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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.

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.

Abstract:
Contract law governs agreements between parties. This paper contains the chapters on contract law from a general, forthcoming book, Foundations of Economic Analysis of Law (Harvard University Press, 2003). Chapter 13 presents an overview of the subject. Chapter 14 is concerned with contract formation, that is, with the process through which parties find contracting partners, with aspects of contract negotiation, and with the rules governing when an arrangement between parties becomes legally recognized as a contract. Chapter 15 considers at length an important type of contract: the contract to produce something. Chapter 16 is concerned with two other types of contract: the contract for transfer of possession of something that already exists (such as land or a painting), and donative contracts.

Abstract:
Contract law governs agreements between parties. This paper contains the chapters on contract law from a general, forthcoming book, Foundations of Economic Analysis of Law (Harvard University Press, 2003). Chapter 13 presents an overview of the subject. Chapter 14 is concerned with contract formation, that is, with the process through which parties find contracting partners, with aspects of contract negotiation, and with the rules governing when an arrangement between parties becomes legally recognized as a contract. Chapter 15 considers at length an important type of contract: the contract to produce something. Chapter 16 is concerned with two other types of contract: the contract for transfer of possession of something that already exists (such as land or a painting), and donative contracts.

Abstract:
This entry for the forthcoming The New Palgrave Dictionary of Economics (Second Edition) surveys the economic analysis of five primary fields of law: property law; liability for accidents; contract law; litigation; and public enforcement and criminal law. It also briefly considers some criticisms of the economic analysis of law.

law and economics, property law, liability for accidents, contract law, litigation, public enforcement, criminal law

Abstract:
This article surveys the theory of the public enforcement of law -- the use of public agents (inspectors, tax auditors, police, prosecutors) to detect and to sanction violators of legal rules. We first present the basic elements of the theory, focusing on the probability of imposition of sanctions, the magnitude and form of sanctions, and the rule of liability. We then examine a variety of extensions of the central theory, concerning accidental harms, costs of imposing fines, errors, general enforcement, marginal deterrence, the principal-agent relationship, settlements, self-reporting, repeat offenders, imperfect knowledge about the probability and magnitude of fines, and incapacitation.

Abstract:
This article surveys the theory of the public enforcement of law--the use of public agents (inspectors, tax auditors, police prosecutors) to detect and to sanction violators of legal rules. We first present the basic elements of the theory, focusing on the probability of imposition of sanctions, the magnitude and form of sanctions, and the rule of liability. We then examine a variety of extensions of the central theory, concerning accidental harms, costs of imposing fines, errors, general enforcement, marginal deterrence, the principal-agent relationship, settlements, self reporting, repeat offenders, imperfect knowledge about the probability and magnitude of fines, and incapacitation.

Abstract:
This part deals with the basic elements of property law. I begin in chapter 7 by examining the fundamental question of what justifies the social institution of property, that is, the rationale for the rights that constitute what we commonly call ownership. I also discuss examples of the emergence of property rights. Then I consider a number of important issues about property rights. In chapter 8, I inquire about the division of property rights (property rights may be divided contemporaneously, over time, and according to contingency). In chapter 9, I study a variety of issues about the acquisition and transfer of property, including the discovery of unowned or lost property, registration systems for transfer of property, and the transfer of property at death. In chapter 10, I investigate 'externalities' and property - problems concerning cooperation and conflict in the use of property, together with the resolution of such problems through bargaining and legal rules. In chapter 11, I discuss public property; here I address the question of why the state should own property, and also the manner of state acquisition of property through purchase or by the exercise of powers of eminent domain. Finally, in chapter 12, I analyze the special topic of intellectual property.

Abstract:
This part deals with the basic elements of property law. I begin in chapter 7 by examining the fundamental question of what justifies the social institution of property, that is, the rationale for the rights that constitute what we commonly call ownership. I also discuss examples of the emergence of property rights.

Then I consider a number of important issues about property rights. In chapter 8, I inquire about the division of property rights (property rights may be divided contemporaneously, over time, and according to contingency). In chapter 9, I study a variety of issues about the acquisition and transfer of property, including the discovery of unowned or lost property, registration systems for transfer of property, and the transfer of property at death. In chapter 10, I investigate "externalities" and property - problems concerning cooperation and conflict in the use of property, together with the resolution of such problems through bargaining and legal rules. In chapter 11, I discuss public property; here I address the question of why the state should own property, and also the manner of state acquisition of property through purchase or by the exercise of powers of eminent domain.

Finally, in chapter 12, I analyze the special topic of intellectual property.

Abstract:
Accident law is the body of legal rules governing the ability of victims of harm to sue and to collect payments from those who injured them. This paper contains the chapters on accident law from a general, forthcoming book, Foundations of Economic Analysis of Law (Harvard University Press, 2003). The analysis is first concerned (chapters 2-4) with the influence of liability rules on incentives to reduce accident risks. Then consideration of accident law is broadened (chapter 5) to reflect the effect of liability rules on compensation of victims and the allocation of risk. In this regard a central issue is the roles of victims' insurance and of liability insurance, and how they alter the incentives inherent in liability rules. Finally, the administrative costs of the liability system, namely, the private and public legal costs of litigation, are examined (chapter 6). These costs are significant and thus bear importantly on whether use of accident law is socially desirable. It is emphasized that social intervention -- either to curtail use of the legal system or to encourage it -- may well be needed because the private incentives to use the system are generally different from the socially desirable incentives to do so.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Accident law is the body of legal rules governing the ability of victims of harm to sue and to collect payments from those who injured them. This paper contains the chapters on accident law from a general, forthcoming book, Foundations of Economic Analysis of Law (Harvard University Press, 2003). The analysis is first concerned (chapters 2-4) with the influence of liability rules on incentives to reduce accident risks. Then consideration of accident law is broadened (chapter 5) to reflect the effect of liability rules on compensation of victims and the allocation of risk. In this regard a central issue is the roles of victims' insurance and of liability insurance, and how they alter the incentives inherent in liability rules. Finally, the administrative costs of the liability system, namely, the private and public legal costs of litigation, are examined (chapter 6). These costs are significant and thus bear importantly on whether use of accident law is socially desirable. It is emphasized that social intervention - either to curtail use of the legal system or to encourage it - may well be needed because the private incentives to use the system are generally different from the socially desirable incentives to do so.

