Volume 4, Issue 1

In Roman law, manifest theft (essentially, one in which a thief was caught in the act) was punished with a more severe penalty than non-manifest theft. This legal policy seems to contradict the economic theory of efficient deterrence. In this paper, we try to explore how economic analysis of criminal law and law enforcement points to several efficiency-based arguments to understand the puzzle, and allows us to tentatively conclude that technological changes in law enforcement in the broad sense might have been the major factor in the disappearance of the rule in modern legal systems.

Games, such as carnival or electronic/video games, may award prizes in some U.S. states only if the game’s outcome depends sufficiently on skill. Otherwise, the game is classified as a gambling device and therefore illegal in most jurisdictions and states. This paper offers a practical methodology to determine what percentage of a game’s payoff deviation can be attributed to skill. This measure of skill is designed to apply to a new class of games that have come to market in which a player in given a task, with no hidden elements, to complete. For completing this task, a random prize is awarded.

This paper extends the law enforcement literature with imperfect information by introducing a new technology to improve information acquisition. Individuals are imperfectly informed about the probability of detection and can postpone their decision whether or not to commit crime in order to learn about the actual probability of detection. We show that the optimal fine is the maximal one when information acquisition is easy.

Efforts to avoid punishment are socially wasteful. Not only do they limit the deterrent effect of punishment, but they may actually lead to the paradoxical result that more severe punishment for crime induces more crime. The law has therefore constantly attempted to deter avoidance efforts and has designed various enforcement measures for this purpose. This paper examines the effects of such measures on avoidance and crime. It distinguishes between two general policy tools: ex ante regulation (e.g., Pigouvian taxes) and ex post punishment of avoidance. The main results of this paper are that (1) ex ante regulation, if feasible, reduces the incentives to engage in avoidance and consequently in crime; whereas (2) ex post punishment of avoidance may induce more avoidance and more crime. The intuitive reason for the latter result is twofold: ex post punishment of avoidance increases not only the costs but also the benefits of avoidance; and avoidance and crime are generally complements. As the control of avoidance through regulation or punishment can be designed into the legal system, the results of this paper can guide policymaking. They suggest, for example, that recent trends to stiffen penalties for substantially obstructive acts might be counter productive, while imposing liability for avoidance efforts on third, economically-related parties such as lawyers and accountants may be productive in curtailing avoidance, since it acts as an ex ante regulation for the principal offender.

This paper develops a game-theoretic model of a contract between a creditor and a debtor where equilibrium depends on the damage rule chosen for breach-of-contract situations, the use of impossibility-of-performance excuses and the level of legal contract enforceability. We find that, under perfect legal enforceability, the different alternative damage rules (based on expectation or reliance damages, with or without performance excuses) are able to induce an efficient performance by the contracting parties. But we also find that, if legal enforceability is imperfect, then a rule based on expectation damages with an excuse for impossibility of performance is likely to be more efficient than the other alternative damage rules.

The influence of social norms on the willingness to obey legal norms depends on contingencies that have not been investigated. Theoretical, behavioral, and experimental considerations investigated in this paper establish the differential behavioral effects of legal rules and standards. The findings of experiments conducted by us indicate that in the absence of information concerning social norms, rules and standards have similar effects on compliance. In contrast, rules and standards have differential effects on compliance when they interact with social norms. Furthermore, it was found that social norms of noncompliance had a much greater effect than social norms of compliance. A second study demonstrated a similar relationship between self-interest and legal ambiguity, corroborating the theoretical mechanisms we have argued for, based on the findings of the first study. The implications of these findings to legal policy-making are discussed.

In this brief article, Professor Harold Demsetz defends his seminal paper "Toward a Theory of Property Rights" against the most recent critique to his theory made by Brett Frischmann in “Evaluating the Demsetzian Trend in Copyright Law” (Review of Law and Economics, 2007).

Standard economic analysis of tort law shows that the causation requirement does not affect the operation of the negligence rule in a perfect world, but does so in an imperfect world. While the standard analysis has focused exclusively on care models, this paper analyzes the impact of the causation requirement in more realistic models of care and activity. This paper shows that in these settings the causation requirement is still of no consequence in a perfectly operating world; however, under imperfect conditions, the qualitative impact of the causation requirement depends on the type of the precautionary measure and its relationship to the activity level. If care and expected harm are linear in activity levels, then causation alters the basic results. For example, it is shown that if due care is set at incorrect levels (a reasonable person rather than an individualized standard), then causation is not necessarily socially desirable; and that it is socially detrimental under conditions of systematically mis-estimated harm. On the other hand, if the precautionary measure is perfectly durable – i.e., its costs are independent of the activity level – then the basic qualitative results are not changed. For example, setting due care slightly higher than first-best optimal care induces injurers to abide by the due care standard. In addition, slight errors in estimating damages do not affect injurers’ adherence to the due care standard.

