Contract Review: Cognitive Bias, Moral Hazard, and Situational Pressure

This Article explores the contract drafting and review process of attorneys from a cognitive and social science perspective. Based on an understanding of the behavioral tendencies of individual attorneys as impacted by cognitive bias, moral hazard, and situational pressure, the drafting attorney may be able to secure particular transactional advantages for her client. For example, the anchoring effect, which suggests that individuals are affected by the presence by an initial value position, may explain why drafters should and do include extreme positions in their initial draft. Similarly, time pressure may affect an attorney\u27s review of a contract, which a drafting attorney can anticipate and exploit to her advantage by increasing contract length and complexity. The drafting attorney can also seek to take advantage of particular moral hazards that the reviewing attorney faces when representing clients, such as when the reviewing attorney is compensated on a per-transaction basis or would like to appease the client and avoid disrupting a transaction. Understanding the cognitive processes and situational influences helps explain or predict particular patterns of contracting behavior. These factors suggest significant limitations in the attorney as an effective tool in checking oppor unistic behavior, both prior to and after contract formation, and undermine a positive model of the transactional attorney as a value-adding transaction cost engineer

Essays on Social Preferences

After giving a brief overview over the historic background on the role of social preferences in economics, I survey the existing corpus of other-regarding utility function. Next, I theoretically analyse incentives in tournaments with agents motivated by social preferences. Finally, I present an experimental study on reference points and altruism

Essays in the theory of organizational structure.

SIGLEAvailable from British Library Document Supply Centre-DSC:DXN031465 / BLDSC - British Library Document Supply CentreGBUnited Kingdo

Lower Court Constitutionalism: Circuit Court Discretion in a Complex Adaptive System

While federal circuit courts play an essential role in defining what the Constitution means, one would never know it from looking at most constitutional scholarship. The bulk of constitutional theory sees judge-made constitutional law through a distorted lens, one that focuses solely on the Supreme Court with virtually no attention paid to other parts of the judicial hierarchy. On the rare occasions when circuit courts appear on the radar screen, they are treated either as megaphones for communicating the Supreme Court’s directives or as tools for implementing the theorist’s own interpretive agenda. Both approaches would homogenize the way circuit courts make choices about constitutional meaning, carving independent federal judges into cookie-cutter replicas of either the theorist or the Supreme Court.These “one size fits all” theories fail to see circuit courts for what they are — parts of an interpretive system where constitutional law is made from both the top-down and from the bottom-up. This partially decentralized structure positions circuit courts to help the system adapt to changes in its environment and ensure its long-term stability and survival. Rather than focusing on their “inferior” position in the judicial hierarchy or the “best” available theory of constitutional interpretation, circuit courts should use their interpretive discretion in constitutional cases in ways that serve this adaptive function.This Article uses a “complex adaptive system” model to explore how decentralized systems balance their need for overall order and stability with demands for evolution and change. These systems rely on two factors: variation (the degree to which the system’s components differ from one another) and interdependence (the degree to which the system’s components affect one another) to manage those competing forces. When applied to circuit courts, a complex adaptive system model shows the importance of generating different answers to difficult interpretive questions rather than a uniform approach, and developing mechanisms for facilitating interpretive communication across circuits. In turn, it offers the promise of aligning constitutional theory with the way constitutional law is actually made

Structural Overdelegation in Criminal Procedure

In function, if not in form, criminal procedure is a type of delegation. It requires courts to select constitutional objectives, and to decide how much discretionary authority to allocate to law enforcement officials in order to implement those objectives. By recognizing this process for what it is, this Article identifies a previously unseen phenomenon that inheres in the structure of criminal procedure decision-making. Criminal procedure’s decision-making structure, this Article argues, pressures the Supreme Court to delegate more discretionary authority to law enforcement officials than the Court’s constitutional objectives can justify. By definition, this systematic “overdelegation” does not result from the Supreme Court’s hostility to protecting criminal procedure rights. Instead, it arises from a set of institutional pressures that, in combination, differentiate criminal procedure from other forms of constitutional decision-making. By identifying the problem of structural overdelegation, this Article clears away much of the confusion that complicates normative debates about the Supreme Court’s criminal procedure decisions. Why does the Supreme Court so frequently grant discretionary authority to law enforcement institutions that other observers find untrustworthy? How can one tell whether the Court has granted “too much” discretion to law enforcement officials, and what does that phrase even mean? By turning attention to criminal procedure’s structure, this Article offers a framework for answering these questions, and for deepening our understanding of criminal procedure decision-making

Making Deals in Court-Connected Mediation: What\u27s Justice Got to Do With It?