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.

Abstract:
This paper contains the chapters on litigation and the legal process from a general, forthcoming book, Foundations of Economic Analysis of Law (Harvard University Press, 2003). In chapter 17, I consider the basic theory of litigation. Here I describe the three phases of litigation: its initiation through suit, the determination of whether the parties will settle their case or proceed to trial, and, if trial results, the trial expenditures. I also analyze the social desirability of their decisions, a major theme being that the private incentives to litigate may diverge from what is socially desirable. In chapter 18, I extend the basic theory of litigation, examining among other issues the bringing of negative value suits, shifting of legal fees to losers at trial, lawyer-client fee arrangements, and the influence of insurers on litigation. Then, in chapter 19, I discuss several general aspects of the legal process not considered in the basic theory and its extensions, including private systems of adjudication, the value of accuracy in adjudication, the appeals process, and the function of legal advice.

Abstract:
This paper contains the chapters on litigation and the legal process from a general, forthcoming book, Foundations of Economic Analysis of Law (Harvard University Press, 2003). In chapter 17, I consider the basic theory of litigation. Here I describe the three phases of litigation: its initiation through suit, the determination of whether the parties will settle their case or proceed to trial, and, if trial results, the trial expenditures. I also analyze the social desirability of their decisions, a major theme being that the private incentives to litigate may diverge from what is socially desirable. In chapter 18, I extend the basic theory of litigation, examining among other issues the bringing of negative value suits, shifting of legal fees to losers at trial, lawyer-client fee arrangements, and the influence of insurers on litigation. Then, in chapter 19, I discuss several general aspects of the legal process not considered in the basic theory and its extensions, including private systems of adjudication, the value of accuracy in adjudication, the appeals process, and the function of legal advice.

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.

Abstract:
A fundamental legal problem is whether property rights should be protected by property rules or by liability rules. In this
Article, we provide a systematic economic analysis of the choice between property and liability rules. We answer a basic
question: why is it that liability rules are commonly used in the context of harmful externalities (such as pollution and
automobile accidents), whereas property rules are generally employed to protect possessors of things against potential
takers? In the course of our analysis, we demonstrate that many commonly held beliefs about property and liability rules
are mistaken. Our analysis is also relevant to policy; for example, we show that in important contexts liability rules (and
pollution taxes) are more efficient than property rules (including much regulation) even when damages must be set using
only limited information about harm.

Abstract:
The private and the social functions of contracts and of contract law are examined in this entry. In section 1, on the basic theory of contracts, the topics considered include contract formation, why contract enforcement is valuable, the incompleteness of contracts, the interpretation of contracts, remedies for breach, renegotiation of contracts, and judicial overriding of contracts. In section 2, the economic literature on production contracts is reviewed, and in section 3 other types of contract are discussed.

Abstract:
Most legal academics and policymakers 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.

Abstract:
Most legal academics and policymakers 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.

Abstract:
This paper contains a chapter on the general structure of the law from a forthcoming book, Foundations of Economic Analysis of Law (Harvard University Press, 2003). In this chapter, I consider basic features of the legal system, including whether the law directly constrains behavior or channels it by the threat of sanctions, and whether the law is brought into play by private legal action or involves public enforcement. I investigate the conditions under which one or another structure of law will be socially desirable, and I then discuss tort, contract, criminal law, and several other areas of law in the light of the analysis of the optimal structure of the law.

Abstract:
This paper contains a chapter on the general structure of the law from a forthcoming book, Foundations of Economic Analysis of Law (Harvard University Press, 2003). In this chapter, I consider basic features of the legal system, including whether the law directly constrains behavior or channels it by the threat of sanctions, and whether the law is brought into play by private legal action or involves public enforcement. I investigate the conditions under which one or another structure of law will be socially desirable, and I then discuss tort, contract, criminal law, and several other areas of law in the light of the analysis of the optimal structure of the law.

Abstract:
This article analyzes corruption of law enforcement agents: payment of bribes to agents so that they will not report violations. Corruption dilutes deterrence because bribe payments are less than sanctions. The state may not be able to offset this effect of bribery by raising sanctions for the underlying offense. Thus, it may be optimal to expend resources to detect and penalize corruption. At the optimum, however, corruption may not be deterred. Nonetheless, it may be desirable to attempt to control corruption in order to raise the offender's costs -- the sum of the bribe payment and the expected sanction for bribery -- and thereby increase deterrence of the underlying violation.

Abstract:
We analyze corruption in law enforcement: the payment of bribes to enforcement agents, threats to frame innocent individuals in order to extort money from them, and the actual framing of innocent individuals. Bribery, extortion, and framing reduce deterrence and are thus worth discouraging. Optimal penalties for bribery and framing are maximal, but, surprisingly, extortion should not be sanctioned. The state may also combat corruption by paying rewards to enforcement agents for reporting violations. Such rewards can partially or completely mitigate the problem of bribery, but they encourage framing. The optimal reward may be relatively low to discourage extortion and framing, or relatively high to discourage bribery.

Abstract:
This paper compares reward systems to intellectual property rights (patents and copyrights). Under a reward system, innovators are paid for innovations directly by the government (possibly on the basis of sales), and innovations pass immediately into the public domain. Thus, reward systems engender incentives to innovate without creating the monopoly power of intellectual property rights, but a principal difficulty with rewards is the information required for their determination. We conclude in our model that intellectual property rights do not possess a fundamental social advantage over reward systems, and that an optional reward system - under which innovators choose between rewards and intellectual property rights - is superior to intellectual property rights.

Abstract:
This paper compares reward systems to intellectual property rights (patents and copyrights). Under a reward system, innovators are paid for innovations directly by government (possibly on the basis of sales), and innovations pass immediately into the public domain. Thus, reward systems engender incentives to innovate without creating the monopoly power of intellectual property rights, but a principal difficulty with rewards is the information required for their determination. We conclude in our model that intellectual property rights do not possess a fundamental social advantage over reward systems, and that an optional reward system under which innovators choose between rewards and intellectual property rights is superior to intellectual property rights.

