Harmful, Harmless, and Beneficial Uncertainty in Law
27 Pages Posted: 15 May 2017 Last revised: 23 Dec 2017
Date Written: May 14, 2017
This article examines the impact of four types of law-related uncertainty on the utility of risk-neutral agents. We find that greater legal or factual uncertainty makes agents worse off if enforcement is targeted (meaning that greater deviations from what the law demands lead to a greater probability of enforcement), or if sanctions are graduated (meaning that greater deviations from what the law demands result in higher sanctions). In contrast, agents are indifferent to changes in detection uncertainty induced by variation in enforcement resources or to changes in sanction uncertainty arising from legally irrelevant factors. Finally, risk-neutral agents benefit from greater legal uncertainty if they act only upon a preapproval by a cautious regulator. Our findings shed light on policy debates about the appropriate specificity of legal standards, the reform of corporate criminal liability, and the government’s reluctance to clarify the details of tax law and tax enforcement.
Keywords: Legal Uncertainty, Rules and Standards, Targeted Enforcement, Graduated Sanctions
JEL Classification: D81, K40
Suggested Citation: Suggested Citation