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Abstract:
Courts express anger and indignation through speech and punishment. Expressions of emotion signal commitment and coordinate expectations in a game with multiple equilibria. Current law relies upon juries using social norms to determine the incidence and extent of punitive damages. Social norms provide a better guide to the need for punitive damages than to their extent. Juries require precise instructions to award consistent punitive damages. The court in a typical case should impose the minimum punishment required to deter wrongdoing. The goal of deterrence can calibrate punishments precisely for some kinds of wrongs but not others.

Abstract:
This article develops an economic theory of expressive law. By expressing social values, law can tip a system of social norms into a new equilibrium. This process can create or destroy a social norm without changing individual values. In addition, law can change the individual values of rational people. Internalizing a social norm is a moral commitment that attaches a psychological penalty to a forbidden act. A rational person internalizes a norm when commitment conveys an advantage relative to the original preferences and the changed preferences. I call such a commitment a Pareto self-improvement. By creating opportunities for Pareto self-improvements, law induces rational people to change their preferences. Inducing change in this way respects individual preferences, rather favoring a particular moral theory.

Abstract:
Agency problems beset firms and prompt opportunistic behavior by employees. Opportunistic behavior redistributes value, whereas cooperative behavior creates value. Firm-specific fairness norms typically promote the firm's efficiency by increasing cooperation and decreasing opportunism. Firm-specific fairness norms best promote efficiency when supported by reputation effects and when the firm's agents internalize the norms. People who internalize norms acquire good character. We will develop the concept of "good agent character", by which we mean agent character that serves the firm's profitability by embodying the firm's fairness norms. Good agent character conveys an advantage to superiors and subordinates in forming cooperative relations with other people who can read character.

Abstract:
How important is the internalization of values by citizens to the effectiveness of the state? Civic acts by citizens help the state to overcome potentially crippling agency problems. Law influences the behavior of citizens through expression, deterrence, and internalization. Distinguishing these effects shows the importance of each, and also shows why the state can express and deter more easily than it can induce citizens to internalize values. In a rational, self-interested theory of the internalization of values, people change their preferences to increase their opportunities for cooperation with others. Since officials have remote relationships with citizens in modern states, the state lacks the information needed to reward virtuous citizens. Instead of promoting civic virtue directly, the state must rely on families, friends, and colleagues to encourage civic virtue. To achieve this goal, the state must first align law with the social norms that facilitate private cooperation.

Abstract:
When do drafters of legal instruments specify details and when do they not? To explore this question, we develop a method called leximetrics that involves comparative quantitative analysis of legal instruments. Using data from the directive process in the European Union, we show: (i) that statute length varies systematically across countries, partially controlling for substance; (ii) that other legal instruments, such as judicial opinions and contracts, are longer in countries with long statutes; and (iii) that both of the above are correlated with a large lawyer population. This paper uses a simple agency model to explain these facts, and offers an agenda for leximetric research.

Abstract:
Like constructing a building, performance on many contracts occurs in phases. As time passes, the promisor sinks more costs into performance and less expenditure remains. For phased performance, we show that optimal liability for the breaching party decreases as the remaining costs of completing performance decrease. In brief, efficiency requires a decreasing-liability contract. To implement such a contract, we recommend deducting past expenditures on incomplete performance from liability. We show that some types of progress-payment contracts are materially equivalent to decreasing-liability contracts. Our analysis should prove useful for elucidating progress-payment contracts and for drafting and litigating phased contracts.

Liability, contracts, remedies, damages, incentives, comparative negligence, contributory negligence, cooperation, expectation damages, reliance damages, over-reliance, efficient breach, decoupling, progress payments, construction contracts, diminished liability, negative liability, negative damages

Abstract:
Like constructing a building, performance on many contracts occurs in phases. As time passes, the promisor sinks more costs into performance and less expenditure remains. For phased performance, we show that optimal liability for the breaching party decreases as the remaining costs of completing performance decrease. In brief, efficiency requires a decreasing liability contract. To implement such a contract, we recommend deducting past expenditure on incomplete performance from liability. We show that progress payment contracts, which are commonplace in some industries, are materially equivalent to decreasing liability contracts. Our analysis should prove useful for elucidating progress payment contracts and for drafting and litigating phased contracts.

