publication of Richard A. Posner's Economic Analysisof Law, that field of learning known as "Law and Economics"has reached a stage of extended explicitness that requires and permits extendedand explicit comment.
The National Health Accounts, produced annually by the Health Care Financing Administration's Office of the Actuary, present estimates for 1960-1996 of nationwide spending for health care and the sources funding that care. This year's estimates set two records: Spending topped $1 trillion for the first time, and expenditure growth slowed to the lowest rate seen in thirty-seven years of measuring health care spending-4.4 percent, The combination of decelerating health spending and a growing economy has kept national health spending as a share of the nation's gross domestic product unchanged for the fourth consecutive year.
This article reports the results of an investigation into how rural landowners in Shasta County, California, resolve disputes arising from trespass by livestock. The results provide an empirical perspective on one of the most celebrated hypothetical cases in the law-and-economics literature. In his landmark article, "The Problem of Social Cost," economist Ronald Coase invoked as his fundamental example a conflict between two neighbors- a rancher running cattle and a farmer raising crops. Coase used the Parable of the Farmer and the Rancher to illustrate what has come to be known as the Coase Theorem. This unintuitive proposition asserts, in its strongest form, that when transaction costs are zero, a change in the rule of liability will have no effect on the allocation of resources. For example, the Theorem predicts that as long as its admittedly heroic assumptions are met, the imposition of liability for cattle trespass would not cause ranchers to reduce the size of their herds, erect more fencing, or keep closer watch on their livestock. The Theorem has become the most fruitful, yet most controversial, proposition in law-and-economics.
Coase himself was fully aware that obtaining information, negotiating agreements, and litigating disputes are all potentially costly, and that thus his Parable might not portray accurately how rural landowners would respond to a change in trespass law. Some law-and-economics scholars, however, assume that transaction costs are indeed often trivial when only two parties are in conflict. Therefore, these scholars might assume that Coase's Parable faithfully depicts how rural landowners resolve cattle-trespass disputes.
The publication of "The Problem of Social Cost" in 1960 by Ronald Coase brought together two powerful intellectual currents, namely, the economic theory of externalities and the common-law tradition concerning torts and nuisance. The sea is fertile but rough where two ocean currents meet, and the same can be said of the disputes provoked by Coase. Coase developed his argument through a series of concrete examples, such as the rancher and the farmer, the railroad sparks and the corn crops, etc. He steadfastly refused to articulate the general truths underlying the examples; for example, the famous "Coase Theorem" is abstracted from the paper but not stated in it. After two decades of debate the generalizations underlying the examples are still disputed.
In this paper I will not attempt the impossible task of offering the "true" or final interpretation of Coase's paper. Hermeneutics is left for others. Rather, I will state and prove those generalizations applicable to Coase's examples which follow from familiar assumptions of economic theory. It seems to me that these generalizations frequently conflict with Coase's examples in the sense that the immediate interpretation of his examples are inconsistent with the provable generalizations. The cost of Coase's paper is that readers are confused or misled about the generalizations which follow from familiar economic assumptions.
In the first section of this paper I characterize the dispute by developing one of Coase's examples. The second section formulates some general propositions about correcting externalities through the use of liability law, taxes, and transferable property rights. The third section addresses the problem of bargaining and the Coase Theorem. The formal development of the argument and the proofs, some of which are interesting in their own right, are relegated to the detailed Appendix
The legitimate and the criminal earnings of mid-rate and high-rate burglars, robbers, auto thieves, swindlers, and mixed types (mostly drug dealers) among state prison inmates in California, Michigan, and Texas are estimated and compared to the inmates' perceptions of their earnings. Crime appears to pay less than legitimate work for most mid-rate offenders; the reverse is true for most high-rate offenders. Inmates believe that they receive from crime much more than they do in fact. The earnings from crime per day spent in prison decrease as the number of crimes increases, suggesting that high-rate offenders commit crimes with little regard to the net yield. We suggest that career criminals do not maximize the net benefits of crime because they are highly present-oriented and quite opportunistic.
