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Abstract:
Existing incomplete contracting models assume that contracting parties have perfect self-control. This Article approaches the incomplete contracting problem from a new perspective, one that brings to the foreground the potential self-control problems faced by contracting parties. In particular, the Article identifies two types of self-control sources of contractual incompleteness: serial procrastination and the projection bias. This Article shows that, under certain conditions, parties will have an incentive to repeatedly procrastinate adopting contractual provisions that they otherwise believe to be value-maximizing. Contracts may therefore be incomplete not because parties intended to leave the existing gaps, but because they procrastinated addressing contractual issues for one period too many - until conflict and litigation ensued. Additionally, at the beginning of a transaction, each party must try to predict her own and the other party's future preferences to take harmful or opportunistic actions. The projection bias - the tendency to project current preferences onto future ones - can lead contracting parties to project their initial preference - colored by feelings of trust, mutual cooperation, and optimism - onto their future preferences, thereby distorting their predictions of how their preferences may evolve during the transaction. This can lead contracting parties to systematically underappreciate the extent to which their preferences may change, as unforeseen (or unattended) contingencies give way to tempting opportunism and to discord, anger, or vengeance. As a result, at the time of contracting, parties will tend to underappreciate the need to adopt contractual provisions to curb the ability of one or both parties to take harmful or opportunistic actions during the transaction. Finally, this Article shows that the perfect self-control assumption of the current literature can lead courts to mistaken conclusions of why contractual gaps exist and mistaken policy decisions when filling those gaps. While the Article focuses on shareholder contracting, the results generalize to other contracting contexts.

incomplete contracts, contracts, corporations, behavioral law & economics

Abstract:
This paper argues that the observed misconduct of managers and gatekeepers in the recent corporate scandals is better explained if one accounts for the time-inconsistent preferences of corporate actors. It builds on of my model of time-inconsistent misconduct, which I develop more fully elsewhere. A person engages in time-inconsistent misconduct when she has a long-term preference to act properly (because the expected costs of misconduct exceed expected rewards), but overrides that baseline preference (one or more times) by yielding to short-term preferences to grab immediate rewards and delay immediate costs. I discuss two types of time-inconsistent misconduct: (1) nibbling opportunism - repeatedly grabbing immediate opportunistic rewards (i.e. over-consuming opportunism); and (2) procrastination following through with planned actions - e.g. delay by board members in monitoring and disciplining managers. To properly deter time-inconsistent misconduct it is necessary to directly target the short-term preferences that motivate it. The paper develops a number of positive and normative implications within the context of the Sarbanes-Oxley Act.

corporate governance, securities, behavioral law & economics, hyperbolic discounting, time-inconsistent preferences

Abstract:
This article starts from the premise that contract parties care about fairness and argues that reciprocal fairness concerns can lead parties to engage in wasteful retaliation. In particular it analyzes reciprocal fairness issues in the context of venture capital contracts. The bargaining power of venture capitalists and the (well-documented) over-optimism of entrepreneurs can lead entrepreneurs to enter into one-sided contracts. In fact, standard venture capital contracts transfer effective control over the venture to the venture capitalist.

As high-powered incentive mechanisms and one-sided contract provisions are triggered, entrepreneurs will begin to revise their initial (over-optimistic) beliefs. This belief-revision will increase the likelihood that an entrepreneur will retaliate. Entrepreneurs control an important firm asset - their human-capital. This control over the production and dissemination of innovation-specific knowledge will given an entrepreneur the power: (1) to protect her contractual interests; and (2) to retaliate against venture capitalist actions deemed unfair. The article develops various theoretical and doctrinal implications.

negative reciprocity, retaliation, venture capital finance, incomplete contracting

