Law Commons^™

Third Party Moral Hazard And The Problem Of Insurance Externalities, Gideon Parchomovsky, Peter Siegelman

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Insurance can lead to loss or claim-creation not just by insureds themselves, but also by uninsured third parties. These externalities—which we term “third party moral hazard”—arise because insurance creates opportunities both to extract rents and to recover for otherwise unrecoverable losses. Using examples from health, automobile, kidnap, and liability insurance, we demonstrate that the phenomenon is widespread and important, and that the downsides of insurance are greater than previously believed. We explain the economic, social and psychological reasons for this phenomenon, and propose policy responses. Contract-based methods that are traditionally used to control first-party moral hazard can be welfare-reducing in …

The Paradox Of Insurance, Gideon Parchomovsky, Peter Siegelman

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In this Article, we uncover a paradoxical phenomenon that has hitherto largely escaped the attention of legal scholars and economists, yet it has far-reaching implications for insurance law: loss-creation by uninsured parties caused by the presence of insurance. Contrary to the conventional wisdom, we show that insurance can create significant negative externalities by inducing third parties to engage in antisocial, illegal and unethical activities in order to extract money from insureds or insurers. Moreover, as the amount and scope of insurance grows, so does its distortionary effect on third parties. We term this phenomenon the paradox of insurance. The risk …

Risk And Regulatory Calibration: Wto Compliance Review Of The U.S. Dolphin-Safe Tuna Labeling Regime, Cary Coglianese, André Sapir

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In a series of recent disputes arising under the TBT Agreement, the Appellate Body has interpreted Article 2.1 to provide that discriminatory and trade-distortive regulation could be permissible if based upon a “legitimate regulatory distinction.” In its recent compliance decision in the US-Tuna II dispute, the AB reaffirmed its view that regulatory distinctions embedded in the U.S. dolphin-safe tuna labeling regime were not legitimate because they were not sufficiently calibrated to the risks to dolphins associated with different tuna fishing conditions. This paper analyzes the AB’s application of the notion of risk-based regulation in the US-Tuna II dispute and finds …

Mutually Assured Protection Among Large U.S. Law Firms, Tom Baker, Rick Swedloff

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Top law firms are notoriously competitive, fighting for prime clients and matters. But some of the most elite firms are also deeply cooperative, willingly sharing key details about their finances and strategy with their rivals. More surprisingly, they pay handsomely to do so. Nearly half of the AmLaw 100 and 200 belong to mutual insurance organizations that require member firms to provide capital; partner time; and important information about their governance, balance sheets, risk management, strategic plans, and malpractice liability. To answer why these firms do so when there are commercial insurers willing to provide coverage with fewer burdens, we …

Human Survival, Risk, And Law: Considering Risk Filters To Replace Cost-Benefit Analysis, John William Draper

Librarian Scholarship at Penn Law

Selfish utilitarianism, neo-classical economics, the directive of short-term income maximization, and the decision tool of cost-benefit analysis fail to protect our species from the significant risks of too much consumption, pollution, or population. For a longer-term survival, humanity needs to employ more than cost-justified precaution.

This article argues that, at the global level, and by extension at all levels of government, we need to replace neo-classical economics with filters for safety and feasibility to regulate against significant risk. For significant risks, especially those that are irreversible, we need decision tools that will protect humanity at all scales. This article describes …

Reimagining The Risk Of Long-Term Care, Allison K. Hoffman

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U.S. law and policy on long-term care fail to address the insecurity American families face due to prolonged illness and disability — a problem that grows more serious as the population ages and rates of disability rise. This Article argues that, even worse, we have focused on only part of the problem. It illuminates two ways that prolonged disability or illness can create insecurity. The first arises from the risk of becoming disabled or sick and needing long-term care, which could be called “care-recipient” risk. The second arises out of the risk of becoming responsible for someone else’s care, which …

Governing Disasters: The Challenge Of Global Disaster Law And Policy, Eric A. Feldman, Chelsea Fish

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This chapter uses the analytical framework of transnational legal ordering (TLO) developed by Halliday and Shaffer and applies it to the area of law and disasters. In contrast to the increasingly transnational legal nature of social ordering highlighted by Halliday and Shaffer, it argues that the emergence of transnational regulatory networks and cross-border principles or policies in the area of disaster management has been uneven and incomplete. Although there are many factors that help to explain why the law/disasters area has resisted the trend toward “transnationalization,” two stand out. One is the relative dearth of national laws and policies governing …

Collateral Consequences And The Preventive State, Sandra G. Mayson

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Approximately eight percent of adults in the United States have a felony conviction. The “collateral consequences” of criminal conviction (CCs) — legal disabilities imposed by legislatures on the basis of conviction, but not as part of the sentence — have relegated that group to permanent second class legal status. Despite the breadth and significance of this demotion, the Constitution has provided no check; courts have almost uniformly rejected constitutional challenges to CCs. Among scholars, practitioners and mainstream media, a consensus has emerged that the courts have erred by failing to recognize CCs as a form of additional punishment. Courts should …

Discounting And Criminals' Implied Risk Preferences, Murat C. Mungan, Jonathan Klick

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It is commonly assumed that potential offenders are more responsive to increases in the certainty than increases in the severity of punishment. An important implication of this assumption within the Beckerian law enforcement model is that criminals are risk-seeking. This note adds to existing literature by showing that offenders who discount future monetary benefits can be more responsive to the certainty rather than the severity of punishment, even when they are risk averse, and even when their disutility from imprisonment rises proportionally (or more than proportionally) with the length of the sentence.