Liability, contracts, remedies, damages, incentives, comparative negligence, contributory negligence, cooperation, expectation damages, reliance damages, over-reliance, efficient breach, decoupling, progress payments, construction contracts, diminished liability, negative liability, negative damages, victim's incentives, aggrieved party's incentives, renegotiation, litigation costs, Anti-Insurance

Abstract:
Besides deterring people, laws may affect behavior by changing preferences or beliefs. A law may elicit intrinsic motivation by framing an act as wrong. Alternatively, it may coordinate the behavior of different people by changing their beliefs about what others will do. We investigate framing and coordination effects experimentally in prisoner's dilemma, "crowding" and coordination games. We simulate a law by imposing a probabilistic penalty on one of the choices. In the prisoner's dilemma and the crowding game, announcing the penalty had no effect. In the coordination game, announcing the penalty caused behavior to jump to the Pareto-superior equilibrium.

Equilibrium selection, framing, expressive law, experiments, coordination, prisoner's dilemma

Abstract:
In trials witnesses often slant their testimony in order to advance their own interests. To obtain truthful testimony, the law relies on cross-examination under threat of prosecution for perjury. We show that perjury law is an imperfect truth-revealing mechanism. More importantly, we develop a perfect truth-revealing mechanism. Under this mechanism the witness is sanctioned if a court eventually finds that the testimony was incorrect; the court need not determine that testimony was dishonest. We explain how truth-revealing mechanisms could combat distortions of observations by factual witnesses and exaggerations by experts, including junk science.

Abstract:
The total social harm caused by everyone is often verifiable and the harm that each actor causes is often unverifiable. In these circumstances, the authorities lack the information necessary to implement the usual liability rules or externality taxes. We propose a novel solution: hold each participant in the activity responsible for all of the excessive harm that everyone causes. By "excessive harm" we mean the difference between the total harm caused by all injurers and the optimal total harm. We show that the rule of total liability for excessive harm creates incentives for efficient precaution and activity level. Consequently, actual harm is not excessive and actual liability is nil. The authorities gain control over social harm without having to monitor individuals, and individuals do not have to pay damages or conform to bureaucratic regulations. This rule has many practical advantages, especially in cases involving harm to the environment.

Pollution, Negligence, Strict Liability, Proportionate Liability, Damages, Unverifiable Harm, Enviromental Harm

Abstract:
The harm that each individual causes others is unverifiable in some circumstances where the total harm caused by everyone is verifiable. For example, the environmental agency can often measure the total harm caused by pollution much easier than it can measure the harm caused by each individual polluter. In these circumstances, implementing the usual liability rules or externality taxes is impossible. We propose a novel solution: Hold each participant in the activity responsible for all of the excessive harm that everyone causes. By "excessive harm" we mean the difference between the total harm caused by all injurers and the optimal total harm. We call this rule "total liability for excessive harm." We show that total liability for excessive harm creates incentives for efficient precaution and activity level. Consequently, actual harm is not excessive and actual liability is nil. For example, the environmental agency can set a target for clean air and announce that each factory is liable for pollution by all factories that exceeds the target. Since the liability rule causes the factories to hit the target, they pay no damages. Thus the environmental agency gains control over emissions without having to monitor individual polluters, and the polluters do not have to pay damages or conform to bureaucratic regulations.

Pollution, negligence, strict liability, proportionate liability, damages, externality tax, unverifiable harm, several wrongdoers, market share liability, victims incentives, enviromental harms, malpractice liability, product liability

Abstract:
In the private sector, many small firms imply shallow hierarchy and narrow product lines. Similarly, in the public sector many small governments imply shallow hierarchy and narrow governments. This paper explains when replacing broad, deep governments with shallow, narrow governments increases stability and reduces corruption. My general conclusion is that developing nations plagued by instability and corruption probably have too few elections and too few democratic governments.

Abstract:
As applied by courts, the Hand Rule balances the injurer's burden of precaution and the victims' reduction in risk. In this application, risk to oneself does not increase the duty owed to others. Economists, however, use the Hand Rule to minimize social costs, which requires balancing the burden of precaution against the reduction in risk to everyone. For economists, risk to oneself counts in determining the duty owed to others. In cases where precaution reduces joint risk (risk to oneself and others), the usual legal interpretation underestimates the reduction in risk relative to the economic interpretation, often by 50%. The consequence is a lower standard of legal care than required to minimize social costs. Judges should reconceptualize the Hand Rule so that risk to oneself increases the care owed to others.

