Volume 9, Issue 3 -

Law enforcers frequently issue warnings, as opposed to sanctions, when they detect first-time offenders. However, virtually all of the law and economics literature dealing with optimal penalty schemes for repeat offenders suggest that issuing warnings is a sub-optimal practice. Another observed phenomenon is the joint use of warnings and sanctions in law enforcement: person A may receive a sanction, whereas person B is only warned for committing the same offense. This situation can be explained through the use of hybrid warning strategies, a concept not yet formalized in the law enforcement literature, where law enforcers issue warnings to and sanctions to of first-time offenders. This article uses a two-period optimal deterrence model to provide a rationale as to why it may be optimal to issue warnings. When uninformed individuals are present and their punishment is assumed to be costly, there is a trade-off between such costs and reduced levels of deterrence. Depending on the cost structure associated with the punishment of uninformed individuals, warning strategies, including hybrid ones, may be optimal. A secondary contribution of this article is to point out that lack of information concerning laws may lead to optimal escalating punishments for repeat offenders.

When consumers vary in their susceptibility to product-related harm, safety regulation dominates liability because when consumers bear their own damages, they are induced to self-select in their purchase decisions, with higher-risk consumers refraining from purchase. When consumers also misperceive risk, however, liability may be preferred because the price of the product accurately conveys the risk, thereby eliminating any distortions due to misperception. In comparing the two approaches to risk control, regulation therefore becomes more desirable as consumers perceive risk more accurately.

Lawyers’ contingent fee (CF) rates are rather uniform, often one-third of the recovery. Arguably, this uniformity is a type of anti-competitive price-fixing, which results in clients paying supra-competitive fees. This paper challenges this argument. It shows that uniform CF rates provide clients with an important advantage, as such rates enable them to make a de facto “take-it-or-leave-it” offer. Consequently, lawyers cannot exploit their private information, and clients retain the transaction’s entire surplus and may hire the best lawyer among those who find it profitable to handle the case. The paper also addresses the effect of uniformity of CF rates when lawyers refer cases to other lawyers. It shows that uniformity facilitates matching of clients and lawyers through the referral system. It also demonstrates that the fact that both direct clients and those obtained through paid-for referrals pay the same CF rate does not attest to cross-subsidization. The clients whose cases are transferred for a referral fee (paid by the handling lawyer) “pay” for the referral service by obtaining a less highly ranked lawyer.

Copyright is typically justified by the rationale that profits induce authors and other artists to invest in cultural production. This rationale is vulnerable to the objection that some artists have intrinsic production incentives and do not require significant capital. Even accepting this objection, copyright is justified by an alternative rationale: it principally supports the profit-motivated intermediaries that bear the high costs and risks involved in evaluating, distributing and marketing content in mass-cultural markets. This “authorless” rationale is consistent with the intermediated structure of mass-cultural markets and accounts for long-standing features of copyright law that have conventionally been dismissed as unjustified transfers from consumers to media interests. The digital transformation of mass-cultural markets, in which content is abundant but quality is variable, challenges and clarifies the intermediary-based rationale for copyright. Even in digitized content markets, robust copyright enables intermediaries to select from the full range of transactional structures for most efficiently bearing the costs and risks of screening, packaging, distributing and marketing content. Weak or zero copyright skews the market’s selection of organizational forms by compelling the use of intermediation structures that bundle unprotected content with excludable complementary goods. Preliminary evidence from the popular music market suggests that the effective decline in copyright protection may have distorted the efficient selection of intermediation mechanisms.

This paper presents a model of lawyers and investment. Investors use litigation to enforce their financial contracts with entrepreneurs. Litigation is modeled as a contest in which both agents hire lawyers to increase their probability of winning the trial. The issue and the cost of the contest determine how much investors are willing to lend. The model predicts that (i) more lawyers are hired if judicial efficiency is lower or damages are higher; (ii) higher judicial efficiency, higher damages, and tighter restrictions on the supply of lawyers benefit investment. Thus, the number of lawyers can be negatively correlated with economic activity even though lawyers are assumed to be productive.