Behaviorism In Finance And Securities Law, David A. Skeel Jr.

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In this Essay, I take stock (as something of an outsider) of the behavioral economics movement, focusing in particular on its interaction with traditional cost-benefit analysis and its implications for agency structure. The usual strategy for such a project—a strategy that has been used by others with behavioral economics—is to marshal the existing evidence and critically assess its significance. My approach in this Essay is somewhat different. Although I describe behavioral economics and summarize the strongest criticisms of its use, the heart of the Essay is inductive, and focuses on a particular context: financial and securities regulation, as recently revamped …

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 …

Making Sense Of The New Financial Deal, David A. Skeel Jr.

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In this Essay, I assess the enactment and implications of the Dodd-Frank Act, Congress’s response to the 2008 financial crisis. To set the stage, I begin by very briefly reviewing the causes of the crisis. I then argue that the legislation has two very clear objectives. The first is to limit the risk of the shadow banking system by more carefully regulating the key instruments and institutions of contemporary finance. The second objective is to limit the damage in the event one of these giant institutions fails. While the new regulation of the instruments of contemporary finance—including clearing and exchange …

The Shifting Terrain Of Risk And Uncertainty On The Liability Insurance Field, Tom Baker

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Recent sociological and historical work suggests that insurance risks often are not reliably calculable, except in hindsight. Insurance is “an uncertain business,” characterized by competition for premiums that pushes insurers into the unknown. This essay takes some preliminary steps that extend this insight into the liability insurance field. The essay first provides a simple quantitative comparison of U.S. property and liability insurance premiums over the last sixty years, setting the stage to make three points: (1) liability insurance premiums have grown at a similar rate as property insurance premiums and GDP over this period, providing yet another piece of evidence …

Insurance In Sociolegal Research, Tom Baker

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Insurance has a long history in sociolegal research, most prominently as a window on accident compensation and related tort law in action. Recent work has extended that research, with the result that tort law in action may be the best mapped of any legal field outside criminal law. Sociological research has begun to explore insurance as a form of governance, with effects in many legal fields and across the economy. This essay reviews developments in both bodies of work. Part one examines the relationship between liability insurance and tort law in action using the metaphors of window and frame. Part …

Tontines For The Invincibles: Enticing Low Risks Into The Health-Insurance Pool With An Idea From Insurance History And Behavioral Economics, Tom Baker, Peter Siegelman

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Over one third of the uninsured adults in the U.S. below retirement age are between 19 and 29 years old. Young adults, especially men, often go without insurance, even when buying it is mandatory and sometimes even when it is a low cost employment benefit. This paper proposes a new form of health insurance targeted at this group—the “Young Invincibles”—those who (wrongly) believe that they don’t need health insurance because they won’t get sick. Our proposal offers a cash bonus to those who turn out to be right in their belief that they did not really need health insurance. The …

State Finance In Times Of Crisis, Brian Galle, Jonathan Klick

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As recent events illustrate, state finances are pro-cyclical: during recessions, state revenues crash, worsening the effects of economic downturns. This problem is well-known, yet persistent. We argue here that, in light of predictable federalism and political economy dynamics, states will be unable to change this situation on their own. Additionally, we note that many possible federal remedies may result in worse problems, such as creating moral hazard that would induce states to take on excessively risky policy, both fiscal and otherwise. Thus, we argue that policy makers should consider so-called “automatic” stabilizers, such as are found in the federal tax …

Risk Equity: A New Proposal, Matthew D. Adler

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What does distributive justice require of risk regulators? Various executive orders enjoin health and safety regulators to take account of “distributive impacts,” “equity,” or “environmental justice,” and many scholars endorse these requirements. But concrete methodologies for evaluating the equity effects of risk regulation policies remain undeveloped. The contrast with cost-benefit analysis--now a very well developed set of techniques --is stark. Equity analysis by governmental agencies that regulate health and safety risks, at least in the United States, lacks rigor and structure. This Article proposes a rigorous framework for risk-equity analysis, which I term “probabilistic population profile analysis” (PPPA). PPPA is …

Does Analyst Independence Sell Investors Short?, Jill E. Fisch

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Regulators responded to the analyst scandals of the late 1990s by imposing extensive new rules on the research industry. These rules include a requirement forcing financial firms to separate investment banking operations from research. Regulators argued, with questionable empirical support, that the reforms were necessary to eliminate analyst conflicts of interest and ensure the integrity of sell-side research.

