Law Commons^™

Unexpected Effects Of Expected Sanctions, Giuseppe Dari‐Mattiacci, Alex Raskolnikov

Faculty Scholarship

The economic analysis of law enforcement holds that greater expected sanctions lead to greater compliance. The literature on positive and negative incentives holds that rewards and sanctions – or carrots and sticks – have identical first-order incentive effects. We extend the basic model of law enforcement in three ways. We allow agents to opt out of the regulatory regime, we allow for enforcement errors, and we model agents who vary in at least one trait in addition to their cost of compliance. We show that following these three realistic modifications of the basic model, the two fundamental conclusions just described …

Price And Prejudice: An Empirical Test Of Financial Incentives, Altruism, And Racial Bias, Kristen Underhill

Faculty Scholarship

Many argue that paying people for good behavior can crowd out beneficial motivations like altruism. But little is known about how financial incentives interact with harmful motivations like racial bias. Two randomized vignette studies test how financial incentives affect bias. The first experiment varies the race of a hypothetical patient in need of a kidney transplant (black or white), an incentive ($18,500 or none), and addition of a message appealing to altruism. Incentives encouraged donation but introduced a significant bias favoring white patients. The second experiment assesses willingness to donate to a patient (black or white) without an incentive and …

Harmful, Harmless, And Beneficial Uncertainty In Law, Scott Baker, Alex Raskolnikov

Faculty Scholarship

This article examines the impact of four types of law-related uncertainty on the utility of risk-neutral agents. We find that greater legal or factual uncertainty makes agents worse off if enforcement is targeted (meaning that greater deviations from what the law demands lead to a greater probability of enforcement), or if sanctions are graduated (meaning that greater deviations from what the law demands result in higher sanctions). In contrast, agents are indifferent to changes in detection uncertainty induced by variation in enforcement resources or to changes in sanction uncertainty arising from legally irrelevant factors. Finally, risk-neutral agents benefit from greater …

The Empty Call For Benefit-Cost Analysis In Financial Regulation, Jeffrey N. Gordon

Faculty Scholarship

The call for benefit-cost analysis (BCA) in financial regulation misunderstands the origins and utility of BCA as a guide to administrative rule making. Benefit-cost analysis imagines an omniscient social planner who can calculate costs and benefits from a natural system that generates prices (costs and benefits) that do not change (or change much) no matter what the central planner does. For example, the toxicity of chemicals, the health hazards of emissions, the statistical value of life – these do not change in response to health-and-safety regulation. For the financial sector, however, the system that generates costs and benefits is constructed …

Endowment Effects Within Corporate Agency Relationships, Jennifer H. Arlen, Matthew L. Spitzer, Eric L. Talley

Faculty Scholarship

Behavioral economics is an increasingly prominent field within corporate law scholarship. A particularly noteworthy behavioral bias is the "endowment effect" – the observed differential between an individual's willingness to pay to obtain an entitlement and her willingness to accept to part with one. Should endowment effects pervade corporate contexts, they would significantly complicate much common wisdom within business law, such as the presumed optimality of ex ante agreements. Existing research, however, does not adequately address the extent to which people manifest endowment effects within agency relationships. This article presents an experimental test for endowment effects for subjects situated in an …

Recovery For Economic Loss Following The Exxon Valdez Oil Spill, Victor P. Goldberg

Faculty Scholarship

The physical cleanup following one of the worst oil spills in history, that of the Exxon Valdez, is done. The legal cleanup, however, has barely begun. Over 100 law firms participating in over 200 suits in federal and state courts involving more than 30,000 claims are presently engaged in litigation. Fishermen, cannery workers, fishing lodges, tour boat operators, oil companies whose shipments were delayed, and even California motorists facing higher gasoline prices have filed claims against Exxon and its fellow defendants.

Most claimants face a formidable roadblock, the so-called Robins doctrine. Under Robins Dry Dock & Repair Co. v. Flint …

Recovery For Pure Economic Loss In Tort: Another Look At Robins Dry Dock V. Flint, Victor P. Goldberg

Faculty Scholarship

In Robins Dry Dock and Repair Co. v. Flint, the Supreme Court laid down the general proposition that claims for pure economic loss are not recoverable in tort. Although courts have sometimes ignored or distinguished Robins, its holding is still a central feature of tort law. In a recent en bane decision regarding claims by those injured by a chemical spill in the Mississippi River, the Fifth Circuit engaged in an extensive debate over the continued vitality of Robins and concluded (despite five dissenters) that it remained good law.

The Robins rule is overbroad, lumping together a number of …

Fishing And Selling, Victor P. Goldberg

Faculty Scholarship

Consumers are a lot like fish, out there waiting to be hooked. Like most images, this one is a caricature of reality. The choice and search effort of consumers is suppressed in order to explore the implications of selling activity by manufacturers and retailers. In particular, the fishing analogy suggests that there is a tendency toward excessive selling activity if sellers do not take into account the effects of their activity on the costs of their rivals. However, sellers, like fishermen, have an incentive to arrange their affairs to mitigate the dissipation of rents. This argument is developed in Section …