Showing papers in "The Journal of Legal Studies in 2008"

Social Distance and Self-Enforcing Exchange

Abstract: This paper models social distance as endogenous to the choices of individuals. I show how large numbers of socially heterogeneous agents can use signals that reduce social distance to capture the gains from widespread trade. Although traditional reputational mechanisms of multilateral punishment break down where large populations of socially diverse agents are involved, ex ante signaling can make widespread trade self‐enforcing. Intergroup trade in precolonial Africa provides evidence for this mechanism.

Happiness inequality in the United States

Abstract: This paper examines how the level and dispersion of self‐reported happiness has evolved over the period 1972–2006. While there has been no increase in aggregate happiness, inequality in happiness has fallen substantially since the 1970s. There have been large changes in the level of happiness across groups: two‐thirds of the black‐white happiness gap has been eroded, and the gender happiness gap has disappeared entirely. Paralleling changes in the income distribution, differences in happiness by education have widened substantially. We develop an integrated approach to measuring inequality and decomposing changes in the distribution of happiness, finding a pervasive decline in within‐group inequality during the 1970s and 1980s that was experienced by even narrowly defined demographic groups. Around one‐third of this decline has subsequently been unwound. Juxtaposing these changes with large increases in income inequality suggests an important role for nonpecuniary factors in shaping the well‐bein...

Hive Psychology, Happiness, and Public Policy

Abstract: We consider three hypotheses about relatedness and well‐being including the hive hypothesis, which says people need to lose themselves occasionally by becoming part of an emergent social organism in order to reach the highest levels of human flourishing. We discuss recent evolutionary thinking about multilevel selection, which offers a distal reason why the hive hypothesis might be true. We next consider psychological phenomena such as the joy of synchronized movement and the ecstatic joy of self‐loss, which might be proximal mechanisms underlying the extraordinary pleasures people get from hive‐type activities. We suggest that if the hive hypothesis turns out to be true, it has implications for public policy. We suggest that the hive hypothesis points to new ways to increase social capital and encourages a new focus on happy groups as being more than collections of happy individuals.

Death, happiness and the calculation of compensatory damages

Abstract: This paper presents a study of the mental distress caused by bereavement. The greatest emotional losses are from the death of a spouse, the second greatest from the death of a child, and the third from the death of a parent. The paper explores how happiness regression equations might be used in tort cases to calculate compensatory damages for emotional harm and pain and suffering. We examine alternative well‐being variables, discuss adaptation, consider the possibility that bereavement affects someone’s marginal utility of income, and suggest a procedure for correcting for the endogeneity of income. Although the paper’s contribution is methodological and further research is needed, some illustrative compensation amounts are discussed.

What Does Happiness Research Tell Us About Taxation

Abstract: This paper analyzes the consequences of happiness research for taxation. It focuses on the finding that happiness depends on status as well as income, examining how adding status concerns to standard optimal tax models changes the results. It then compares the empirical findings of the happiness literature to see whether they provide the type of data needed to parameterize the models, arguing that the models need different types of data than most happiness studies emphasize. The paper also looks at Robert Frank’s arguments for a progressive consumption tax based on the findings of the happiness research. It finds that these claims are not supported by the current models or empirical data. Finally, the paper considers a number of other potential implications of happiness research for taxation, including marriage penalties or bonuses, special tax rates for the disabled, and age‐dependent taxation.

Case Law versus Statute Law: An Evolutionary Comparison

Abstract: Case law develops gradually through the rulings of appellate judges who have heterogeneous preferences but are partially bound by stare decisis. We show that its evolution converges toward more efficient and predictable legal rules. Since statutes do not share this evolutionary property, case law is the best system when the efficient rule is time invariant, even if the legislature is more democratically representative than individual judges are. In the presence of social change, the ideal legal system includes both legislation and judicial decisions as complementary sources of law. Our model thus explains the modern history of common law and the observed cross‐country correlation between legal origins and economic outcomes. It also predicts the gradual convergence of civil law and common law toward a mixed system.