Abstract:
This paper compares reward systems to intellectual property rights (patents and copyrights). Under a reward system, innovators are paid for innovations directly by government (possibly on the basis of sales), and innovations pass immediately into the public domain. Thus, reward systems engender incentives to innovate without creating the monopoly power of intellectual property rights, but a principal difficulty with rewards is the information required for their determination. We conclude in our model that intellectual property rights do not possess a fundamental social advantage over reward systems, and that an optional reward system--under which innovators choose between rewards and intellectual property rights--is superior to intellectual property rights.

Abstract:
This paper contains the chapters on public enforcement of law and on criminal law from a general, forthcoming book, Foundations of Economic Analysis of Law (Harvard University Press, 2003). By public law enforcement is meant the use of public law enforcement agents - such as police, tax inspectors, regulatory personnel - to enforce legal rules. A number of important dimensions of public law enforcement may be distinguished. One is the choice of the basic rule of liability: whether liability is strict or fault-based, and whether liability is imposed only if harm is done or may be imposed on the basis of acts alone (independently of the occurrence of harm). A second dimension of enforcement is the type of sanction, whether monetary or nonmonetary, notably, imprisonment. A third aspect of enforcement is the magnitude of sanctions. And a fourth dimension of enforcement is the degree of enforcement effort, which determines the probability of imposition of sanctions. These dimensions of enforcement are discussed in the chapters that follow. In chapter 20, the basic theory of public enforcement employing monetary sanctions is discussed; in chapter 21, the basic theory of enforcement using nonmonetary sanctions is examined; and in chapter 22, extensions to the basic theory are considered. Then, in chapter 23, functions of sanctions apart from deterrence, namely, incapacitation, rehabilitation, and retribution, are discussed. Finally, in chapter 24, the subject of criminal law is addressed against the background of the theory of public enforcement of law.

Abstract:
This paper contains the chapters on public enforcement of law and on criminal law from a general, forthcoming book, Foundations of Economic Analysis of Law (Harvard University Press, 2003). By public law enforcement is meant the use of public law enforcement agents - such as police, tax inspectors, regulatory personnel - to enforce legal rules. A number of important dimensions of public law enforcement may be distinguished. One is the choice of the basic rule of liability: whether liability is strict or fault-based, and whether liability is imposed only if harm is done or may be imposed on the basis of acts alone (independently of the occurrence of harm). A second dimension of enforcement is the type of sanction, whether monetary or nonmonetary, notably, imprisonment. A third aspect of enforcement is the magnitude of sanctions. And a fourth dimension of enforcement is the degree of enforcement effort, which determines the probability of imposition of sanctions.

These dimensions of enforcement are discussed in the chapters that follow. In chapter 20, the basic theory of public enforcement employing monetary sanctions is discussed; in chapter 21, the basic theory of enforcement using nonmonetary sanctions is examined; and in chapter 22, extensions to the basic theory are considered.

Then, in chapter 23, functions of sanctions apart from deterrence, namely, incapacitation, rehabilitation, and retribution, are discussed. Finally, in chapter 24, the subject of criminal law is addressed against the background of the theory of public enforcement of law.

Abstract:
The major theme of this article is that the interpretation of contracts is in the interests of contracting parties. The general reasons are (a) that interpretation may improve on otherwise imperfect contracts; and (b) that the prospect of interpretation allows parties to write simpler contracts and thus to conserve on contracting effort. A method of interpretation is defined as a function whose argument is the written contract and whose value is another contract, the interpreted contract, which is what actually governs the parties' joint enterprise. It is shown that interpretation is superior to enforcement of contracts as written, and the optimal method of interpretation is analyzed.

Abstract:
The major theme of this article is that the interpretation of contracts is in the interests of contracting parties. The general reasons are (a) that interpretation may improve on otherwise imperfect contracts; and (b) that the prospect of interpretation allows parties to write simpler contracts and thus to conserve on contracting effort. A method of interpretation is defined as a function whose argument is the written contract and whose value is another contract, the interpreted contract, which is what actually governs the parties' joint enterprise. It is shown that interpretation is superior to enforcement of contracts as written, and the optimal method of interpretation is analyzed.

Abstract:
The major theme of this article is that the interpretation of contracts - their possible amplification, correction, and modification by adjudicators - is in the interests of contracting parties. The general reasons are (a) that interpretation may improve on otherwise imperfect contracts; and (b) that the prospect of interpretation allows parties to write simpler contracts and thus to conserve on contracting effort. A method of interpretation is defined as a function whose argument is the written contract and whose value is another contract, the interpreted contract, which is what actually governs the parties' joint enterprise. It is shown that interpretation is superior to enforcement of contracts as written, and the optimal method of interpretation is analyzed.

Abstract:
The major theme of this article is that the interpretation of contracts - their possible amplification, correction, and modification by adjudicators - is in the interests of contracting parties. The general reasons are (a) that interpretation may improve on otherwise imperfect contracts; and (b) that the prospect of interpretation allows parties to write simpler contracts and thus to conserve on contracting effort. A method of interpretation is defined as a function whose argument is the written contract and whose value is another contract, the interpreted contract, which is what actually governs the parties' joint enterprise. It is shown that interpretation is superior to enforcement of contracts as written, and the optimal method of interpretation is analyzed.