Abstract:
A contingent claim is a right to receive money or goods in the event that a possible event actually occurs. A liability right is a right to money damages contingent upon conditions stipulated in law, such as the injurer's negligence causing the victim's harm. When the contingencies occur, a liability right matures into a legal right of action with a claim to damages. In principle, the victim could transfer his right to receive damages to someone else, and the injurer could pay someone else to assume his obligation to pay damages. The transfers could occur before or after the liability right matures. Exchange in a complete set of perfectly competitive markets allocates liability rights efficiently, regardless of the initial allocation by law. In practice, the law impedes such exchanges. Legal reforms could facilitate the development of competitive markets for liability rights, rather than impeding exchange. I explain briefly how competitive exchange could solve the problems of deterrence and insurance, lower the transaction cost of dispute resolution, and improve the quality of consent to waivers of liability.

HARD COPY PAPER REQUESTS: Contact Chris Swain, School of Law, University of California, Berkeley, CA 94720-7200. E-mail: MAILTO:swainc@boalt.berkeley.edu Phone: (510) 642-0503. Fax: (510) 642-3767.

Abstract:
In trials witnesses often gain by slanting their testimony. The law tries to elicit the truth from witnesses by cross-examination under threat of criminal prosecution for perjury. As a truth-revealing mechanism, perjury law is crude and ineffective. We develop the mathematical form of a perfect truth-revealing mechanism, which exactly offsets the gain from slanted testimony by the risk of a possible sanction. Implementing an effective truth-revealing mechanism requires a witness to certify accuracy by posting bond. If events subsequently prove that the testimony was inaccurate, the witness forfeits the bond. By providing superior incentives for telling the truth, truth-bonding could combat some distortions by factual witnesses and interested experts, including junk science.

Abstract:
According to legal principles, a driver who negligently breaks a pedestrian's leg should pay the same damages as a doctor who negligently breaks a patient's leg. According to economic principles, however, the driver should pay more than the doctor. Non-negligent drivers impose risk on others without being liable for it. When liability externalities are mainly negative as with driving, liability should increase beyond full compensation to discourage the activity. Unlike pedestrians, patients contract with doctors for treatment and willingly submit to the risk of harm. Imperfections in medical markets cause some kinds of doctors to convey more positive than negative externalities on their patients. Increasing liability for these doctors would discourage an activity that needs encouragement. The argument for decreasing doctors' liability is especially strong when doctors must choose among risky procedures, such as cesarean or vaginal delivery of a baby, which we call a "mandatory choice". Given equal benefits, the doctor ought to choose the least risky alternative. If the doctor negligently chooses a more risky alternative and harm materializes, courts award damages equal to the harm suffered by the patient. Even without the doctor's faulty choice, however, the patient would have been exposed to the least risky alternative. Economic efficiency requires reducing the doctor's liability below the victim's actual harm, which current legal rules usually prohibit. We propose that legislatures give courts the choice of lowering tort damages for doctors in well defined circumstances, and for their mandatory choices in particular, and we suggest some principles for doing so.

positive externalities, negative externalities, medical malpractice, doctors' liability, road accidents, activity level, mandatory choices, disgorgement damages for accidents, damages

Abstract:
Compared to budget-balanced Sharing contracts, Anti-Sharing may improve the efficiency of teams. The Anti-Sharer collects a fixed payment from all team members; he receives the actual output and pays out its value to them. If a team members becomes Anti-Sharer, he will be unproductive in equilibrium. Hence, internal Anti-Sharing fails to yield the first-best outcome. Anti-Sharing is more likely to yield a higher team profit than Sharing, the larger the team, the curvature of the production function, or the marginal effort cost. Sharing is more likely to be better, the greater the marginal product, the cross-partials of the production function, or the curvature of the effort cost.

Team production, strategic complements, Anti-insurance, second-best

Abstract:
"First order precaution" directly affects the probability of an accident, such as judging the speed of a car and stepping on the brakes. Intentions are not always realized, so first order precaution is a draw from a probability distribution. Drawing an uncharacteristically low value is a "lapse." "Second order precaution" reduces the probability of a lapse. Examples include concentration when driving and preparation before performing a medical operation. The prevailing tort rule holds the injurer liable for harm caused by unreasonable first order precaution, regardless of second order precaution. Unlike the standard model, our model allows injurers to make second order precaution observable at a cost. Modifying the prevailing tort rule to allow a defense of second order reasonableness will cause injurers to satisfy the legal standard and make this fact observable. Three distinct advantages follow. First, the courts can set the legal standard to induce socially efficient second order behavior. Second, this defense reduces the burden of liability on the underlying activity, which is especially desirable to encourage activities that benefit others, such as practicing medicine. Third, this defense reduces the attraction of actors to activities and forms of precaution that decrease the probability of a lapse and increase the overall risk of an accident.

lapses, momentary care, negligence, medical malpractice, road accidents, positive externalities

Abstract:
Citizens in many states use direct democracy to make laws on everything from soda bottles and horsemeat to affirmative action and same-sex marriage. Does direct democracy save citizens from corrupt legislators, or does it enfeeble competent representatives and empower an ignorant crowd? These ideological extremes often collide in court over a technical rule – the single subject rule – that limits each ballot initiative to one “subject.” Opponents can invalidate an initiative by convincing a court that it contains two different subjects (say, marriage and domestic partnerships), while proponents can preserve it by showing that it contains only one subject (say, same-sex unions).