Who Is the Happy Warrior? Philosophy Poses Questions to Psychology

Abstract: Psychology has recently focused attention on subjective states of pleasure, satisfaction, and what is called “happiness.” The suggestion has been made in some quarters that a study of these subjective states has important implications for public policy. Sometimes, as in the case of Martin Seligman’s “positive psychology” movement, attempts are made to link the empirical findings and the related normative judgments directly to the descriptive and normative insights of ancient Greek ethics and modern virtue ethics. At other times, as with Daniel Kahneman’s work, the connection to Aristotle and other ancient Greek thinkers is only indirect, and the connection to British Utilitarianism is paramount; nonetheless, judgments are made that could be illuminated by an examination of the rich philosophical tradition that runs from Aristotle through to John Stuart Mill’s criticisms of Bentham.

Measuring Well-Being for Public Policy: Preferences or Experiences?

Abstract: Policy makers seeking to enhance well‐being are faced with a choice of possible measures that may offer contrasting views about how well an individual’s life is going. We suggest that choice of well‐being measure should be based on three general criteria: (1) the measure must be conceptually appropriate (that is, are we measuring the right sort of concept for public policy?), (2) it must be valid (that is, is it a good measure of that concept?), and (3) it must be empirically useful (that is, does it provide information in a format that can be readily used by policy makers?). Preference‐based measures (as represented by income) are compared to experience‐based measures (as represented by subjective evaluations of life) according to these criteria. Neither set of measures meets ideal standards, but experiences do fare at least as well as preferences, and subjective evaluations perform much better than income alone as a measure of well‐being.

The Effect of Crime on Life Satisfaction

Abstract: Crime often ranks at the top of public concern, and a majority of the public report they sometimes worry about crime. Yet we know little about crime’s impact on day‐to‐day quality of life. This paper provides new evidence on crime’s effect on life satisfaction using a combination of victimization and subjective survey data. I find that county‐level crime rates and perceived neighborhood safety have little impact on overall life satisfaction. In contrast, the effect of a home burglary on life satisfaction is quite large—nearly as much as moving from excellent health to good health. In monetary terms, I estimate a compensating income equivalent of nearly $85,000 for a home burglary. Thus, while being burglarized has a large and significant effect on a victim’s overall life satisfaction, neither county‐level crime rates nor neighborhood safety appear to have very large effects on daily life satisfaction for the average American.

Judicial Fact Discretion

Abstract: Following legal realists, we model the causes and consequences of trial judges exercising discretion in finding facts in a trial. We identify two motivations for the exercise of such discretion: judicial policy preferences and judges’ aversion to reversal on appeal when the law is unsettled. In the latter case, judges exercising fact discretion find the facts that fit the settled precedents, even when they have no policy preferences. In a standard model of a tort, judicial fact discretion leads to setting of damages unpredictable from true facts of the case but predictable from knowledge of judicial preferences, distorts the number and severity of accidents, and generates welfare losses. It also encourages litigants to take extreme positions in court and raises the incidence of litigation relative to settlement, especially in new and complex disputes for which the law is unsettled.

Bias in Judicial Citations: A Window into the Behavior of Judges?

Abstract: This article tests for the presence of bias in judicial citations within federal circuit court opinions. Our findings suggest bias along three dimensions. First, judges base outside‐circuit citation decisions in part on the political party of the cited judge. Judges tend to cite judges of the opposite political party less often than would be expected considering the fraction of the total pool of opinions attributable to judges of the opposite political party. Second, judges are more likely to engage in biased citation practices in certain high‐stakes situations. These high‐stakes situations include opinions dealing with certain subject matters (such as individual rights and campaign finance) as well as opinions in which another judge is in active opposition. Third, judges more often cite those judges who cite them frequently, which suggests the presence of mutual citation clubs.

Realistic Standards: Optimal Negligence with Limited Liability

Abstract: We study the standard economic model of unilateral accidents under the assumption that the injurers have limited assets. We identify a second‐best optimal rule that selects as due care the minimum of first‐best care and a level of care that takes into account the wealth of the injurer. We show that such a rule in fact maximizes the precautionary effort by a potential injurer. The idea is counterintuitive: being softer on an injurer, in terms of the required level of care, actually improves the incentives when he or she is potentially insolvent. We extend the basic result to an entire population of potentially insolvent injurers and find that the optimal general standards of care do depend on wealth and the distribution of income. We also show that, under certain conditions, wealthier populations should be subject to higher general standards of care in the case of accidents.