Abstract:
This chapter of the forthcoming Handbook of Law and Economics surveys the theory of the public enforcement of law %u2013 the use of governmental agents (regulators, inspectors, tax auditors, police, prosecutors) to detect and to sanction violators of legal rules. The theoretical core of our analysis addresses the following basic questions: Should the form of the sanction imposed on a liable party be a fine, an imprisonment term, or a combination of the two? Should the rule of liability be strict or fault-based? If violators are caught only with a probability, how should the level of the sanction be adjusted? How much of society%u2019s resources should be devoted to apprehending violators? We then examine a variety of extensions of the central theory, including: activity level; errors; the costs of imposing fines; general enforcement; marginal deterrence; the principal-agent relationship; settlements; self-reporting; repeat offenders; imperfect knowledge about the probability and magnitude of sanctions; corruption; incapacitation; costly observation of wealth; social norms; and the fairness of sanctions.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
This chapter of the forthcoming Handbook of Law and Economics surveys the theory of the public enforcement of law - the use of governmental agents (regulators, inspectors, tax auditors, police, prosecutors) to detect and to sanction violators of legal rules. The theoretical core of our analysis addresses the following basic questions: Should the form of the sanction imposed on a liable party be a fine, an imprisonment term, or a combination of the two? Should the rule of liability be strict or fault-based? If violators are caught only with a probability, how should the level of the sanction be adjusted? How much of society's resources should be devoted to apprehending violators? We then examine a variety of extensions of the central theory, including: activity level; errors; the costs of imposing fines; general enforcement; marginal deterrence; the principal-agent relationship; settlements; self-reporting; repeat offenders; imperfect knowledge about the probability and magnitude of sanctions; corruption; incapacitation; costly observation of wealth; social norms; and the fairness of sanctions.

public enforcement of law, fines, imprisonment, strict liability, fault-based liability, probability of detection, errors, general enforcement, marginal deterrence, settlements, self-reporting, repeat offenders, fairness of sanctions, norms

Abstract:
In Fairness versus Welfare, we advance the thesis that social policies should be assessed based entirely on 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.

Abstract:
In Fairness versus Welfare, we advance the thesis that social policies should be assessed based entirely on 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.

Abstract:
This paper contains the chapters on welfare economics, morality, and the law from a general, forthcoming book, Foundations of Economic Analysis of Law (Harvard University Press, 2003). I begin in chapter 26 with a discussion of the normative foundations of economic analysis, namely, the subject of welfare economics. I also describe notions of morality and fairness, which play an important, if dominant, role in much normative discourse about law, and I discuss the connections between welfare economics and morality. A theme of this discussion is that notions of morality have functional aspects, and that, for a complex of reasons, they also take on importance in their own right to individuals.

Then in chapter 27, I consider the observed relationship between law and morality, and comment on what might be thought to be the optimal relationship between law and morality.

In chapter 28, I discuss issues concerning income distributional equity and the law, including the question of whether the distributional effects of legal rules should influence their selection. The answer to this question will be a qualified no, given that society has an income tax system that can serve to redistribute income or to correct problems with distribution that arise due to the effects of legal rules.

Abstract:
When would parties to a contract want performance to be specifically required, and when would they prefer payment of money damages to be the remedy for breach? This fundamental question is studied here, and an answer is provided that is based on a simple distinction between contracts to produce goods and contracts to convey property. Setting aside qualifications, the conclusion for breach of contracts to produce goods is that parties would tend to prefer the remedy of damages, essentially because of the problems that would be created under specific performance if production costs were high. In contrast, parties would often favor the remedy of specific performance for breach of contracts to convey property, in part because there can be no problems with production cost when property already exists. The conclusions reached shed light on the choices made between damages and specific performance under Anglo-American and under civil law systems, and they also suggest the desirability of certain changes in our legal doctrine.

Abstract:
It is evident that both law and morality serve to channel our behavior. Law accomplishes this primarily through the threat of sanctions if we disobey legal rules. Morality too involves incentives: bad acts may result in guilt and disapprobation, and good acts may result in virtuous feelings and praise. These two very different avenues of effect on our actions are examined in this article from an instrumental perspective. The analysis focuses on various social costs associated with law and morality, and on their effectiveness, as determined by the magnitude and likelihood of sanctions and by certain informational factors. After the relative character of law and of morality as means of control of conduct is assessed, consideration is given to their theoretically optimal domains - to where morality alone would appear to be best to control behavior, to where morality and the law would likely be advantageous to employ jointly, and to where solely the law would seem desirable to utilize. The observed pattern of use of morality and of law is discussed, and it is tentatively suggested that the observed and the optimal patterns are in rough alignment with one another.

Abstract:
It is evident that both law and morality serve to channel our behavior. Law accomplishes this primarily through the threat of sanctions if we disobey legal rules. Morality too involves incentives; bad acts may result in guilt and disapprobation, and good acts in virtuous feelings and praise. These two very different avenues of effect on our actions are examined in this article from an instrumental perspective. The analysis focuses on various social costs associated with law and morality, and on their effectiveness, as determined by the magnitude and likelihood of sanctions and by certain informational factors.

After the relative character of law and of morality as means of control of conduct is assessed, consideration is given to their theoretically optimal domains - to where morality alone would appear to be best to control behavior, to where morality and the law would likely be advantageous to employ jointly, and to where solely the law would seem to be desirable to utilize. The observed pattern of use of morality and of law is discussed, and it is tentatively suggested that the observed and the optimal patterns are in rough alignment with one another.

Abstract:
We examine how moral sanctions and rewards, notably the moral sentiments involving feelings of guilt and virtue, would be employed to govern individuals' behavior if the objective were to maximize social welfare. In our model, we analyze how the optimal use of guilt and virtue is influenced by the nature of the behavior under consideration, the costs of inculcating moral rules, constraints on the capacity to experience guilt and virtue, the fact that guilt and virtue often must be applied to groups of acts rather than be tailored to every conceivable type of act, and the direct effect of feelings of guilt and virtue on individuals' utility. We also consider a number of ways that the model could be extended, discuss the extent to which our analysis is consistent with the observed use of guilt and virtue, and relate our conclusions to longstanding philosophical debates about morality.

Abstract:
We examine how moral sanctions and rewards, notably the moral sentiments involving feelings of guilt and virtue, would be employed to govern individuals' behavior if the objective were to maximize social welfare. In our model, we analyze how the optimal use of guilt and virtue is influenced by the nature of the behavior under consideration, the costs of inculcating moral rules, constraints on the capacity to experience guilt and virtue, the fact that guilt and virtue often must be applied to groups of acts rather than be tailored to every conceivable type of act, and the direct effect of feelings of guilt and virtue on individuals' utility. We also consider a number of ways that the model could be extended, discuss the extent to which our analysis is consistent with the observed use of guilt and virtue, and relate our conclusions to longstanding philosophical debates about morality.