In spite of its tenure as the prevailing economic theory of strict liability, the proposition that strict liability should be preferred to negligence when it is desirable to reduce injurers’ activity levels rather than victims’ activity levels raises a few questions. First, when should we prefer to reduce injurers’ activity levels rather than victims’? Second, why should we not hold both victim and injurer strictly liable? This paper provides a model that answers these questions more effectively than the prevailing economic model. The model presented here offers specific predictions that are consistent with the detailed law on strict liability and the appearance of strict liability in pockets rather than as an across-the-board default rule. The choice between strict liability and negligence depends on the degree to which there is a reciprocal exchange of risk among actors, and the extent to which benefits, in addition to risks, are externalized.

Barriers to entry are a necessary, but not sufficient condition for a merger to adversely affect competition. As a barrier definition must be linked to the specific theory of competitive concern under review to be meaningful, a theoretical barrier definition is unlikely to be useful. Instead, an operational definition of barriers to entry is required. This paper explores the operationalization of the Merger Guidelines barrier to entry concept. A review of the files observes that most matters involve multiple entry scenarios, so it is often impossible to draw strict conclusions for the individual characteristics of timeliness, likelihood or sufficiency. However, by following each entry scenario through the three-stage analysis, it is possible to identify barriers to entry in 109 of the 138 matters reviewed. Within this analysis, the timeliness consideration is generally supported by the best evidence, while the likelihood characteristic leaves the most room for improvement. A total of 55 matters exhibit evidence of recent entry and 46 files report expectations of future entry. A few files detail innovative net present value analyses to determine the profitability of entry into the market. This type of financial analysis offers the promise of a quantitative approach to likelihood analysis.

The Supreme Court’s decision in Daubert v. Merrell Dow Pharmaceuticals placed federal judges in the role of “gatekeepers” empowered to screen out unreliable expert testimony. We address the impact of “gatekeeping” on the accuracy of expert testimony and, consequently, on the accuracy of jury decision-making through a simple game-theoretic model. We find that a sufficiently high probability of excluding biased testimony is essential for accurate damages awards. Otherwise, asymmetries in the judicial process lead to damages awards that are either insufficient or excessive relative to “true” damages. We explain the conditions leading to each outcome and demonstrate that excessive damages awards are more likely to occur in complex cases. We also discuss the role of a court-appointed technical advisor and briefly explain how the “threat” alone that a judge will use such an advisor can deter biased testimony and lead to an accurate expected damages award.

Coal-bed methane is an emerging contributor to the US energy supply. Split estates, where landowners control the surface and the energy companies lease the rights to the underground gas from the federal government, often impede successful negotiations for methane extraction. We provide an extensive form representation of the dynamic game of the negotiation process for subsurface access. We then solve for a set of Nash equilibrium outcomes associated with the split estate negotiations. By examining the optimal offers we can identify methods to improve the likelihood of negotiations that do not break down and result in the gas developer resorting to the use of a bond. We examine how changes in transaction costs or entitlements will affect the outcomes, and support our finds with anecdotal evidence from actual negotiations for coal-bed methane access.

We study litigation between a plaintiff and a defendant in which each litigant hires an attorney who expends his effort on her behalf, and the attorneys' effort is not verifiable to a third party. We examine the equilibrium fixed fees and contingent fees for the attorneys in two legal systems: the system with the nonnegative-fixed-fee constraint and the system with the contingent-fee cap. We show that the fixed fees are always zero in the former legal system, and the contingent fees are always equal to the cap in the latter legal system. We examine also the equilibrium expected payoffs for the attorneys and those for the litigants in the two systems. By comparing these expected payoffs, we show that the attorneys prefer the system with the nonnegative-fixed-fee constraint, while the litigants prefer the system with the contingent-fee cap.

