Harmful, Harmless, and Beneficial Uncertainty in Law

27 Pages Posted: 15 May 2017 Last revised: 23 Dec 2017

See all articles by Scott Baker

Scott Baker

Washington University in St. Louis - School of Law

Alex Raskolnikov

Columbia University - Law School

Date Written: May 14, 2017

Abstract

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

Baker, Scott A. and Raskolnikov, Alex, Harmful, Harmless, and Beneficial Uncertainty in Law (May 14, 2017). Journal of Legal Studies, June 2017; Columbia Law and Economics Working Paper No. 565; Washington University in St. Louis Legal Studies Research Paper No. 17-05-01. Available at SSRN: https://ssrn.com/abstract=2968137

Scott A. Baker

Washington University in St. Louis - School of Law ( email )

Campus Box 1120
St. Louis, MO 63130
United States

Alex Raskolnikov (Contact Author)

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States

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