Abstract:
The sale of liability insurance presents us with a basic question. On one hand, individuals want to purchase liability insurance coverage, suggesting that its ownership is socially good. On the other, the risk against which liability coverage protects its holders is having to pay legally-mandated sanctions. And because the purpose of legal sanctions is in significant part to discourage and to punish unwanted behavior, the fundamental issue arises whether liability insurance might undermine the effect of the law and thus be socially undesirable.

This concern led to early resistance against the sale of liability insurance, and reservations about the wisdom of liability insurance are reflected today by certain limitations on the sale of coverage. However, liability insurance is widely held, and without apparently untoward consequences for the functioning of the legal system.

My purpose in this paper is to discuss what the economic theory of insurance and of liability law imply about the social desirability, or lack thereof, of liability insurance. I first consider the standard model of accidents and determine there that liability insurance is socially desirable. I then turn to the chief circumstance under which regulation of liability insurance coverage may be justified -- when incentives to reduce risk are inadequate. Inadequate incentives may arise because of judgment-proof problems or the possibility of escape from liability. Regulation of liability coverage may then help to augment diluted incentives to reduce risk. Notably, requirements to purchase coverage may improve incentives when insurers can monitor insured behavior; and the opposite form of regulation, forbidding coverage, may increase incentives when insurers are not able to monitor insured behavior.

Abstract:
We analyze a model in which firms are able to acquire information about product risks and may or may not be required to disclose this information. We initially study the effect of disclosure rules assuming that firms are not liable for the harm caused by their products. Although mandatory disclosure obviously is superior to voluntary disclosure given the information about product risks that firms possess - since such information has value to consumers - voluntary disclosure induces firms to acquire more information about product risks because they can keep silent if the information is unfavorable. The latter effect could lead to higher social welfare under voluntary disclosure. The same results hold if firms are liable for harm under the negligence standard of liability. Under strict liability, however, firms are indifferent about revealing information concerning product risk, and mandatory and voluntary disclosure rules are equivalent.

Abstract:
We analyze a model in which firms are able to acquire information about product risks and may or may not be required to disclose this information. We initially study the effect of disclosure rules assuming that firms are not liable for the harm caused by their products. Although mandatory disclosure obviously is superior to voluntary disclosure given the information about product risks that firms possess - since such information has value to consumers - voluntary disclosure induces firms to acquire more information about product risks because they can keep silent if the information is unfavorable. The latter effect could lead to higher social welfare under voluntary disclosure. The same results hold if firms are liable for harm under the negligence standard of liability. Under strict liability, however, firms are indifferent about revealing information concerning product risk, and mandatory and voluntary disclosure rules are equivalent.

product risk, information, mandatory disclosure, voluntary disclosure, negligence, strict liability

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.

Abstract:
In an earlier work, we analyzed how the legal rules governing contractual liability affect the transfer of information between the parties to the contract. In particular, we showed how limitations on contractual liability might lead high valuation buyers to reveal their valuation of performance, and we identified the circumstances under which such limitations on liability are and are not socially desirable. In an article forthcoming in the Stanford Law Review, Barry Adler develops a critique of our analysis, as well as that of Ayres and Gertner, who independently argued that contractual rules can beneficially facilitate information transfers. We reconsider here the subject of contractual liability and the revelation of information and respond to Adler's critique. We find Adler's model to be a natural extension of ours rather than a departure from it. Our reexamination leads to the conclusion that the informational effects that our work analyzed are important to take into account in designing contract rules.

Abstract:
In an earlier work, we analyzed how the legal rules governing contractual liability affect the transfer of information between the parties to the contract. In particular, we showed how limitations on contractual liability might lead high valuation buyers to reveal their valuation of performance, and we identified the circumstances under which such limitations on liability are and are not socially desirable. In an article forthcoming in the Stanford Law Review, Barry Adler develops a critique of our analysis, as well as of that of Ayres and Gertner, who independently argued that contractual rules can beneficially facilitate information transfers. We reconsider here the subject of contractual liability and the revelation of information and respond to Adler's critique. We find Adler's model to be a natural extension of ours rather than a departure from it. Our reexamination leads to the conclusion that the informational effects that our work analyzed are important to take into account in designing contract rules.

Abstract:
This entry for the forthcoming The New Palgrave Dictionary of Economics (Second Edition) surveys the economic analysis of public enforcement of law - the use of public agents (inspectors, tax auditors, police, prosecutors) to detect and to sanction violators of legal rules. We first discuss the basic elements of the theory: the probability of imposition of sanctions, the magnitude and form of sanctions (fines, imprisonment), and the rule of liability. We then examine a variety of extensions, including the costs of imposing fines, mistake, marginal deterrence, settlement, self-reporting, repeat offenses, and incapacitation.

Abstract:
According to the contract law principle established in the famous nineteenth century English case of Hadley v. Baxendale, and followed ever since in the common law world, liability for a breach of contract is limited to losses "arising...according to the usual course of things," or that may be reasonably supposed "to have been in the contemplation of both parties, at the time they made the contract...." Using a formal model, we attempt in this paper to analyze systematically the effects and the efficiency of this limitation on contract damages. We study two alternative rules: the limited liability rule of Hadley, and an unlimited liability rule. Our analysis focuses on the effects of the alternative rules on two types of decisions: buyers' decisions about communicating their valuations of performance to sellers; and sellers' decisions about their level of precautions to reduce the likelihood of nonperformance. We identify the efficient behavior of buyers and sellers. We then compare this efficient behavior with the decisions that buyers and sellers in fact make under the limited and unlimited liability rules. This analysis enables us to provide a full characterization of the conditions under which each of the rules induces, or fails to induce, efficient behavior, as well as the conditions under which each of the rules is superior to the other.

contracts, breach, damages, precautions, information, communication

Abstract:
According to the contract law principle established in the famous nineteenth century English case of Hadley v. Baxendale, and followed ever since in the common law world, liability for a breach of contract is limited to losses "arising...according to the usual course of things," or that may be reasonable supposed "to have been in the contemplation of both parties, at the time they made the contract,..." Using a formal model, we attempt in this paper to analyze systematically the effects and the efficiency of this limitation on contract damages. We study two alternative rules: the limited liability rule of Hadley, and an unlimited liability rule. Our analysis focuses on the effects of the alternative rules: the limited liability rule of Hadley, and an unlimited liability rule. Our analysis focuses on the effects of the alternative rules on two types of decisions: buyers' decisions about communicating their valuations of performance to sellers; and sellers' decisions about their level of precautions to reduce the likelihood of nonperformance. We identify the efficient behavior of buyers and sellers. We then compare this efficient behavior with the decisions that buyers and sellers in fact make under the limited and unlimited liability rules. This analysis enables us to provide a full characterization of the conditions under which each of the rules induces, or fails to induce, efficient behavior, as well as the conditions under which each of the rules is superior to the other.