The legal and economic analysis presented here empirically tests the theoretical framework advanced by Kugler, Verdier, and Zenou (2003) and Buscaglia (1997). This paper goes beyond the prior literature by focusing on the empirical assessment of the actual implementation of the institutional deterrence and prevention mechanisms contained in the United Nations’ Convention against Transnational Organized Crime (Palermo Convention). A sample of 107 countries that have already signed and/or ratified the Convention was selected. The paper verifies that the most effective implemented measures against organized crime are mainly founded on four pillars: (i) the introduction of more effective judicial decision-making control systems causing reductions in the frequencies of abuses of procedural and substantive discretion; (ii) higher frequencies of successful judicial convictions based on evidentiary material provided by financial intelligence systems aimed at the systematic confiscation of assets in the hands of criminal groups and under the control of “licit” businesses linked to organized crime; (iii) the attack against high level public sector corruption (that is captured and feudalized by organized crime) and (iv) the operational presence of government and/or non-governmental preventive programs (funded by the private sector and/or governments and/or international organizations) addressing technical assistance to the private sector, educational opportunities, job training programs and/or rehabilitation (health and/or behavioral) of youth linked to organized crime in high-risk areas (with high-crime, high unemployment, and high poverty).An empirical jurimetrics model is for the first time developed for the above four anti-crime policy domains in order to assess the legal implementation of organized crime laws. In this context, the empirical results suggest that high-impact prosecutions and effective convictions against criminal organizations are less driven by incarceration of physical persons and more focused on disrupting the production function of criminal groups through asset forfeitures that reduce the amounts of net worth aimed at expanding public corruption rings in order to feudalize States. At the same time, preventive policies aimed at diminishing the flow of youth into criminal activities will also tend to disrupt the street-based operational capacities of organized crime.Accordingly, a paradox of criminal dissuasion emerges that requires the adjustment of Becker’s (1968) framework when applied to organized crime. As a result of the jurimetrics-based analysis presented in this study, just relying on traditional legal sanctions to counteract organized crime (e.g., increased incarceration and/or extradition of physical persons) will tend to create an incentive for criminal groups to expand their corruption rings (in order to protect themselves from higher expected sanctions) thus increasing the feudalization of the state by criminal groups while enhancing their operational capacities. This unwanted result of applying traditional criminal sanctions will occur if the network of criminal assets (net worth in the hands of a network of licit and illicit businesses) is not hampered by intelligence and judicial authorities first. In the cases where criminal asset networks remain untouched, the data in this paper show that criminal groups will simply react to higher expected punishments by re-assigning their relatively untouched financial resources to expanding their rings (scope) and scale of corruption at higher levels in order to protect themselves. As a result, organized crime and high level corruption grow even when the expected punishment aimed at the members of criminal enterprises is increasing at the same time. The jurimetrics-based results in 107 countries show that, in the absence of an active financial intelligence-based criminal assets forfeiture program, high-level corruption grows rapidly while, paradoxically, public sectors continue to devote more criminal justice system resources to incarcerating increasing numbers of organized crime members. At the same time, empirical analysis shows that higher probabilities of sanctions combined with stiffer sentencing guidelines on the books against organized crime members do not play their dissuasive role in the absence of preventive programs to reduce the flow of youth to criminal groups. This constitutes the paradox of criminal sanctions where more frequent and stiffer punishments applied to physical persons lead to higher levels of organized crime and higher level corruption. The deterioration of institutional performance against criminal enterprises in Afghanistan and México and the recent 2001-2007 significant improvements experienced by Colombia and Jordan can be explained jointly by financial intelligence, judicial capacities, and preventive capabilities coordinated by public sectors and civil societies.

This article investigates the impact of memory limitations and memory distortions on the process of legal decision-making. I develop a simple framework in which jurors establish interim judgments, which are later used by a memory technology to reconstruct, in an inductive process, evidence related to those judgments. The resulting behavior matches a number of stylized facts that are inconsistent with the standard Bayesian framework. I show that beliefs in a given hypothesis may remain unchanged, and may even be strengthened, in the face of disconfirming evidence. This, in turn, implies that the beliefs of two jurors with different memory technologies may deviate further apart as they receive new information, accounting for heterogeneous, i.e. opposite verdict choices, and strongly held beliefs after a large amount of information is presented. Finally, I show that in this setup the probability of legal errors is highest for moderate strengths of evidence.

The Uniform Sales Act was a precursor to Article 2 of the Uniform Commercial Code. Between 1906 and 1947 it was adopted in 34 states. Transaction cost theory suggests that states’ adoption decisions should have been influenced by “neighborhood effects” – the adoption decisions of their neighbors. This paper uses hazard analysis to test various hypotheses about the factors that influenced states’ adoption decisions. The results indicate that neighborhood effects were among the most important factors in the diffusion of the Act. Manufacturing interests also played an important role, especially in a small number of states that adopted the Act early. Subsequent to these early adoptions, the Act gradually diffused across most of the country, except the south. Its diffusion was driven primarily by neighborhood effects and manufacturing interests, although the legal profession and transportation systems may also have played a role. It appears that the Act ultimately failed to achieve complete uniformity largely because the neighborhood effects that drove its adoption in most of the country were not present in the south.

This paper re-examines the social versus private value of lawsuits when both injurers and victims can take care. The basic conclusions of that literature remain valid in this context: the private and social values generally differ, and there is no necessary relationship between them, meaning that there may be either too many or too few suits. Introducing the possibility of victim care does, however, alter the calculation of the deterrent effect of lawsuits. In particular, because allowing suits tends to reduce the incentives for victims to invest in precaution, the social value of prohibiting suits increases in direct relation to the productivity of victim care in lowering accident risk.