How Much Irrationality Does the Market Permit

Abstract: This article asks whether competition can ameliorate the consequences of cognitive error. Consumers differ cognitively, some being more prone to err (the “naive”) than others (the “sophisticated”). Competition among firms is analyzed with a search equilibrium model. Firms offer an exploitative contract or a naive contract to a consumer population partitioned in two ways: some consumers are sophisticated while others are naive, and some consumers search for preferred contracts while others visit one firm. There are two principal results. First, when consumers shop, neither contract type is priced monopolistically, and competitive pricing sometimes obtains. Second, when enough consumers are sophisticated and the naive have a relatively low willingness to pay for their preferred contract, exploitative contracts decline in frequency and may actually vanish. These results suggest that while decision makers should continue to ask if consumers suffer from cognitive error, they also should ask whether ma...

Pain and Suffering Awards: They Shouldn’t Be (Just) about Pain and Suffering

Abstract: In this paper, we challenge the conventional view that pain‐and‐suffering awards should be interpreted literally as a compensation for feelings of pain and suffering. People adapt to conditions as serious as paraplegia and blindness, returning rapidly to near‐normal levels of happiness, which means that pain‐and‐suffering awards based literally on pain and suffering would be small. We argue that compensation for these types of conditions should be larger than would be dictated by pain and suffering alone because people legitimately care about more than just the pain and suffering that results from an injury; they also care about a variety of other factors, such as their capabilities to perform various functions, that often do not affect happiness. We propose the outlines of a method for determining noneconomic damages that divides the problem into three judgments, each to be made by the constituency most competent to make it.

Transnational Forum Shopping as a Trade and Investment Issue

Abstract: Plaintiffs regularly bring cases in U.S. courts seeking damages for harms that have occurred abroad, attracted by higher expected returns than are available in the jurisdiction in which the harm arose. This paper focuses on the potential distortion of trade and investment patterns that can result from implicit discrimination in the applicability of liability rules to producers or investors of different nationalities due to such forum shopping. These distortions are akin to those caused by discriminatory tariff or tax policies and can reduce global economic welfare. In appropriate cases, the welfare costs can be averted by limiting foreign tort plaintiffs to the law and forum of the jurisdiction in which their harm arose, although such a rule is not efficient in all cases. The analysis has implications for a number of areas of legal doctrine, including the doctrine of forum non conveniens, the construction of the Alien Tort Statute, and the rules governing choice of law in transnational tort cases.

Completing Contracts in the Shadow of Costly Verification

Abstract: Contract theory typically holds that verification costs are obstacles to complete contracting; yet real‐world contracts often contain provisions that seem costly to verify. We show how verification (or litigation) costs operate as a screen on the promisee’s incentive to sue and as an effective sanction against the breaching promisor. As long as the court’s judgment is correlated with the promisor’s behavior, the parties can design a set of prices (including damages) to provide additional incentive to the promisor through an off‐the‐equilibrium, credible litigation threat. We show that the parties may prefer to adopt a costly signal over a costless signal. Rather than focus solely on either the problems of adjudication or those of contracting (without sufficient regard to how the disputes will be resolved in the future), we take a more comprehensive approach by looking at the design of contracts in anticipation of the path of the adjudication process.

Happiness Research and Cost‐Benefit Analysis

Abstract: A growing body of research on happiness or subjective well‐being (SWB) shows, among other things, that people adapt to many injuries more rapidly than is commonly thought, fail to predict the degree of adaptation and hence overestimate the impact of those injuries on their SWB, and, similarly, enjoy small or moderate rather than significant changes in SWB in response to significant changes in income. Some researchers believe that these findings pose a challenge to cost‐benefit analysis and argue that project evaluation decision procedures based on economic premises should be replaced with procedures that directly maximize SWB. This view turns out to be wrong or, at best, premature. Cost‐benefit analysis remains a viable decision procedure. However, some of the findings in the happiness literature can be used to generate valuations for cost‐benefit analysis where current approaches have proved inadequate.