When mediation was first introduced to the courts, the process was hailed as “alternative.” Mediation gave disputants the opportunity to discuss and resolve their dispute themselves; the role of the third party was to facilitate the disputants’ negotiations, not to dictate the outcome; and because the disputants were able to focus on their underlying interests in mediation, the process could result in creative, customized solutions. The picture of mediation is changing, however, as the process settles into its role as a tool for the resolution of personal injury, contract, and other nonfamily cases on the courts’ civil dockets. Attorneys dominate the mediation sessions, while their clients play no or minimal roles. Mediators are selected for their ability to value cases and to assess each side’s strengths and weaknesses. Mediators also increasingly bypass or marginalize the joint session in order to move quickly to caucuses. Moreover, a surprisingly small percentage of the settlements produced by these mediation sessions are creative or even nonmonetary. Mediation’s shift strongly suggests that the bargaining paradigm that dominates and delivers settlements in most civil cases is capturing the mediation process. Significant theory and research in negotiation and decision making support the move toward attorney dominance, evaluative intervention, the marginalization or abandonment of joint sessions and traditional monetary settlements. If mediation is viewed simply as a means to enhance the deal-making that occurs in the negotiated settlement of most civil cases, the process’ evolution appears to represent a successful adaptation to the realities of our civil system of “litigotiation.” Many commentators and mediators, however, argue that mediation is a process that goes beyond assisting current approaches to bargaining and decision making. These commentators urge that the disputants want and deserve something more. There is disagreement, however, regarding the identity of the additional benefit that mediation can offer to disputants. This Article argues that particularly within the context of the courts, mediation should be expected to deliver to disputants an experience of justice, more commonly referred to as procedural justice. Although some commentators have suggested that our courts are moving toward a transactional model, it is not the metaphor of the marketplace that provides the courts with their social and political legitimacy. Research in the field of procedural justice clearly reveals that citizens want the courts to resolve their disputes in a manner that feels like justice is being done. This yearning for the experience of justice is so profound that disputants’ perceptions regarding procedural justice affect their perceptions of the distributive justice that is delivered by a dispute resolution process, their compliance with the outcome of the dispute resolution process, and their perception of the legitimacy of the institution providing or sponsoring the process. Ultimately, insuring that mediation comes within a procedural justice paradigm serves some of the courts’ most important goals - delivering justice, delivering resolution, and fostering respect for the important public institution of the judiciary. Knowledge of procedural justice research can enable an experience of justice to co-exist with deal-making in court-connected mediation. This research indicates clearly that disputants want and need the opportunity to tell their story and control the telling of that story; disputants want and need to feel that the mediator has considered their story and is trying to be fair; and disputants want and need to feel that they have been treated with dignity and respect. This Article applies these research findings, as well as the theories that explain the importance of these process characteristics, in order to conclude that some of the changes that streamline bargaining - the dominant participation of disputants’ attorneys and the reduced role of the disputants, the eventual use of evaluative interventions, and the prevalence of monetary (noncreative) outcomes - are not necessarily inconsistent with procedural justice considerations. Indeed, if used appropriately, some of these changes may even have the potential to enhance disputants’ perceptions of procedural justice. This Article thus argues that deal-making and procedural justice can co-exist and even complement each other. The analysis in this Article also shows, however, that other changes designed to ease legal negotiation - the de facto exclusion of disputants from mediation sessions, the abandonment or marginalization of initial joint sessions, and the early and aggressive use of legally evaluative interventions - are inconsistent with procedural justice. These particular adaptations raise serious concerns regarding the ability of court-connected mediation to deliver an experience of justice along with a settlement

Revisiting Incentive-Based Contracts

Incentive-based pay is rational, intuitive, and popular. Agency theory tells usthat a principal seeking to align its incentives with an agent\u27s should be able to simply pay the agent to achieve the principal\u27s desired results. Indeed, this strategy has long been used across diverse industries-from executive compensation to education, professional sports to public service-but with mixed results. Now a new convert to incentive compensation has appeared on the scene: the United States\u27 behemoth health-care industry. In many ways, the incentive mismatch story is the same. Insurance companies and employers are concerned about constraining the cost of care, and patients are concerned about quality of care. Physicians lack an adequate financial incentive to pay attention to either. Health care\u27s recent move away from the traditional fee-for-service compensation model to incentive pay is perhaps unsurprising

