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Bias Arbitrage

Amitai Aviram

University of Illinois College of Law

Illinois Public Law Research Paper No. 06-12
U Illinois Law & Economics Research Paper No. LE07-17
Washington and Lee Law Review, Vol. 64, 2007

The production of law - including the choice of a law's subject matter, the timing of its enactment and the manner in which it is publicized and perceived by the public - is significantly driven by an extra-legal market in which politicians and private parties compete over the opportunity to engage in bias arbitrage. Bias arbitrage is the extraction of private benefits through actions that identify and mitigate discrepancies between objective risks and the public's perception of the same risks.

Politicians arbitrage these discrepancies by enacting laws that address the misperceived risk and contain a 'placebo effect' - a counter-bias that attempts to offset the pre-existing misperception. If successful, politicians are able to take credit for the change in the perceived risk, while social welfare is enhanced by the elimination of deadweight loss caused by the risk misperception.

However, politicians must compete with private parties such as insurers, experts and the media, who can engage in bias arbitrage using extra-legal means. This article analyses methods in which parties engage in bias arbitrage and the effect of interaction between potential bias arbitrageurs on the production of law.

Number of Pages in PDF File: 39

JEL Classification: D21, D72, D84, G22, K40

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Date posted: September 8, 2006  

Suggested Citation

Aviram, Amitai, Bias Arbitrage. Illinois Public Law Research Paper No. 06-12; U Illinois Law & Economics Research Paper No. LE07-17; Washington and Lee Law Review, Vol. 64, 2007. Available at SSRN: http://ssrn.com/abstract=928696

Contact Information

Amitai Aviram (Contact Author)
University of Illinois College of Law ( email )
504 E. Pennsylvania Avenue
Champaign, IL 61820
United States
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