Abstract:
This is a survey of legal liability for accidents. Three general aspects of accident liability are addressed. The first is the effect of liability on incentives, both whether to engage in activities (for instance, whether to drive) and how much care to exercise (at what speed to travel) to reduce risk when so doing. The second general aspect concerns risk-bearing and insurance, for the liability system acts as an implicit insurer for accident victims and it imposes risk on potential injurers (because they may have to pay judgments to victims). In this regard, victims' accident insurance and injurers' liability insurance are taken into account. The third general aspect of accident liability is its administrative expense, comprising the cost of legal services, the value of litigants' time, and the operating cost of the courts. A range of subtopics are considered, including product liability, causation, punitive damages, the judgment-proof problem, vicarious liability, and nonpecuniary harm. Liability is also compared to other methods of controlling harmful activities, notably, to corrective taxation and to regulation.

Abstract:
This is a survey of legal liability for accidents. Three general aspects of accident liability are addressed. The first is the effect of liability on incentives, both whether to engage in activities (for instance, whether to drive) and how much care to exercise (at what speed to travel) to reduce risk when so doing. The second general aspect concerns risk-bearing and insurance, for the liability system acts as an implicit insurer for accident victims and it imposes risk on potential injurers (because they may have to pay judgments to victims). In this regard, victims' accident insurance and injurers' liability insurance are taken into account. The third general aspect of accident liability is its administrative expense, comprising the cost of legal services, the value of litigants' time, and the operating cost of the courts. A range of subtopics are considered, including product liability, causation, punitive damages, the judgment-proof problem, vicarious liability, and nonpecuniary harm. Liability is also compared to other methods of controlling harmful activities, notably, to corrective taxation and to regulation.

law and economics, liability, accident(s), tort(s), insurance, product liability, externalities, information, regulation, litigation, suit, trial, court(s)

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.

Abstract:
In this article we incorporate notions of the fairness of sanctions into the standard model of public enforcement. When both the probability and magnitude of sanctions may be varied, the usual solution involves a very high sanction and a relatively low probability of enforcement if individuals are risk neutral. When the issue of fairness is added to the analysis, the optimal sanction generally is not extremely high because such a sanction would be seen as unfair. The optimal probability of imposing sanctions may be higher than in the usual case (to offset the lower sanction) or lower than in the usual case (because the lower sanction reduces the effectiveness of enforcement).

Abstract:
In this article we incorporate notions of the fairness of sanctions into the standard model of public enforcement. We first determine the optimal sanction when the probability of imposing sanctions is fixed, and we relate this optimal sanction to the sanction that is ideal in terms of fairness alone and to the sanction that is ideal in terms of deterrence alone. We then consider optimal enforcement policy when both the probability and magnitude of sanctions may be varied. The usual solution in this case involves the maximal sanction and a relatively low probability of enforcement if individuals are risk neutral. When the issue of fairness is added to the analysis, however, the usual solution generally is not optimal because a very high sanction will be seen as unfair. A consequence of the fairness-related motive to constrain the sanction to a moderate level is that the optimal probability of imposing sanctions changes, and it may be higher or lower than the optimal probability in the usual case.

Abstract:
This article develops the point that the problems associated with contractual holdup may justify legal intervention in theory, and the article relates this conclusion to legal intervention in practice. Contractual holdup is considered for both fresh contracts and for modifications of contracts.

The law can in principle alleviate the incentive and risk-bearing problems due to holdup in two ways. One approach is for the law simply to void agreements made in certain circumstances, since that will remove the prospect of profit from holdup. This policy may be desirable when the events that permit holdup are engineered, for these events would not have been instigated if they would not have resulted in enforceable contracts. When situations of need are not engineered (bad weather puts a ship in jeopardy), flat voiding of contracts is undesirable, since contracts for aid in situations of need (to tow a ship) are often socially beneficial. In these circumstances, the policy of controlling the contract price is preferable, as that policy can reduce the problems of holdup but still allow contracts to be made.

Both types of legal intervention in contracts and their modifications - voiding without regard to price and control of price - are used by courts to counter problems of pronounced holdup. Also, various price control regulations appear to serve the same objective, at least in part, for instance maximum price ordinances for car towing services, emergency price regulations, and the historically important rule of laesio enormis of the Middle Ages.

Abstract:
This article develops the point that the problems associated with contractual holdup may justify legal intervention in theory, and the article relates this conclusion to legal intervention in practice. Contractual holdup is considered for both fresh contracts and for modifications of contracts. The law can in principle alleviate the incentive and risk-bearing problems due to holdup in two ways. One approach is for the law simply to void agreements made in certain circumstances, since that will remove the prospect of profit from holdup. This policy may be desirable when the events that permit holdup are engineered, for these events would not have been instigated if they would not have resulted in enforceable contracts. When situations of need are not engineered (bad weather puts a ship in jeopardy), flat voiding of contracts is undesirable, since contracts for aid in situations of need (to tow a ship) are often socially beneficial. In these circumstances, the policy of controlling the contract price is preferable, as that policy can reduce the problems of holdup but still allow contracts to be made. Both types of legal intervention in contracts and their modifications - voiding without regard to price and control of price - are used by courts to counter problems of pronounced holdup. Also, various price control regulations appear to serve the same objective, at least in part, for instance maximum price ordinances for car towing services, emergency price regulations, and the historically important rule of laesio enormis of the Middle Ages.