Despite hundreds of cases, including recent challenges to initiatives on same-sex marriage, illegal immigration, eminent domain, and taxes on oil profits, judges and scholars have been unable to define a “subject” with precision. This has led to inconsistent case outcomes, accusations of judicial activism, calls to repeal the rule, and anxiety among judges who must decide inflammatory issues by applying an undefined concept. Judges and scholars will never find a legal definition of “subject” by focusing exclusively on logic and language. Instead, the definition must be drawn from political theory. In the legislature, representatives of the citizens can bargain with each other, allowing compromise among groups that disagree politically. In contrast, hundreds of thousands of unorganized voters must accept or reject initiatives as presented to them. Those voters cannot bargain among themselves, but they can override legislative bargains that serve special interests. This political vision exposes the true justification for the single subject rule: to empower the majority on issues where there is one, and to channel bargaining and compromise into the legislature where it belongs.

This “democratic process theory” leads to a precise, operational interpretation of the single subject rule. The interpretation focuses on whether voters can make independent judgments about components of a challenged initiative. When opponents contend that an initiative contains two components in violation of the rule, the court should ask whether voters’ support hinges on whether the other component becomes law – then the voters need to decide simultaneously. To allow them to do so, the court should find that the initiative contains one subject.

According to the democratic process theory, separability of issues in the minds of voters implies an obligation to separate on the ballot, and inseparability in the minds of voters implies permission to combine on the ballot. The democratic process test for a single subject empowers the citizens on issues where there is a clear majority and empowers the legislature on issues that require compromise, just as the rule – and direct democracy itself – were designed to do.

Abstract:
When legal and social norms regulate the same behavior, an act can trigger both legal and non-legal sanctions. Should courts deduct the non-legal sanction suffered by the wrongdoer from damages owed to the victim? We provide the answer for a legal system that seeks to minimize social costs. Non-legal sanctions typically harm the wrongdoer and benefit other people. In principle, courts should avoid over-deterring wrongdoers by deducting the benefit of the non-legal sanction from compensatory damages. In practice, instead of deducting the benefit of the non-legal sanction to other people, courts should deduct the burden on the wrongdoer. Deducting the burden of the non-legal sanction from compensatory damages typically improves the incentives of wrongdoers and victims. We make practical suggestions for courts to implement our proposal that would significantly reduce damages in torts and contracts.

Abstract:
In standard models of contracts, efficient incentives require the promisor to pay damages for non-performance and the promisee to receive no damages. To give efficient incentives to both parties, we propose a novel contract requiring the promisor to pay damages for nonperformance to a third party, not to the promisee. In exchange for the right to damages, the third party pays the promisor and promisee in advance before performance or nonperformance occurs. We call this novel contract "anti-insurance" because it strengthens incentives by magnifying risk, whereas insurance erodes incentives by spreading risk. Anti-insurance is based on the general principle that when several parties jointly create risk, efficient incentives typically require each party to bear the full risk. Without a third party, the most that can be achieved is to divide the risk among the parties. By improving incentives, anti-insurance contracts can create value and benefit everyone as required for a voluntary exchange.

Abstract:
In recent years, ingenious entrepreneurs have invented new commodities by bundling contingent claims and marketing them. A liability right can be viewed as a contingent claim and analyzed like stock options or commodity futures. Since law prohibits markets for liability rights, no one knows how they would work. I assume no legal impediments to unbundling, packaging, and selling liability rights, and then I imagine how such markets might solve some legal problems. When contracts reallocate tort liability, courts often invalidate the terms on grounds of inadequate consent. Competitive markets for liability rights could solve this problem by pricing liability rights at the true value of the underlying risk. Tort reformers also struggle for a way to combine efficient deterrence and efficient insurance. Competitive markets for liability rights could solve this problem by the potential accident victim retaining the rights desired for insurance and selling the rest to, say, a lawyer whose assertion of the rights would deter.