Legal Uncertainty as a Welfare Enhancing Screen

28 Pages Posted: 18 Nov 2014 Last revised: 19 Nov 2016

See all articles by Matthias Lang

Matthias Lang

Ludwig Maximilian University of Munich (LMU); CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 3 versions of this paper

Date Written: October 2016

Abstract

Consider legal uncertainty as uncertainty about the legality of a specific action. In particular, suppose that the threshold of legality is uncertain. I show that this legal uncertainty raises welfare. Legal uncertainty changes deterrence in opposite directions. The probability of conviction increases for firms below the threshold, while the probability of conviction decreases for firms above the threshold. Hence, legal uncertainty acts as a welfare enhancing screen and increases welfare. Legal uncertainty discourages some actions with low private benefits, while it encourages other actions with high private benefits.

Keywords: Enforcement, Deterrence, Legal Uncertainty, Regulation, Asymmetric Information, Incomplete Contracts

JEL Classification: D8, K2, K4, L5

Suggested Citation

Lang, Matthias, Legal Uncertainty as a Welfare Enhancing Screen (October 2016). MPI Collective Goods Preprint, No. 2014/17, Available at SSRN: https://ssrn.com/abstract=2526128 or http://dx.doi.org/10.2139/ssrn.2526128

Matthias Lang (Contact Author)

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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