Abstract:
When, and why, might it be thought immoral to commit a breach of contract? The answer to this fundamental question is not obvious, because, as is stressed, and as has been overlooked in addressing the question, contracts do not usually provide explicitly for the particular events that are observed to occur. When a contract does not expressly address a contingency that occurs, the morality of breach is assumed here to depend on what the contract would have said had it addressed the contingency. This assumption is explained to imply that breach is not immoral if expectation damages would have to be paid for breach, but that breach might be immoral if damages are less than the true expectation, as is probable. This conclusion is related to the results of a survey that was conducted of individuals' attitudes toward the morality of breach. The conclusion is also related to the views of commentators on the morality of breach and of those on the "efficiency" of breach.

Abstract:
We explain in this Article that the benefits of product liability may well be outweighed by its costs in a wide range of circumstances. One benefit is that the threat of liability may induce firms to improve product safety. However, this benefit is limited: even in the absence of product liability, firms would often be motivated by market forces to enhance product safety because their sales are likely to fall if their products harm consumers; moreover, their products must frequently conform to safety regulations. Consequently, product liability might not be expected to exert a significant additional influence on product safety - and the available empirical evidence suggests that such liability does not in fact have a measurable effect on the frequency of product accidents. A second benefit of product liability is that it causes product prices to increase to reflect the riskiness of products and thereby may improve consumer purchase decisions. But this benefit also involves a detriment, because product prices may rise excessively and undesirably chill purchases. A third benefit of product liability is that it compensates victims of product-related accidents for their losses. Yet this benefit is only partial, for accident victims are already often compensated by their insurers for some or all of their losses. Potentially offsetting the benefits of product liability are its costs, which are great. To transfer a dollar to a victim of a product accident requires more than a dollar on average in legal expenses. Given the limited benefits and the high costs of product liability, we conclude that it may be socially undesirable - especially for widely sold products, with respect to which market forces and regulation are relatively strong. This judgment is in tension both with the broad social endorsement of product liability and with proposals for its reform, which generally do not question its existence. Our more critical assessment of product liability stems from the fact that we engage in an analysis of its benefits and costs, whereas neither the proponents of product liability nor its reformers undertake to do so.

Abstract:
Our thesis in Fairness versus Welfare is that social policies should be assessed entirely on the basis of how they affect individuals' well-being. This claim implies that no independent weight should be granted to deontological principles. We support our thesis with three sets of arguments: a demonstration that deontological principles lead to perverse reductions in welfare, indeed, sometimes to a decline in everyone's well-being; the presentation of numerous other difficulties with the principles, including their lack of intellectually satisfying rationales; and a reconciliation of the intuitive appeal of the principles with our thesis that they should not be viewed as directly relevant to the assessment of social policy. In this essay, we explain that the critique of Professor Ripstein largely fails to respond to any of these arguments.

Abstract:
Legal liability for accidents determines the circumstances under which injurers must compensate injurers for harm. The effects of liability on incentives to reduce risk, on risk-bearing and insurance (both direct coverage for victims and liability coverage for injurers), and on administrative expenses are considered. Liability is also compared to other methods of controlling harmful activities, notably, to corrective taxation and regulation.

Abstract:
Economists have long recognized that certainty of contract is essential to a healthy economy. Long-term forward contracts, in particular, help reduce financial risk. Those contracts can only accomplish that goal, however, if parties know the contracts will be enforced.

From an economic and policy standpoint, long-term energy contracts should be abrogated only in truly exceptional circumstances. The mere fact that a price seems too high in retrospect does not justify abrogating contracts voluntarily agreed to by sophisticated buyers and sellers. Nor do generalized claims of - market dysfunction - at the time the contract was formed.

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.

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 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 it is of doubtful practical importance.

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 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 it is of doubtful practical importance.

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.

Abstract:
This article discusses a simple proposal that could reduce litigation costs in the country by about half, yet without compromising the functioning of the liability system in a significant way. Under the proposal (1) only half the cases brought before a court would be randomly chosen for litigation, and (2) damages would be doubled in cases accepted for litigation. The first element of the proposal saves litigation costs and the second preserves deterrence of undesirable behavior. The effect of the proposal on settlement is emphasized, one important implication of which is that settlement is likely to occur before cases are filed (and possibly randomly eliminated), in which event plaintiffs will definitely be compensated.

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 a different view-that either corrective taxes or quantity regulation could be superior to the other. We emphasize that one argument for this newer view, identified 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. But 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, then corrective taxes are superior to quantity regulation. Another argument favoring quantity regulation is that it 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.

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.

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, identified 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.

Abstract:
Minimum asset and liability insurance requirements must often be met in order for parties to participate in potentially harmful activities. Such financial responsibility requirements may improve parties' decisions whether to engage in harmful activities and, if so, their efforts to reduce risk. However, the requirements may undesirably prevent some parties with low assets from engaging in activities. Liability insurance requirements tend to improve parties' incentives to reduce risk when insurers can observe levels of care, but dilute incentives to reduce risk when insurers cannot observe levels of care. In the latter case, compulsory liability insurance may be inferior to minimum asset requirements.

Abstract:
Minimum asset and liability insurance requirements must often be met in order for parties to participate in potentially harmful activities. Such financial responsibility requirements may improve parties' decisions whether to engage in harmful activities and, if so, their efforts to reduce risk. However, the requirements may undesirably prevent some parties with low assets from engaging in activities. Liability insurance requirements tend to improve parties' incentives to reduce risk when insurers can observe levels of care, but dilute incentives to reduce risk when insurers cannot observe levels of care. In the latter case, compulsory liability insurance may be inferior to minimum asset requirements.

Abstract:
It is shown in this paper that there may exist an intrinsic advantage in focusing law enforcement effort on a subgroup of possible violators of law, rather than applying law enforcement effort uniformly over the relevant population of potential violators. For example, it might be desirable for the tax audit rate to be higher for individuals whose names begin with the letters A-M than for those whose names begin with N-Z. This may be desirable even though, as is assumed, the frequency of violations does not differ between subgroups.

Optimal enforcement, focused enforcement, allocation of police

Abstract:
There is a widely held view that breach of contract is immoral. I suggest here that breach may often be seen as moral, once one appreciates that contracts are incompletely detailed agreements and that breach may be committed in problematic contingencies that were not explicitly addressed by the governing contracts. In other words, it is a mistake generally to treat a breach as a violation of a promise that was intended to cover the particular contingency that eventuated.

