Breach of Contract

Kevin Lewis

January 22, 2010

Efficient Regulation

Andrei Shleifer
NBER Working Paper, January 2010

Regulation of economic activity is ubiquitous around the world, yet standard theories predict it should be rather uncommon. I argue that the ubiquity of regulation is explained not so much by the failure of markets, or by asymmetric information, as by the failure of courts to solve contract and tort disputes cheaply, predictably, and impartially. The approach accounts for the ubiquity of regulation, for its growth over time, as well as for the fact that contracts themselves are heavily regulated. It also makes predictions, both across activities and across jurisdictions, for the efficiency of regulation and litigation as strategies of enforcing efficient conduct.


Economic Foundations of the Law of the Sea

Eric Posner & Alan Sykes
University of Chicago Working Paper, December 2009

The United Nations Convention on the Law of the Sea has a plausible economic logic. Jurisdiction over portions of the ocean is assigned to states which can regulate them most cheaply and value them the most. These jurisdictional rights are subject to limits that reflect the interests of other states in navigation and other uses of the seas. For the vast areas of the ocean that no state can regulate, the Convention provides for an open access regime subject to simple rules, mostly self-enforcing, to limit conflict over resources.


The Trouble with Cases

Frederick Schauer & Richard Zeckhauser
Harvard Working Paper, August 2009

For several decades now a debate has raged about policy-making by litigation. Spurred by the way in which tobacco, environmental, and other litigation has functioned as an alternative form of regulation, the debate asks whether policy-making or regulation by litigation is more or less socially desirable than more traditional policy-making by ex ante rule-making by legislatures or administrative agencies. In this paper we step into this debate, but not to come down on one side or another, all things considered. Rather, we seek to show that any form of regulation that is dominated by high-salience particular cases is highly likely to make necessarily general policy on the basis of unwarranted assumptions about the typicality of one or a few high-salience cases or events. Two cornerstone concepts of behavioral decision - the availability heuristic and related problems of representativeness - explain this bias. This problem is virtually inevitable in regulation by litigation, yet it is commonly found as well in ex ante rule-making, because such rule-making increasingly takes place in the wake of, and dominated by, particularly notorious and often unrepresentative outlier events. In weighing the net advantages of regulation by ex ante rule-making against those of regulation by litigation, society must recognize that any regulatory form is less effective insofar as it is unable to transcend the distorting effect of high-salience unrepresentative examples.


Judicial Duty and the Supreme Court's Cult of Celebrity

Craig Lerner & Nelson Lund
George Washington Law Review, forthcoming

Judging from recent confirmation hearings, there is now a consensus that Supreme Court Justices should be humble servants of the law, highly respectful toward precedent and without personal agendas of any kind. Few informed observers expect this to happen. After describing some of the institutional factors that operate to discourage adherence to the traditional ideal of judicial duty, this article proposes four statutory reforms that could help the Justices stick a little closer to the promises they are expected to make, and do make, at their confirmation hearings. First, Congress should require that all Supreme Court opinions, including concurrences and dissents, be issued anonymously. This should lead to fewer self-indulgent separate opinions, more coherent and judicious majority opinions, and more reason for future Justices to treat the resulting precedents respectfully. Second, Congress should require the Court to hear at least one case certified from a circuit court (or one diversity case) for every federal question case they choose from their discretionary docket. This would reduce the temptation to assemble a docket consisting largely of interesting or high-profile cases, and encourage the Justices to grapple with more of the important but unglamorous issues vexing the lower courts. Third, Congress should forbid law clerks to draft judicial opinions, and move them to the office of the Court's Librarian, where they would do legal research for the Court rather than for individual Justices. Truly humble and old-fashioned judges should study the precedents themselves, discuss the law with their colleagues (rather than with their handpicked votaries), and write their own opinions. Fourth, Congress should require Justices to serve part of their time on lower federal courts, as they did for the first century of the republic's existence. Restoring "circuit riding" would give the Justices some on-going experience with playing the role of a modest judge whose decisions are subject to appellate review and who is often required to interpret and apply muddled Supreme Court opinions. If serving as a Supreme Court Justice were to become a full-time, non-delegable job with fewer opportunities for personal aggrandizement, the Justices would behave more like judges than legal celebrities, Presidents would have more incentive to appoint genuinely able people, and fewer Justices would insist on staying in the saddle past the time when they can even mount the horse.


Judicial Expenditures and Litigation Access: Evidence from Auto Injuries

Paul Heaton & Eric Helland
RAND Working Paper, December 2009

Despite claims of a judicial funding crisis, there exists little direct evidence linking judicial budgets to court utilization. Using data on thousands of auto injuries covering a 15-year period, the authors measure the relationship between state-level court expenditures and the propensity of injured parties to pursue litigation. Controlling for state and plaintiff characteristics and accounting for the potential endogeneity of expenditures, they show that expenditures increase litigation access, with their preferred estimates indicating that a 10% budget increase increases litigation rates by 3%. Consistent with litigation models in which high litigation costs undermine the threat posture of plaintiffs, increases in court resources also augment payments to injured parties.


The Negative Impact of Attorneys on Mediation Outcomes: A Myth or a Reality?

Jean Poitras, Arnaud Stimec & Jean-François Roberge
Negotiation Journal, January 2010, Pages 9-24

Mediators often do not welcome the presence of attorneys at the mediation table. Because of the apparent contradictions between both professions, many mediators believe that the presence of attorneys is prejudicial to the mediation process. Using empirical data collected from workplace mediation cases, we have explored the actual impact of the presence of attorneys. Our results indicate that the presence of an attorney does not significantly affect the outcome of a mediation, with two exceptions. First, the presence of attorneys in a mediation process reduces the parties' level of satisfaction with the mediator. Second, the presence of an attorney would appear to hinder the level of reconciliation possible between the parties.


The Closure Effect: Evidence from Workers Compensation Litigation

Henry Hyatt
U.S. Census Bureau Working Paper, January 2010

Consideration of the "best interests" of Workers Compensation (WC) claimants often involves the assumption that those who receive benefits in a "lump-sum" behave "too myopically" with respect to labor supply. However, many attorneys argue that lump-sum settlements induce a beneficial "sense of closure." In this paper, I provide an empirical context for these ideas using a unique set of linked administrative databases owned by the State of California. Upon receipt of a court-approved lump-sum settlement, WC claimants immediately increase labor supply. No such change is found for claimants who receive a court-approved settlement in which the insurer provides benefits over time, suggesting that the method of litigation settlement is a determinant of labor supply.


The Economics of Credence Goods: On the Role of Liability, Verifiability, Reputation and Competition

Uwe Dulleck, Rudolf Kerschbamer & Matthias Sutter
American Economic Review, forthcoming

Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market break-down. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that either liability or verifiability yields efficiency, we find that liability has a crucial, but verifiability only a minor effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated.


Reporter's Privilege and Incentives to Leak

Ido Baum, Eberhard Feess & Ansgar Wohlschlegel
Review of Law & Economics, 2009

Journalists sued for defamation may refuse to reveal their anonymous sources. To escape liability under the traditional English rule, they then need to show proof that the news is correct. By contrast, many US states have switched the burden of proof such that plaintiffs must first present evidence that the news is false. Focusing on the incentives of sources to leak, we find that the American rule reduces the frequency of type I errors (true stories are not learned by the society) at the expense of a higher frequency of type II errors (the society believes wrong stories). The American rule is superior when courts are likely to find the truth without knowing the identity of sources, and when firms can severely punish even honest sources. Furthermore, when courts rule that sources must be revealed, they should ensure a higher compliance rate of journalists under the American rule.

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