Does Nonprofit Status Signal Quality

Abstract: A popular theory for why firms take nonprofit status is that it is a signal of quality. This paper offers a simple, empirical test of this theory. If nonprofit status signals quality, surely nonprofit firms would want to ensure that consumers are aware of this. A natural way for firms to do this is to indicate their nonprofit status in their advertising. Taking this cue, we conducted a survey of over 2,800 firms in the hospital, nursing home, or child care industries in order to determine whether nonprofit firms communicate their status to consumers on their Web sites or yellow pages listings. We find that fewer than 7.5 percent of nonprofit firms signal their status in yellow pages listings, only 25 percent do so on their home pages, and 30 percent do so on their about‐us pages. Indeed, over 35 percent never signal their nonprofit status on their Web sites. Our evidence does not support the hypothesis that nonprofit status is a signal of quality.

On Optimal Legal Change, Past Behavior, and Grandfathering

Abstract: When is it socially advantageous for legal rules to be changed in the light of altered circumstances? In answering this basic question here, a simple point is developed—that past compliance with rules tends to reduce the social advantages of change. The reasons are twofold: adjusting to a new legal rule involves costs, and the social benefits of change are only in addition to those of past compliance. The general implications are that legal rules should be more stable than would be appropriate were the relevance of past behavior not recognized and that grandfathering, namely, permitting noncompliance, is sometimes desirable. These points have broad relevance, often explaining what we observe but also indicating possibilities for reform, such as in the regulation of pollution. The analysis is related to the conventional reliance‐based justification for the stability of the law, the literature on legal transitions, and economic writing on optimal legal standards.

The Human and Economic Dimensions of Altruism: The Case of Organ Transplantation

Abstract: This paper analyzes three issues critical to understanding the chronic shortage of organs. Section 2 develops a simple economic model of altruism that helps explain how markets with altruistic participants operate like ordinary economic markets but produce an equilibrium position in which more organs are transferred at lower cash prices. Section 3 examines and rejects the various arguments used to undermine the neoclassical arguments in the first section. Section 4 looks at ways to expand the supply of organs: directed donations within families and among friends, solicited organs via MatchingDonors.com, donor‐recipient pairs, and LifeSharers.

Two Recommendations on the Pursuit of Happiness

Abstract: While any improvement in wealth and consumption will likely increase happiness, the increased happiness may or may not last long. In this article we offer two recommendations to make the increased happiness sustainable. The first one—to invest resources to promote adaptation‐resistant rather than adaptation‐prone consumption—seeks to make the increased happiness sustainable within a generation. The second recommendation—to invest resources to promote inherently evaluable rather than inherently inevaluable consumption—seeks to make the increased happiness sustainable across generations.

Taxing Cap‐and‐Trade Environmental Regulation

Abstract: This paper examines the extent to which income taxation interferes with cap‐and‐trade environmental regulation and reaches two conclusions. First, within a single tax period, imposing an income tax will not undermine the cost‐effectiveness of cap‐and‐trade regulation. Second, taxes may distort cost‐effective allocation of permits and abatement through time when the permit market is dominated by permit owners with a tax basis of zero.

Don’t Buy Shares without It: Limited Liability Comes to American Express

Abstract: What is the value of limited liability to the corporation? Financial economists take the value of limited liability for granted, and there has been little empirical study of its value. Few natural experiments allow us to estimate the value of limited liability. One of these, however, is the case of the American Express Company. It appears that American Express was the last publicly traded unlimited liability firm in the United States, becoming a corporation with limited liability only in 1965. In this article, I examine the effects of adopting limited liability on the value of American Express shares and on their risk. Consistent with economic theory and previous empirical research, I find little effect on the firm's value and a reduction in both systematic and unsystematic risk. This article also contributes to the empirical methodology of event studies.

A Primary‐Activity Approach to Proof Burdens

Abstract: The question of which party should bear the burden of proof on a given factual issue remains one of the most important and problematic in evidence and procedure. This paper approaches the question from a relatively unstudied perspective, viewing litigation as a device for influencing primary‐activity behavior rather than as a stand‐alone search for truth. Its main finding is as follows: when a given evidentiary contest concerns the primary‐activity behavior of one of the parties, placing the burden of proof on the other party maximizes the incentive impact of that contest. Although counterintuitive, the finding accords with a striking regularity in existing law. The adversary of the incentive target typically does bear the burden of proof with regard to the target’s primary‐activity behavior.

