Economics Commons^™

The Law And Economics Of Liability Insurance: A Theoretical And Empirical Review, Tom Baker, Peter Siegelman

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We survey the theoretical and empirical literature on the law and economics of liability insurance. The canonical Shavell model predicts that, despite the presence of some ex ante moral hazard (care-reduction by insureds), liability insurance will generally raise welfare because its risk-spreading gains will likely be larger than its adverse effects on precautionary activities. We discuss the numerous features of liability insurance contracts that are designed to reduce ex ante moral hazard, and examine the evidence of their effects. Most studies conclude that these features work reasonably well, so that liability insurance probably does not generate substantial ex ante moral …

Mobile Phones And Crime Deterrence: An Underappreciated Link, Jonathan Klick, John Macdonald, Thomas Stratmann

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Between 1991 and 2001, crime rates dropped by about a third across all crime categories. We suggest that the introduction and growth of mobile phone technology may have contributed to the crime decline in the 1990s, specifically in the areas of rape and assault. Given that mobile phones increase surveillance and the risks of apprehension when committing crimes against strangers, an expansion of this technology would increase the costs of crime as perceived by forward-looking criminals. We use the available mobile phone data to show that there is a strongly negative association between mobile phones and violent crimes, although data …

Legal Promise And Psychological Contract, Tess Wilkinson-Ryan

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No abstract provided.

Breaching The Mortgage Contract: The Behavioral Economics Of Strategic Default, Tess Wilkinson-Ryan

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Underwater homeowners face a quandary: Should they make their monthly payments as promised or walk away and save money? Traditional economic analysis predicts that homeowners will strategically default (voluntarily enter foreclosure) when it is cheaper to do so than to keep paying down the mortgage debt. But this prediction ignores the moral calculus of default, which is arguably much less straightforward. On the one hand, most people have moral qualms about breaching their contracts, even when the financial incentives are clear. On the other hand, the nature of the lender-borrower relationship is changing and mortgage lenders are increasingly perceived as …

Do Liquidated Damages Encourage Breach? A Psychological Experiment, Tess Wilkinson-Ryan

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This Article offers experimental evidence that parties are more willing to exploit efficient-breach opportunities when the contract in question includes a liquidated-damages clause. Economists claim that the theory of efficient breach allows us to predict when parties will choose to breach a contract if the legal remedy for breach is expectation damages. However, the economic assumption of rational wealth-maximizing actors fails to capture important, shared, nonmonetary values and incentives that shape behavior in predictable ways. When interpersonal obligations are informal or underspecified, people act in accordance with shared community norms, like the moral norm of keeping promises. However, when sanctions …

Breach Is For Suckers, Tess Wilkinson-Ryan, David A. Hoffman

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This paper presents results from three experiments offering evidence that parties see breach of contract as a form of exploitation, making disappointed promisees into “suckers.” In psychology, being a sucker turns on a three-part definition: betrayal, inequity, and intention. We used web-based questionnaires to test the effect of each of the three factors separately. Our results support the hypothesis that when breach of contract cues an exploitation schema, people become angry, offended, and inclined to retaliate even when retaliation is costly. This theory offers a useful advance insofar it explains why victims of breach demand more than similarly situated tort …

Allowing Patients To Waive The Right To Sue For Medical Malpractice: A Response To Thaler And Sunstein, Tom Baker, Timothy D. Lytton

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This essay critically evaluates Richard Thaler and Cass Sunstein’s proposal to allow patients to prospectively waive their rights to bring a malpractice claim, presented in their recent, much acclaimed book, Nudge: Improving Decisions about Health, Wealth and Happiness. We show that the behavioral insights that undergird Nudge do not support the waiver proposal. In addition, we demonstrate that Thaler and Sunstein have not provided a persuasive cost-benefit justification for the proposal. Finally, we argue that their liberty-based defense of waivers rests on misleading analogies and polemical rhetoric that ignore the liberty and other interests served by patients’ tort law rights. …

The Ethic Of High Expectations, Jean Galbraith

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No abstract provided.

The Sucker Norm, Tess Wilkinson-Ryan

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In this paper, I review the theoretical and empirical scholarship bearing on the notion of being a sucker. I suggest that there is a social norm against being a sucker, and that a number of experimental results could be reconsidered in light of this "sucker norm." First, I establish, at least for the purposes of this analysis, the basic parameters of what it means to be a sucker. Second, I consider when the fear of being a sucker is helpful or normative, and when it seems to be misapplied to cases in which it might actually lead to sub-optimal outcomes. …

Wikitruth Through Wikiorder, David A. Hoffman, Salil K. Mehra

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How does large-scale social production coordinate individual behavior to produce public goods? Hardin (1968) denied that the creation of public goods absent markets or the State is possible. Benkler (2006), Shirky (2008), Zittrain (2008), and Lessig (2008) recently countered that the needed coordination might emerge though social norms. However, the means to this coordination is under-theorized. Focusing on Wikipedia, we argue that the site’s dispute resolution process is an important force in promoting the public good it produces, i.e., a large number of relatively accurate public encyclopedia articles. We describe the development and shape of Wikipedia’s existing dispute resolution system. …

The Effect Of Conflicting Moral And Legal Rules On Bargaining Behavior: The Case Of Divorce, Tess Wilkinson-Ryan, Jonathan Baron

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No abstract provided.

