Volume 10, Issue 1 -

Following Calabresi and Melamed, legal theory has employed the property rule/liability rule distinction in order to hone our understanding of existing norms, as well as suggest new ones. This paper suggests an addition to the pantheon in the form of a protocol that we call an “Incorporation Rule”. It is a novel mechanism allowing private parties and courts to combine property rule and liability rule protection where both apply to the same entitlement. Incorporation Rules allow for separating the effects of intertwined property and liability rules, focusing on ex-ante voluntary determination of levels of protection usually adjudicated ex-post. Under the protocol, the entitlement is transferred to a special-purpose corporate vehicle, which then issues tailor-made securities to the owner of the entitlement and to the potential buyer or rivalrous user. In this manner, the entitlement is split along the contours of three basic corporate instruments – heterogeneous capital structure, separation of ownership and control, and an independent legal personality. By relying on these known-and-tested corporate mechanisms, risk and transaction costs are minimized, enforcement is improved, and heterogeneous preferences of individuals can be accommodated. The Incorporation Rule protocol thus allows for flexibility in protecting entitlements while facilitating efficient exchange.

We conduct a bargaining experiment in a stylized litigation setting. In the baseline, dispute costs are divided equally between the two parties. There are two treatments with an asymmetric distribution of dispute costs. The design allows us to gain insight into how a fair offer evolves with the distribution of dispute costs. The amount of surplus in the average offer depends on the total amount of surplus available and not on the distribution of dispute costs. About 28% of the total surplus is contained in the average offer, regardless of the distribution of dispute costs. Based on the empirical rejection frequencies, we calculate that the optimal offer contains 13% of the total surplus from settlement. We also find evidence that disputes are more likely when dispute costs are asymmetrically distributed. This suggests that the experimental subjects have more difficulty coordinating on a fair offer when dispute costs are not symmetric.

Antitrust policy in the US and EU toward non-horizontal mergers between oligopolists is based on a strong presumption of Cournot effects and/or improvements in consumer welfare through post-merger bundling. We show that complementary goods mergers between firms that possess market power in their respective components markets do not always assure either. The analysis underscores the importance of fully specifying the nature of pre-merger rivalry among all market participants and the assumed distribution of consumer preferences when making predictions about the likely effects of such transactions.

After demonstrating that institutional design based on the rational choice approach is hardly ever applicable, we suggest a procedural alternative and demonstrate its applicability with a focus on the supply side of public authorities, i.e., on the “productive state.” Whereas the former approach, based on unrealistic common knowledge assumptions, is consequentialistic, procedural fairness relies on appealing requirements of non-arbitrariness and equal treatment. In our view, game theoretic mechanism design is useful to explore the consequentialistic – e.g., welfaristic – potential but is, except for specific situations, not implementable. Compared to this, procedural fairness is in line with actually used procedures and legal traditions. Although game theoretic mechanism design can be informative, its unrealistic assumptions justify the procedural approach, which can be rigorously defined by intuitive fairness requirements.

In the last few years, legal aid has been much debated, especially in the European Union. Our aim is to determine in a tort litigation model the impact of legal aid upon plaintiffs’ decision whether to sue, plaintiffs’ level of expenses at trial and the level of deterrence of potential injurers. We study the two most common types of legal aid: fixed and proportional. Whatever the system, we show that increasing legal aid induces more cases filed and more deterrence (fewer accidents). Then we compare these incentives with those given by the contingent/conditional fees systems. We show that the incentives to bring suit are higher in the contingent/conditional fees systems, but incentives to take care are higher with legal aid since legal expenses from the plaintiff are higher.