Essays in behavioral economics

Thesis (Ph.D.)--Massachusetts Institute of Technology, Dept. of Economics, 2000.Includes bibliographical references (p. 141-149).Chapter 1: This chapter examines the logical consequences of the rather unsurprising notion that humans care about and manage their self-image, a notion long taken for granted by psychologists. I model this by assuming that decisionmakers derive utility from positive views about the self, holding constant standard utilitarian outcomes usually assumed relevant in economics. Other than this, agents are timeconsistent expected utility maximizers, are constrained in their updating by Bayes' rule, and can manipulate their beliefs only by controlling the flow of information that they receive. The motive to maintain a favorable self-image leads to a systematic rejection of free information about the self in certain states of the world and eventually to overconfident beliefs. Economically relevant decisions are affected by this overconfidence as well as the incentive to gather information about and make decisions so as to optimally manage beliefs. Agents might avoid informative actions when satisfied with their current beliefs ('self-image protection'), and seek out activities in which they can prove themselves when they are not ('self-image enhancement'), even if these choices are otherwise poor. These motives lead to a whole host of effects on behavior that other models have trouble explaining in a unified framework. The model can also make testable predictions on how these effects play themselves out across different categories of tasks and within a category of tasks over time. Applications to stock market participation, the choice between salaried and self-employment, career choice, manager behavior, and employee motivation are discussed. Chapter 2: This chapter starts from the same premise as the previous one, the assumption that agents care about their self-image, but examines its consequences in a different information structure. Agents can improve financial decisions by making subjective judgments about their payoffs, while they derive ego utility from their perceptions regarding this ability. If the agent has a self-image protection motive, she will as a result be averse to making a subjective judgment and reviewing it later, since this combination is informative about ability. The consequence could be a sluggishness in responding to new information, procrastination in making up one's mind, or the reliance on inferior objective information. Possible remedies and applications are discussed, with particular attention to anxiety about health. Chapter 3 (with Peter Diamond): There is overwhelming psychological evidence that some people run into self-control problems regularly, yet the effect of these findings on major life-cycle decisions hasn't been studied in detail. This paper extends Laibson's quasi-hyperbolic discounting savings model, in which each intertemporal self realizes that her time discount structure will lead to preference changes, and thus plays a game with her future selves. By making retirement endogenous, savings affect both consumption and work in the future. From earlier selves' points of view, the deciding self tends to retire too early, so it is possible that the self before saves less to induce her to work. However, still earlier selves think the pre-retirement self may do this too much, leading to possible higher saving on their part and eventual early retirement. Thus, the consumption path exhibits observational non-equivalence with exponential discounting. Observational non-equivalence also obtains on a number of comparative statics questions. For example, a self could have a negative marginal propensity to consume out of changes in future income. The outcome with naive agents, who fail to realize their self-control problem, is also briefly discussed. In that case, the deciding self's potential decision to retire despite earlier selves' plans results in a downward updating of available lifetime resources, and an empirically observed downward jump in the consumption path.by Botond Kőszegi.Ph.D

Goin\u27 Round in Circles ... and Letting the Bad Loans Win: When Subprime Lending Fails Borrowers: The Need for Uniform Broker Regulation

Home ownership is an American dream. Yet, America faces a crisis in the residential housing market that threatens that dream for many. Approximately 2.2 million borrowers with home equity totaling $164 billion or almost one-third of outstanding subprime mortgages will face foreclosure. An even greater number of subprime home loans, 16.31$164 billion are delinquent in monthly mortgage payments. Ironically, these rising delinquency and foreclosure rates are due in large part to greater access to credit for homebuyers through the subprime lending market. Though subprime lending has filled a credit gap and addressed the problem of access to mortgage financing by creating a new market for home ownership, it has created more opportunities for abusive lending. Borrowers have entered into financially detrimental and imprudent loans, often without being fully aware of or understanding the substance of their commitments. These often predatory loans are characterized by product terms and features such as interest- only, high loan-to-value ( LTV ) ratios, low start rates, and adjustable rates. Borrowers also have entered into mortgage agreements with high debt-to-income ratios; loans in which the monthly payment was large relative to the borrower\u27s income. Many of these borrowers received loans without providing supporting documentation of their income or even providing a down payment. The rising number of subprime mortgage foreclosures threatens to undermine the significant home ownership gains made over the past two decades