As information technology becomes more sophisticated, consumers will be able to access more information to help them make difficult high-stakes choices, such as medical and financial investments or career decision making. The purpose of this article is to examine how consumers think such information should be used in making decisions for which there are high stakes. Results, based on five exploratory studies, indicate that subjects do not spontaneously favor the use of compensatory decision procedures, such as multiattribute utility theory (MAUT). Explanation and structured pedagogical procedures significantly increase the subjects’ endorsement of decision rules over no decision rules, but they do not increase the endorsement of MAUT. Further, subjects believe that they would be more likely to use compensatory models when they have more options and more information about the options, more time, less certainty about their goals, and more accountability. Paradoxically, although subjects generally do not want to use compensatory rules themselves, they are more likely to want their agents (e.g., physicians or financial or career advisors) to use these rules in making decisions.
The legal rules of contracts and corporations can be divided into two distinct classes. The larger class consists of "default" rules that parties can contract around by prior agreement, while the smaller, but important, class consists of "immutable" rules that parties cannot change by contractual agreement. Default rules fill the gaps in incomplete contracts; they govern unless the parties contract around them. Immutable rules cannot be contracted around; they govern even if the parties attempt to contract around them. For example, under the Uniform Commercial Code (U.C.C.) the duty to act in good faith is an immutable part of any contract, while the warranty of merchantability is simply a default rule that parties can waive by agreement. Similarly, most corporate statutes require that stockholders elect directors annually but allow the articles of incorporation to contract around the default rule of straight voting. Statutory language such as "[u]nless otherwise provided in the certificate of incorporation" or "[u]nless otherwise unambiguously indicated" makes it easy to identify statutory default, but common-law precedents can also be divided into the default and immutable camps. For example, the common-law holding of Peevyhouse v. Garland Coal & Mining Co., which limited damages to diminution in value, could be contractually reversed by prospective parties. In contrast, the common law prerequisite of consideration is largely an immutable rule that parties cannot contractually abrogate.
Eleven closely related experiments testing the free rider hypothesis under different conditions, and sampling various subpopulations, are reported. Results question the empirical validity and generality of a strong version of the hypothesis. Some reasons for its failure are discussed.
It is a common argument in law and economics that divided ownership can create or exacerbate strategic behavior. For instance, when several persons own the land designated for a proposed stadium, individual sellers may "hold out" for a disproportionate share of the gains from trade. Alternatively, when building a public library would benefit multiple residents, individual buyers may "free ride" on the willingness of others to pay for its construction. Such transaction costs of collective action fall under a variety of analytic rubrics, including the "tragedy of the commons" and the theory of "public goods." Nonetheless, each example of market failure shares a common attribute: The division of a single legal entitlement, or of rivalrous entitlements, among joint sellers or joint buyers may prevent socially efficient transactions, particularly when the parties possess private information about their preferences.
This Article explores a different way of dividing an entitlement. Rather than analyzing divisions among buyers or among sellers, we consider the effects of splitting an entitlement between the two groups. Our core insight is Solomonic in character: Dividing a legal entitlement between rivalrous users can facilitate efficient trade. More specifically, we show that when two parties have private information about how much they value an entitlement, endowing each party with a partial claim to the entitlement can reduce the incentive to behave strategically during bargaining, thereby enhancing economic efficiency.
This study replicates and then extends Wilson and Boland's (1978) theory of the deterrent effect of policing on crime rates in American cities by linking it to recent thinking on control of urban disorder and incivilities (Sherman, 1986; Skogan and Maxfield, 1981). The theory posits that police departments with a legalistic style tend to generate policies of proactive patrol (e.g., high traffic citation rate and frequent stops of suspicious or disorderly persons), which in turn may decrease crime rates either (1) indirectly, by increasing the probability of arrest, or (2) directly, by decreasing the crime rate through a deterrent effect regarding perceived threat of social control. We test both these propositions in an examination of robbery rates in 171 American cities in 1980. Overall, the major results suggest that proactive policing has direct inverse effects on aggregate robbery rates, independent of known determinants of crime (e.g., poverty, inequality, region, and family disruption). Moreover, when we demographically disaggregate the robbery rate the direct inverse effect of aggressive policing on robbery is largest for adult offenders and black offenders. We examine the reasons for these findings and discuss their theoretical and policy implications.
