Volume 12, Issue 2 -

We develop a model of pretrial bargaining under asymmetric information where both the plaintiff and the defendant’s cost of proceeding to trial is an increasing function of the judgment at trial. This contrasts with the standard assumption that costs at trial are a constant. As a result of this assumption, fee shifting can affect the incidence of trial in a model in which it would otherwise have no effect. Fee shifting will increase the incidence of trial if the plaintiff expects to shift the variable costs of trial to the defendant on net and will lower the incidence of trial if the defendant expects to shift these costs to the plaintiff. The model also implies that a reallocation of the variable costs of trial from the defendant to the plaintiff will lower the incidence of trial.

Problems resulting from the delegation of competencies from one actor to another are at the heart of any governance discussion. While the conventional agency view strongly emphasizes that such problems can be solved ex post by monitoring and control strategies, the contract view proposes to tackle said problems ex ante through alignment of the agent’s incentives to those of the principal by, for instance, incentive contracts. In this paper, we introduce a behavioral perspective to this discussion. We will spotlight that the ex post strategies are behaviorally dysfunctional. The effect of self-serving and hindsight tendencies can hardly be overcome. Ex ante strategies, in contrast, suffer from problems of incentive design. However, proper incentive design can account for behavioral decision patterns. On this ground we argue that incentive contracting appears to be superior to monitoring approaches to solve the principal–agent conflict. To address behavioral problems in governance systems, we propose a counterintuitive shift of rule-making competencies: from public to private ordering for monitoring strategies and from private to public ordering for incentive contracting.

One of the most important propositions in the economics of liability rules states that strict liability and the negligence rule are equivalent and first-best efficient if the standard of due care is set according to the Hand rule. This proposition hinges on the assumption that individuals are risk neutral. This paper considers this proposition with risk-averse individuals, and demonstrates that the proposition does not extend. In particular, the two liability rules are not equivalent, and the analysis compares the two liability rules in terms of utilitarian social welfare.

In the landmark 2005 Kelo case, the Supreme Court ruled that eminent domain takings for private development constituted permissible “public use” because of their potential to produce higher revenue. This paper provides the first examination of that relationship between eminent domain activity and state and local revenue. We find virtually no evidence of a positive relationship between the number of eminent domain takings for private use (such as the one that led to the Kelo decision) and the level of revenue. We find some limited evidence of a negative relationship between eminent domain and future revenue growth .

This paper studies how government policies regarding when to publicly reveal criminal histories affect criminal behavior and labor productivity. I focus attention on two policies: a strict policy that publicly reveals citizens’ past criminal acts after the first conviction, and a lenient policy that discloses this information only after the second conviction. My main results provide conditions such that leniency benefits society by minimizing the crime rate and maximizing productivity of the criminal population. The lenient policy can minimize the crime rate when public notification has a relatively small positive effect on detection probabilities and agents have long expected criminal lifetimes. Moreover, I show that when either notification policy minimizes the crime rate it also maximizes labor productivity.

Politicians act strategically. In the face of competition they modify their decisions in order to restrict the latitude of their potential successors. On the other hand, politicians have ideological preferences that also affect their decisions. The literature, however, has neglected to fully explore the interaction between these two considerations. This work offers such an analysis, using an empirical investigation of judicial independence as an example. We show that when the interaction between ideological considerations and strategic ones is accounted for, the impact of political competition on the level of judicial independence that politicians prefer – may in fact be opposite to the traditional wisdom.

This paper investigates the drivers of tax honesty of high-ranking politicians and bureaucrats in a developing country with a predatory tax system and an autocratic political regime. We argue that in this environment, high-ranking officials may report their income truthfully in order to send a credible signal of their strength to the political leadership, indicating that they are more costly to fire. This is because, in the setting that we study, tax honesty paradoxically increases the risks for taxpayers, making them more transparent and therefore vulnerable to the attacks of their opponents (especially in law enforcement agencies); only powerful officials can survive these attacks. We test our argument using a unique dataset of the tax returns filed by the Russian regional governors and members of their families for the year 2009.

The use of mild laws to affect people’s behavior is pervasive – from environmental regulation to tort law – but little is known about how the law changes human behavior and social outcomes when it uses non-deterrent monetary incentives. We find that when low monetary incentives are framed so as to indicate what is group desirable behavior, people behave more cooperatively in a public goods game than when no-incentives exist. However, we find that the effect is transitory. Surprisingly, the effect is long lasting when low monetary incentives are presented as payments for some neutral behavior – that is, when the fine is presented as a mere price change. Our findings suggest that the indication of what is group desirable behavior makes salient the conflict between people’s normative expectations and what others effectively do. This undermines conditional cooperators’ own motivation to contribute to public goods. Neutrally framed price-incentives have a long lasting positive effect on contribution decisions because it does not indicate what one should do and thus avoids the conflict with what others effectively do.