Abstract:
A solution to a broad category of nuisance suits is examined in this paper. The solution is to give defendants the option to have courts prevent settlements (by refusing to enforce them). Then, if a defendant knows he is facing a plaintiff who would not be willing to go to trial, the defendant would exercise his option to bar settlement, forcing the plaintiff to withdraw. And because the plaintiff would anticipate this, he would not bring his nuisance suit in the first place.

Abstract:
Discretion is examined as a feature of the design of rule-guided systems. That is, given that rules have to be administered by some group of persons, called adjudicators, and given that their goals may be different from society's (or a relevant organization's), when is it socially desirable to allocate discretionary authority to the adjudicators and, if so, to what extent? The answer reflects a tradeoff between the informational advantage of discretion—that adjudicators can act on information not included in rules—and the disadvantage of discretion—that decisions may deviate from the desirable because adjudicators' objectives are different from society's. The control of discretion through limitation of its scope, through decision-based payments to adjudicators, and through the appeals process, is also considered.

D8, K4, K40

Abstract:
Discretion is examined as a feature of the design of rule-guided systems. That is, given that rules have to be administered by some group of persons, called adjudicators, and given that their goals may be different from society's (or a relevant organization's), when is it socially desirable to allocate discretionary authority to the adjudicators and, if so, to what extent? The answer reflects a trade-off between the informational advantage of discretion - that adjudicators can act on information not included in rules - and the disadvantage of discretion - that decisions may deviate from the desirable because adjudicators' objectives are different from society's. The control of discretion through limitation of its scope, through decision-based payments to adjudicators, and through the appeals process, is also considered.

Abstract:
When is it socially advantageous for legal rules to be changed in the light of altered circumstances? In answering this basic question here, a simple point is developed - that past compliance with legal rules tends to reduce the social advantages of legal change. The reasons are twofold: adjusting to a new legal rule often involves costs; and the social benefits of change are frequently only incremental, only in addition to those of past compliance. The general implications are that legal rules should be more stable than would be appropriate were the relevance of past behavior not recognized, and that a policy of grandfathering, namely, of permitting noncompliance, should sometimes be employed. The analysis of these points has broad relevance, applying across legal fields, often explaining what we observe but also indicating possibilities for reform, such as in the regulation of air pollution. The analysis is related to the conventional reliance-based justification for the stability of the law, the literature on legal transitions, and economic writing on optimal legal standards.

Abstract:
When is it socially advantageous for legal rules to be changed in the light of altered circumstances? In answering this basic question here, a simple point is developed - that past compliance with legal rules tends to reduce the social advantages of legal change. The reasons are twofold: adjusting to a new legal rule often involves costs; and the social benefits of change are frequently only incremental, only in addition to those of past compliance. The general implications are that legal rules should be more stable than would be appropriate were the relevance of past behavior not recognized, and that a policy of grandfathering, namely, of permitting noncompliance, should sometimes be employed. The analysis of these points is general, applying across legal fields, often explaining what we observe but also indicating possibilities for reform, such as in the regulation of air pollution. The analysis is related to the conventional reliance-based justification for the stability of the law and to the literature on legal transitions.

Abstract:
Requirements that parties have assets of at least a minimum level in order to participate in an activity are frequently imposed. A principal rationale for minimum asset requirements is considered in this article - potential injurers have stronger incentives to prevent harm, or not to engage in harmful activities, provided that they have at least the required level of assets at stake if they are sued for causing harm. The optimal minimum asset requirement generally reflects a tradeoff between this advantage and the disadvantage that some parties with assets below a required level ought to engage in the activity (because the benefits they would obtain exceed the expected harm they would cause). Additionally, it is emphasized that minimum asset requirements are socially desirable only when the victims of harm are not customers of firms. When victims of harm are customers of firms, minimum asset requirements are socially undesirable.

Abstract:
Requirements that parties have assets of at least a minimum level in order to participate in an activity are frequently imposed. A principal rationale for minimum asset requirements is considered in this article - potential injurers have stronger incentives to prevent harm, or not to engage in harmful activities, provided that they have at least the required level of assets at stake if they are sued for causing harm. The optimal minimum asset requirement generally reflects a tradeoff between this advantage and the disadvantage that some parties with assets below a required level ought to engage in the activity (because the benefits they would obtain exceed the expected harm they would cause). Additionally, it is emphasized that minimum asset requirements are socially desirable only when the victims of harm are not customers of firms. When victims of harm are customers of firms, minimum asset requirements are socially undesirable.

Abstract:
Overly strict legal standards are commonly thought to discourage parties from engaging in socially desirable activities. It is explained here, however, that excessive legal standards cannot lead to undesirable curtailment of activities when legal standards are enforced by liability for negligence, essentially because parties can choose to be negligent rather than comply. But excessive legal standards can lead to undesirable reduction of activities when adherence to the standards is required by the regulatory system.

standards, regulation, liability, negligence

Abstract:
Governments employ two basic policies for acquiring land: taking it through exercise of their power of eminent domain; and purchasing it. The social desirability of these two policies is compared in a model in which the government's information about landowners' valuations is imperfect. Under this assumption, the policy of purchase possesses the market test advantage that the government obtains land only if an owner's valuation is low enough that he is willing to sell it. However, the policy suffers from a drawback when the land that the government needs is owned by many parties. In that case, the government's acquisition will fail if any of the owners refuses to sell. Hence, the policy of eminent domain becomes appealing if the number of owners of the land is large. This conclusion holds regardless of whether the land that the government seeks is a parcel at a fixed location or instead may be located anywhere in a region.

Abstract:
The appeals process - whereby litigants can have decisions of adjudicators reviewed by a higher authority - is a general feature of formal legal systems (and of many private decisionmaking procedures). It leads to the making of better decisions, because it constitutes a threat to adjudicators whose decisions would deviate too much from socially desirable ones. Further, it yields this benefit without absorbing resources to the extent that adjudicators can anticipate when appeals would occur and would thus make decisions to forestall the actual occurrence of appeals.