Some people hate themselves. But if I say, “I hate myself,” who is this “I” that stands apart from “myself”? And notice how in the expression “I am not myself today,” the “I” and “myself” change places. Now it is “myself” who is the authentic, the authoritative, the judgmental “I,” and it is “I” who is the self that is judged and found wanting. Some people talk to themselves; when they do, who is speaking and who is listening?
Publisher Summary This chapter focuses on norms, which can be demonstrated to affect human action systematically and powerfully. Three distinct types of norms that are effective: social norms of the descriptive kind, which guides the behavior via the perception of how most others would behave; social norms of the injunctive kind, which guides the behavior via the perception of how most others would approve/disapprove of a person's conduct; and personal norms, which guides the behavior via the perception of how a person would approve/disapprove of his own conduct. At a given time, an individual's actions are likely to conform to the dictates of the type of norm that are familiar even when the other types of norms dictate contrary conduct. The chapter discusses those injunctive social norms—once activated—is likely to lead to beneficial social conduct across the greatest number of situations and populations. By focusing subjects on one or another type of norm, the action of a particular kind of norm was stimulated, without activating the other kinds.
Auditors are faced with the task of formulating opinions about the fairness of their clients' financial statements. In doing so, they use their professional judgment to determine the type and amount of information to collect, the timing and manner of collecting it, and the implications of the information collected. This information is rarely, if ever, perfectly reliable or perfectly predictive of the "true" state of a client's financial statements. Nevertheless, auditors may be held liable at common law or under the federal securities laws should the audited financial statements prove to be unrepresentative of this true state. Thus, it is important for auditors to have the ability to formulate appropriately judgments based on probabilistic data. In this paper, we describe the results of experiments designed to assess whether auditors formulate judgments in accordance' with normative principles of decision making or whether a particular alternative to the normative model of decision making under uncertainty 's employed. In the next section, we discuss several alternatives to normative decision models, focusing on the anchoring and adjustment heuristic which forms the basis for our experiments.
The standard rational actor model of organizational behavior leads one to question why corporations would mislead the investing public when neither the company nor its managers were trading in securities. After a brief investigation of answers to this problem in traditional economic terms, this article seeks to use modern institutionalist theory on organizational behavior to argue that corporate belief systems can become "unrealistic" (and hence the source of possible corporate misrepresentations about its risks and future prospects) because of predictable distortions in information flow and, more importantly, perceptual biases among managers. The potentially adaptive role of bias in corporate cultures is considered, along with possible implications for securities law. The article then extends the account based on these cognitive and informational forces to other forms of socially harmful corporate behavior.
The standard economic conception of deterrence assumes that individuals obey or break the law depending on the "price" of crime -- that is, the severity of punishment discounted by the probability that it will be imposed. This paper supplements the standard conception by showing that individuals' decisions to commit crimes are also responsive to another factor: the decisions of other individuals to commit them or not. Social psychologists use the term social influence to refer to the pervasive tendency of individuals to conform to the behavior and expectations of others. There is ample evidence that social influence affects the commission of all manner of crime, from theft, to homicide, to tax evasion. Identifying the contribution of social influence to criminality suggests that society should attend not just to law's effect on the price of crime, but also to its social meaning -- that is, its power to shape individuals' perceptions of the conduct and values of other individuals. In some cases, policies that seem to have little effect on the price of crime -- including order-maintenance policing and curfews -- might nonetheless be cost-effective deterrents because of their power to suppress signs that individuals are engaged in or value crime. Likewise, policies that appear to be cost-effective means of raising the price of crime -- such as the substitution of severity of punishment for certainty of conviction -- might in fact undermine deterrence by magnifying the perception that crime is rampant.