By eliminating investment banking revenues as a source for funding research, the reforms have had substantial effects. Research coverage of small issuers has been dramatically reduced—the vast majority of small capitalization firms now have no coverage at all. The market for research …

Predicting Corporate Governance Risk: Evidence From The Directors' & Officers' Liability Insurance Market, Tom Baker, Sean J. Griffith

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No abstract provided.

Qalys And Policy Evaluation: A New Perspective, Matthew D. Adler

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“QALYs” (Quality-Adjusted Life Years) are a metric for health and longevity very widely employed by health researchers. Surveys are used to assign health states a quality ranking on zero-one scale, with zero representing a health state no better than death and one perfect health. The total QALY value of a health profile is calculated as the time spent in its component health states, each weighted by its quality. Until a few years ago, despite the huge academic literature on QALY measurement, this approach was seldom used by policymakers in the U.S. But there have been recent signs of governmental interest …

Equity Analysis And Natural Hazards Policy, Matthew D. Adler

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What is an “equitable” policy for mitigating the impacts of hurricanes, earthquakes, floods, and other natural hazards? Economists tend to see “equity” or “distribution” as irreducibly political and subjective. But, in truth, equity analysis and cost-benefit analysis are on a par. Both require a normative justification. Moreover, normative argument can help us structure equity analysis, just as it can cost-benefit analysis. This chapter, written for a forthcoming book on natural hazards policy after Katrina, argues that equity is a normative consideration distinct from efficiency or overall well-being. It then argues that equity is individualistic, not group-based; ex post, not ex …

Against 'Individual Risk': A Sympathetic Critique Of Risk Assessment, Matthew D. Adler

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"Individual risk" currently plays a major role in risk assessment and in the regulatory practices of the health and safety agencies that employ risk assessment, such as EPA, FDA, OSHA, NRC, CPSC, and others. Risk assessors use the term "population risk" to mean the number of deaths caused by some hazard. By contrast, "individual risk" is the incremental probability of death that the hazard imposes on some particular person. Regulatory decision procedures keyed to individual risk are widespread. This is true both for the regulation of toxic chemicals (the heartland of risk assessment), and for other health hazards, such as …

Risk Regulation, Endogenous Public Concerns, And The Hormones Dispute: Nothing To Fear But Fear Itself?, Howard F. Chang

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The dispute between the United States and the European Union (EU) regarding the EU ban on meat imports treated with hormones raises the question: How should regulators respond to public fears that are disproportionate to the risks as evaluated by experts in risk assessment? If regulators cannot eliminate public fears through education, then there is some social benefit from regulations that reduce the feared risks and thereby reduce public anxiety and distortions in behavior flowing from that anxiety. These considerations imply that we cannot simply ignore public fears that technocrats would deem "irrational." On the other hand, there is the …

The Virtues Of Uncertainty In Law: An Experimental Approach, Tom Baker, Alon Harel, Tamar Kugler

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Predictability in civil and criminal sanctions is generally understood as desirable. Conversely, unpredictability is condemned as a violation of the rule of law. This paper explores predictability in sanctioning from the point of view of efficiency. It is argued that, given a constant expected sanction, deterrence is increased when either the size of the sanction or the probability that it will be imposed is uncertain. This conclusion follows from earlier findings in behavioral decision research and the results of an experiment conducted specifically to examine this hypothesis. The findings suggest that, within an efficiency framework, there are virtues to uncertainty …

Fear Assessment: Cost-Benefit Analysis And The Pricing Of Fear And Anxiety, Matthew D. Adler

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Risk assessment is now a common feature of regulatory practice, but fear assessment is not. In particular, environmental, health and safety agencies such as EPA, FDA, OSHA, NHTSA, and CPSC, commonly count death, illness and injury as costs for purposes of cost-benefit analysis, but almost never incorporate fear, anxiety or other welfare-reducing mental states into the analysis. This is puzzling, since fear and anxiety are welfare setbacks, and since the very hazards regulated by these agencies - air or water pollutants, toxic waste dumps, food additives and contaminants, workplace toxins and safety threats, automobiles, dangerous consumer products, radiation, and so …

Reconsidering Insurance For Punitive Damages, Tom Baker

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No abstract provided.

Conflicts And Defense Lawyers: From Triangles To Tetrahedrons, Tom Baker

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No abstract provided.

Protecting The Environment: Finding The Balance Between Delaney And Free Play, Geoffrey C. Hazard Jr., Howard C. Kunreuther

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No abstract provided.

On The Genealogy Of Moral Hazard, Tom Baker

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No abstract provided.

Tort Law As A Comparative Institution, Claire Oakes Finkelstein

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No abstract provided.