The process of treaty formation and reservations to multilateral treaties, enshrined in Articles 19-21 of the Vienna Convention on the Law of Treaties, establishes the principle that reservations are reciprocal. The treaty will be in force between a reserving state and a non-reserving state as amended by the reservation. Therefore a state that wants to exempt itself from a treaty obligation must let other nations escape that same burden. This paper presents an economic model of treaty formation and considers the effect of reciprocity on treaty ratifications among heterogeneous states. The model reveals that the Vienna Convention creates a strategic advantage for states with high costs and low benefits.

The felony murder rule would appear to be an anomaly in the common law. It represents one of the very few instances in criminal law where the element of intent is waived. Criticism of the rule is almost uniform among scholars and commentators, yet it endures in most jurisdictions throughout the United States. Typically, critics assert the rule’s longevity is the result of political forces that make it difficult to change laws that make criminal prosecutions easier. Others claim the rule fills some psychological need to mete out retribution when harm occurs to innocent parties. If a justification for the rule is offered, it generally focuses on the deterrence properties of the rule, however empirical research suggests the rule does little to deter felonies or felony murders. We offer a model in which the felony murder rule serves to deter crimes against relatively more vulnerable victims, who would otherwise be more attractive targets of crime in the absence of the rule. This model predicts only a relatively modest decrease in felonies, as perpetrators substitute away from relatively more vulnerable toward less vulnerable victims.

This paper analyzes the relationship around the world between the underpricing of IPOs and a country’s legal framework. From the theoretical research we expect a negative relationship between a higher level of investor protection (and other measures of a country’s legal framework) and the level of underpricing. The empirical results support our expectations and show a negative relationship between a country’s legal framework and the underpricing of IPOs. In this way, this study adds to the growing law and finance literature. Firms in countries with stronger investor protection (and other measures of the country’s legal framework) have, ceteris paribus, lower costs to go public, and thus an international advantage in comparison to firms from other countries with less developed legal frameworks.

We consider a simple employment contract model to analyze the difference between two remedies for unjust dismissals: damages vs. reinstatement. The bargaining power of workers in the reinstatement case is stronger in severe recessions than it is in the damages case. In contrast, reinstatement worsens the bargaining position of workers in moderately severe recessions than do damages, and hence, the payoff for workers in the reinstatement case is greater in severe recessions and lower in moderately severe recessions than it is in the damages case. A higher payoff in the severe state causes serious damage to workers' incentives because shirking behavior is more attractive under the reinstatement policy. Firms are more likely to fire workers in the reinstatement case than in the damages case. Since there is a transaction cost with employment adjustment, damages are better than reinstatement from the viewpoint of workers’ incentives.

The objective of this study was to examine the factors used by juries to make their decisions on compensatory damages awarded for physical injuries in automobile crash cases involving driving under the influence of alcohol and to compute a value that juries might award for hypothetical total impairment. This study used data obtained from Jury Verdict Research on drunk driving, non-fatal injury cases occurring in the time period from 1980 through 1990, before tort reform started in several states. To achieve the objective of this study, we used two log-linear regression models, with the logs of award and net award amounts as dependent variables. The award variable is a comprehensive figure that includes punitive damages and medical expenses. To calculate the net award, the latter were subtracted from the award amount. The regression explained 57% of the variance in 323 injury awards for impaired driving.The present value of impairment was the dominant predictor. Alone, it explained 21% of the variance. The type of verdict was also very important. Awards achieved through jury trials were approximately 75 percent higher than those achieved through mediation, arbitration or settlement. Using the model where the log of net award was the dependent variable, the value juries placed on total impairment compared to no impairment was approximately $3.1 million at 4% discount rate and $4.3 million at 2.5% discount rate (in 2005 dollars).

Japan’s prefecture-level panel data is used to examine how the demand for lawyers is affected by social capital after controlling for economic conditions. The main findings from a fixed effects model are: (1) The demand for lawyer is smaller when people live close and cohesively. (2) Conflicts generated by bankruptcies cause people to seek legal resolutions, thus relying on lawyers. Nevertheless, the elasticity of demand in Japan is small, reflecting a feature of Japan that the norm is to settle a matter informally.

This paper compares two organizational modes for extracting oil from a common pool: unitization and competitive extraction. The analysis suggests that the general presumption that unitization is surplus enhancing relative to competitive extraction may not always be valid due to contractual incompleteness associated with unitization contracts. While competitive extraction suffers from the tragedy of the commons, unitization can be subject to the dual tragedy of the anticommons. This provides an explanation for the puzzle confronting the oil industry that firms are often reluctant to voluntarily enter unitization agreements.