The Fairness Opinion Puzzle: Board Incentives, Information Asymmetry, and Bidding Strategy

Abstract: The proliferation of fairness opinions promulgating “wide as Texas” price ranges is not only a seeming regulatory failure, it is a puzzle: why do 60 percent of target boards solicit seemingly worthless documents not required by law, while 40 percent of their peers do not? This article explains a fairness opinion as “cheap talk” between a board and public shareholders. In the Fairness Opinion Game, a board issues a fairness opinion to communicate with two shareholder generations: existing shareholders voting on the proposed sale of their shares and potential aftermarket buyers who would buy if the present transaction falls through. The game yields two equilibria: one where the board issues no opinions and one where Texas‐wide opinions emerge as equilibrium messages. We conclude that three factors determine a fairness opinion's width: the board’s private incentives, information asymmetry between the board and shareholders, and transaction costs incurred by aftermarket buyers.

A Switching Costs Explanation of Tying and Warranties

Abstract: Competitive markets in which buyers face a cost of switching suppliers can result in an inefficient pricing pattern: sellers initially seek to gain market share with below‐cost prices, then later exploit past customers with above‐cost prices. This article shows that, rather than simply offer cash discounts initially, sellers can bundle a tied good that is worth more to high‐demand buyers. This bundling strategy can efficiently screen out socially undesirable sales to low‐demand buyers that a straight cash discount would invite. This theory can explain warranties, which are a kind of tying contract in which aftermarket service is bundled with a durable good. The theory also has application in imperfectly competitive markets, in which sellers for reasons of price discrimination prefer a pricing pattern with high aftermarket prices and low durable‐good prices. Finally, the theory has implications for antitrust law in the Kodak setting and antitrust cases involving warranties specifically.

The Effect of Conflicting Moral and Legal Rules on Bargaining Behavior: The Case of No‐Fault Divorce

Abstract: We hypothesize that the no‐fault divorce law is in conflict with moral intuitions favoring punishment for people who break the marriage contract and that people will be either unwilling or unable to fully ignore marital fault in the context of divorce settlement negotiations. In four Web‐based experiments, we asked subjects to read vignettes about divorcing couples and then to rate proposals by each party about how to divide the marital property. Under instructions to ignore fault, subjects nonetheless rated wrongdoers’ proposals lower than victims’ proposals. Some subjects ignored fault purposely, while others were unaware of their own bias. We also find evidence of self‐serving bias; subjects taking the perspective of a victim showed more fault‐based bias than did subjects taking the perspective of a wrongdoer. We conclude that under certain conditions of unilateral fault, the no‐fault divorce law may actually increase the likelihood of impasse in divorce negotiations.

Introduction to the Conference on Law and Happiness

Abstract: Economists who make normative proposals traditionally assume that policy should advance “efficiency,” usually in the Kaldor or Hicks sense, which defines efficiency in terms of whether the project’s winners can hypothetically compensate the project’s losers. A compensation criterion is used because it can be based on ordinal utilities, which puts a smaller information burden on the decision maker than cardinal utilities do. Ordinal utilities, unlike cardinal utilities, can (in principle) be inferred from observations of consumer behavior. By seeing how people trade off goods, willingness-to-pay (or willingness-to-accept) amounts can be derived and summed, so that alternative policy outcomes can be easily compared. This approach has received a great deal of criticism over the decades, but it has survived mainly because no alternative method has commanded widespread agreement. In recent years, however, a small group of economists and psychologists have argued that an alternative method is available. This method, often called the “happiness approach,” relies on surveys that ask people to rate their happiness on a scale. Econometric analysis then finds correlations between ratings on the scale and various characteristics or experiences of the survey respondents—wealth, income, family relationships, and so forth. Though still regarded with skepticism in many quarters, the happiness approach has scored some notable successes. The various factors that are correlated with happiness appear to be robust: they recur in different surveys and are correlated