The Disadvantages Of Immigration Restriction As A Policy To Improve Income Distribution, Howard F. Chang

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In this Article, I argue that tax and transfer policies are more efficient than immigration restrictions as instruments for raising the after tax incomes of the least skilled native workers. Policies to protect these native workers frol1'l immigrant competition in the labor market do no better at promoting distributive justice and are likely to impose a greater economic burden on natives in the country of immigration than the tax alternative. These immigration restrictions are especially costly given the disproportionate burden that they place on households with working women, which discourages fel1'wle participation in the labor force. This burden runs contrary …

Negotiating Divorce: Gender And The Behavioral Economics Of Divorce Bargaining, Tess Wilkinson-Ryan, Deborah Small

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No abstract provided.

Self-Handicapping And Managers’ Duty Of Care, David A. Hoffman

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This symposium essay focuses on the relationship between managers' duty of care and self-handicapping, or constructing obstacles to performance with the goal of influencing subsequent explanations about outcomes. Conventional explanations for failures of caretaking by managers have focused on motives (greed) and incentives (agency costs). This account of manager behavior has led some modern jurists, concerned about recent corporate scandals, to advocate for stronger deterrent measures to realign manager and shareholder incentives. * Self-handicapping theory, by contrast, teaches that bad manager behavior may occur even when incentives are well-aligned. Highly successful individuals in particular come to fear the pressure of …

Regulatory Responses To Investor Irrationality: The Case Of The Research Analyst, Jill E. Fisch

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An extensive body of behavioral economics literature suggests that investors do not behave with perfect rationality. Instead, investors are subject to a variety of biases that may cause them to react inappropriately to information. The policy challenge posed by this observation is to identify the appropriate response to investor irrationality. In particular, should regulators attempt to protect investors from bad investment decisions that may be the result of irrational behavior?

This Article considers the appropriate regulatory response to investor irrationality within the concrete context of the research analyst. Many commentators have argued that analyst conflicts of interest led to biased …

The Best Puffery Article Ever, David A. Hoffman

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This Article provides the first extensive legal treatment of an important defense in the law of fraud and contracts: puffery. Legal authorities commonly say they make decisions about whether defendants should be able to utter exaggerated, optimistic, lies based on assumptions about buyer behavior, concluding that consumers do not rely on such speech. However, as the Article shows, such analyses are proxies for a deeper analytical question: does the speech encourage or discourage a type of consumption activity that the court deems welfare maximizing? The Article presents a novel constitutional analysis of puffery doctrine that focuses on the meaning of …

The "Duty" To Be A Rational Shareholder, David A. Hoffman

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How and when do courts determine that corporate disclosures are actionable under the federal securities laws? The applicable standard is materiality: would a (mythical) reasonable investor have considered a given disclosure important. As I establish through empirical and statistical testing of approximately 500 cases analyzing the materiality standard, judicial findings of immateriality are remarkably common, and have been stable over time. Materiality's scope results in the dismissal of a large number of claims, and creates a set of cases in which courts attempt to explain and defend their vision of who is, and is not, a reasonable investor. Thus, materiality …

The Microfoundations Of Standard Form Contracts: Price Discrimination Vs. Behavioral Bias, Jonathan Klick

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Standard form contracts, or contracts of adhesion, appear to provide contradictory evidence for the operation of bargaining in the markets where they are common. Non-negotiated contract terms that seemingly benefit sellers to the detriment of buyers call into question the efficiency implications of the Coase Theorem, which forms the foundation of positive law and economics. Proponents of the behavioral school of law and economics have suggested that behavioral biases, observed in experimental contexts, provide the most plausible explanation for standard form contracts. However, price discrimination might provide a more parsimonious explanation for abusive terms in contracts. If there is heterogeneity …

How Relevant Is Jury Rationality?, David A. Hoffman

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This essay reviews Punitive Damages: How Juries Decide by Cass Sunstein, et al. The book provides a good example of a recent trend: the use of behavioralist research to justify surprisingly paternalistic legal reforms. While critics of behavioralism often contend that its theoretical foundations are weak, this approach is unlikely to prove an effective rejoinder in the new debate about what kinds of paternalism are made permissible by human "irrationality". A better approach: (1) notes the lack of a nexus between behavioralism and the supposed emergent necessity of paternalist reforms; and (2) suggests that juror unwillingness to apply cost-benefit formula …

Can Law And Economics Be Both Practical And Principled?, David A. Hoffman, Michael P. O'Shea

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This article describes important recent developments in normative law and economics, and the difficulties they create for the project of efficiency-based legal reform. After long proceeding without a well articulated moral justification for using economic decision procedures to choose legal rules, scholars have lately begun to devote serious attention to developing a philosophically attractive definition of well-being. At the same time, the empirical side of law and economics is also being enriched with an improved understanding of the complexities of individuals' decision-making behavior. That is where the problems begin. Scholars may have better, more plausible conceptions of well-being in hand, …

On Insider Trading, Markets, And "Negative" Property Rights In Information, Zohar Goshen, Gideon Parchomovsky

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No abstract provided.

Is There A Caring Crisis?, Amy L. Wax

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No abstract provided.

Designing A Hybrid Income-Consumption Tax, Michael S. Knoll

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No abstract provided.

"A Nation Of Thieves": Securing Black People's Right To Shop And To Sell In White America, Regina Austin

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No abstract provided.

"An Honest Living": Street Vendors, Municipal Regulation, And The Black Public Sphere, Regina Austin

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No abstract provided.

Corporate Integration: Do The Uncertainties Outweigh The Benefits?, Reed Shuldiner

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No abstract provided.