Abstract:
This article develops a model of time-inconsistent criminal misconduct. It shows that people who from a long-term perspective want to be law-abiding may nonetheless engage in repeated misconduct due to the pull of their short-term preferences for immediate gratification. I demonstrate that the optimal sanctions under the standard law & economics model will always under-deter time-inconsistent wrongdoers. This is true, even for wrongdoers with a very small preference for immediate gratification. The model yields a second counterintuitive conclusion: wrongdoers who intend to engage in criminal misconduct (because it has positive expected returns) will procrastinate following through if they face sufficiently high immediate costs - i.e., they may exhibit time-inconsistent honesty. This allows policymakers to indirectly regulate behavior by exploiting the time-inconsistency of citizens. Such stealth regulation raises questions of democratic accountability, as well as numerous moral considerations. Finally, the model explains several existing criminal law doctrines that, from a standard law and economics perspective, are puzzling.

criminal law, optimal deterrence, repeat offenders, behavioral law & economics, time-inconsistent preferences

Abstract:
This Article examines the effect of time-inconsistent preferences on the decision-making process of criminal offenders. It shows that even a relatively small preference for immediate gratification and over-optimism about their future self-control can lead hyperbolic criminals to repeatedly commit welfare-reducing crimes - i.e., those that (from a detached, long-term perspective) have negative expected returns. The Article makes four principal contributions. First, it develops a theory of repeated criminal misconduct that incorporates the findings of the growing behavioral economics literature on hyperbolic discounting and self-control problems. Second, it identifies various deterrence implications of the theory, showing, among other things, that the optimal sanctions of standard (or neoclassical) law & economics models will under-deter hyperbolic offenders. Third, it explains a number of well-known empirical puzzles of neoclassical theory, including why policymakers punish repeat offenders more harshly and spend more on enforcement than the theory predicts, as well as why, in some areas, such as tax compliance, people routinely forego committing crimes with positive expected returns. Fourth, the Article describes various implications of the time-inconsistent misconduct theory for the law of conspiracies, entrapment, and domestic violence.

optimal deterrence, criminal law, recidivism, time-inconsistent preferences

Abstract:
This article develops a model of time-inconsistent misconduct to explain incremental misconduct by lawyers - i.e., repeated, marginal misconduct that over time can lead to a moral unraveling or disintegration. A person engages in time-inconsistent misconduct when: (1) she has determined that a particular type of misconduct has negative expected returns and made a long-term decision to abstain from such misconduct; (2) nonetheless, when provided with the opportunity, she reverses her long-term preference to abstain and engages in misconduct; and (3) the reversal is due to a preference for immediate gratification (and not to the acquisition of new information). A person will engage in such misconduct in each period in which the incremental gain from misconduct (i.e., the added incremental utility due to the immediacy of a reward or from avoiding an immediate cost) exceeds the incremental loss (i.e., the actual net expected loss from that one act of misconduct). For example, the prospect of receiving an immediate reward can lead a lawyer to repeatedly take prohibited or unethical actions, a phenomenon that I refer to as nibbling opportunism. At the same time, the prospect of incurring an immediate cost can lead a lawyer to repeatedly procrastinate following through with a required action. Time-inconsistent misconduct harms both the third-party victims and the lawyer - i.e., each time that the lawyer engages in misconduct she incurs an incremental loss that from a long-term perspective she wanted to avoid, and which in the aggregate can be very large. Accounting for time-inconsistent misconduct is important, among other reasons, because the rules needed to deter such misconduct are different from those needed to deter the time-consistent misconduct assumed in standard models. The time-inconsistent misconduct model also generalizes to other types of misconduct, such as criminal misconduct and group misconduct.

legal ethics, behavioral law and economics, time-inconsistent preferences, hyperbolic discounting, criminal law, group misconduct

