Volume 16, Issue 1 -

The European Association of Law and Economics grants a biennial Lifetime Achievement Award and Honorary Membership to a scholar “for his or her significant contributions to the field of Law and Economics, in particular to the development of this scientific movement in Europe.” This paper is the award lecture delivered by Professor Francesco Parisi at the Annual Meeting of the European Association of Law and Economics, held at Tel-Aviv University on September, 19, 2019.

The Coase theorem states that where there are externalities and no transaction costs resource allocation is Pareto-optimal and independent of the stakeholders’ legal position. This result has been challenged many times. In the cooperative game approach to resource allocation, the refutation is made by constructing a three-person game which has an empty core under one set of liability rules—which implies that optimal allocations are coalitionally unstable–and a nonempty core under another set. In this example, however, the probability that the core is non-empty is rather high (5/6). Yet, even if coalitionally stable Pareto-optimal arrangements are likely, to establish the plain validity of the Coase theorem it must be shown that the legal neutrality statement also holds. We show that for the three-person cooperative game example mentioned above, the probability that the two assertions of the Coase theorem hold can be as low as 3/8.

Actors, whether guilty or innocent, may invest in costly measures to reduce their likelihood of being audited. The value of these investments are increasing in the probability with which they expect to be found guilty conditional on being audited. Because strengthening the standard of proof reduces the probability of conviction, it also lowers the investments by actors to reduce their likelihood of being audited. Therefore, when balancing such avoidance costs and deterrence effects, it is optimal to employ a stronger standard than that which maximizes deterrence, namely stronger than preponderance of the evidence.

It is generally assumed that independent agencies reflect the Congress’ willingness to deal with two different sources of risk that complement each other: political uncertainty regarding the policy implemented, and technical uncertainty regarding the outcome that would be achieved with that policy. This paper claims that such complementariness is true only when the Congress is expecting to capture the benefits of a sound technical decision. If this is not the case, for example when there is a large possibility of a political turnover in the near future, institutional design should follow a dynamic of entrenchment. Here politics and expertise substitute each other, thus reducing the optimal choice of agency independence. This paper illustrates these ideas by comparing the two waves of institutional reforms that occurred in Chile in the 1920’s and the 1980’s. The variance in the level of insulation achieved by each process responds to a key political difference: the first one was conducted through a democratic consensus that was meant to last several decades, whereas the second one was conducted during an authoritarian regime aware that its tenure in power was coming to an end.

Using vignettes that are based on seminal cases in law and economics, I find that judicial decisions across different areas of the common law are considered to be fairer when they follow prescriptions for efficiency based on law-and-economic reasoning. Vignettes describe legal disputes and require respondents to rate the fairness of a judge’s resolution. For each vignette, fairness ratings are compared across a version that follows a particular economic prescription and a version that does not, with differences across versions generated by subtle changes in context that are motivated by the economic logic that either was used in the relevant case’s actual judicial opinion or has been applied to the case by scholars of law and economics. The results suggest that the economic logic that underlies the Coase theorem, the Hand rule and the foreseeability doctrine, and generates prescriptions for efficient use of strict product liability and efficient breach of contract, aligns with lay intuitions of fairness. The results also identify two areas, fugitive property and punitive damages, where law-and-economic prescriptions do not align with perceptions of fairness.