Abstract:
There is a large literature in behavioral economics finding that people routinely override their long-term preferences due to the pull of immediate gratification. With this in mind, this paper develops a simple model of repeated procrastination that can be used to examine the efficacy of legal rules. Among other things, the model leads to the following counter-intuitive result: a person who from a long-term perspective believes that violating the law is economically worthwhile, may nonetheless repeatedly procrastinate following through with the planned misconduct. This sort of "time-inconsistent obedience" helps explain an important puzzle in the criminal law literature: the fact that people routinely obey the law even though the expected benefits of disobedience greatly exceed the expected sanctions. The phenomenon of time-inconsistent obedience has implications beyond the problem of unintended over-deterrence. In particular, I argue that lawmakers who are sufficiently aware of the self-control problems of citizens can take advantage of them by engaging in "stealth regulation": creating legal rules that lead people to repeatedly procrastinate doing otherwise legal activities. I show how even relatively low hurdles for getting abortions can have a much larger impact on reducing the number of abortions than one would expect if one were to assume that people have perfect self-control. Additionally, I extend the concepts of time-inconsistent obedience and stealth regulation to interactions between private parties, such as co-conspirators, corporate participants, and spouses.

procrastination, behavioral law and economics, self-control problems, abortion, criminal law, jurisprudence, time-inconsistent preferences

Abstract:
This Essay extends to the family law area the behavioral economics empirical literature on procrastination. Numerous studies have found that people who have a long-term preference to take welfare actions routinely procrastinate following through (due to a short-term preference for maximizing immediate gratification and over-optimism about their future self-control). The Essay focuses on the decisions to get a divorce, end an abusive relationship, and follow through with a planned abortion. Among other things, the theory set forth in the Essay shows that: (1) marriages are stickier than standard economic theory predicts; and (2) even relatively small immediate costs of getting abortions - e.g., a 24-hour waiting period or being confronted by protesters - can lead some women to repeatedly procrastinate following through. Finally, the theory provides a new explanation for why some abused spouses stay with their abusers much longer than what appears rational to outside observers.

family law, time-inconsistent preferences, self-control problems, divorce, abortion

Abstract:
This paper develops a simple model of corporate governance based on the concept of time-inconsistent misconduct. The model relaxes the standard rational choice assumption that corporate actors have time-consistent preferences and thus have perfect self-control; it therefore directly accounts for the behavioral economics literature findings that people routinely exhibit a preference for immediate gratification that can lead them to act in a dynamically inconsistent manner. I show that time inconsistent preferences can lead corporate actors to overconsume misconduct in the same manner that they overconsume other goods that provide them with immediate utility. Moreover, where complying with a legal rule requires corporate actors to incur immediate costs, a preference for immediate gratification can lead them to repeatedly procrastinate following through. Finally, the paper shows that managers can exploit the time-inconsistent preferences of board members to entrench themselves to a much greater degree than predicted by standard economic models.

corporate law, corporate governance, self-control problems, time-inconsistent preferences, board of directors, management entrenchment

Abstract:
This article develops a theory of wrongful convictions based on the concept of observational equivalence. Under the model, a wrongful conviction is the end-product of a sequence of observations (triggered by the criminal act) that leads a jury to conclude: (1) that someone committed a crime; and (2) that the innocent defendant is that someone. Both steps in the proof process make use of equivalence relations; my principal contribution is to show that the way society defines these relations can play an important role in wrongful convictions. The model leads to two counter-intuitive results. First, I show that the likelihood of a wrongful conviction due to a witness' cross-racial misidentification can be reduced by making use of the witness's very weakness: her inability to tell apart individuals of other races. Second, I show that wrongfully convicted prisoners residing behind a veil of ignorance would reject the following exoneration rule: a prisoner whose innocence is determined with 100 percent certainty should be released immediately. That is, they would choose to keep some innocent individuals imprisoned, or at least to delay their release. The intuition is simple. Wrongful convictions will be overturned sequentially (i.e., not all at once); moreover, the order in which innocent prisoners are released matters: whenever exonerated prisoners, particularly recidivists, re-offend, they make it more difficult for the innocent who are still behind bar to get their convictions overturned.

wrongful convictions, criminal law, criminal procedure, evidence, innocence