Limiting Limited Liability

Limited liability may result in inefficient accident prevention, because a relevant portion of the expected harm is externalized on victims. This paper shows that under some restrictive conditions further limiting liability by means of a liability cap can improve caretaking.

THE ECONOMICS OF PURE ECONOMIC LOSS AND THE INTERNALISATION OF MULTIPLE EXTERNALITIES

This study emphasises the divergence between the legal approach to pure economic loss and the economic one, and focuses on the latter. Traditional economic theory is grounded on the divide between social and private loss and is employed in formulating policy recommendations for an efficient outcome. However, it fails to explain why pure economic loss cases are treated differently in different legal systems. This study suggests that pure economic loss should be regarded as the internalisation of positive externalities through a mechanism (tort law) primarily designed for negative externalities. The pure economic loss problem is a problem of choosing between secondbest solutions, because tort law generally fails to provide first-best internalisation of both types of externalities. Within this framework, some new hypotheses on the comparative law and economics of pure economic loss will be discussed.economic loss, financial loss, tort, damage, compensation,

Carrots, sticks, and the multiplication effect

Although a punishment can be applied only once, the threat to punish (also referred to as stick) can be reiterated several times, because when parties obey, the punishment is not applied and thus the threat can be repeated. The same is not possible with promises to reward (also known as carrots), since they need to be carried on every time a party complies, and hence at each round a new reward is needed. We show that the multipliability of sticks has pervasive consequences in economics and law and provides a unified explanation for seemingly unrelated phenomena such as the dynamics of riots and revolutions, the divide-and-conquer strategy, comparative negligence, the anticommons problem, the use of property rules in markets, the most-favored nation clause, legal restrictions on penalties in employment contracts, and legal aid

Soft Negligence and Cause In Fact: A Comment on Ganuza and Gomez

Lowering the standard of negligence below the first-best socially optimal level has been shown by Ganuza and Gomez (2004) to increase the level of care taken by judgment proof injurers. In this paper, I consider a more complex model of negligence in which cause in fact is taken into account, and I show that this conclusion holds when the injurer’s care reduces the magnitude of the accidental harm but not when the injurer’s care reduces the probability of the accident. Thus, such soft negligence strategies aimed at tackling the adverse effects of judgment proofness need to be conditioned to the accident prevention technology available to injurers

Uncertainty of Law and the Legal Process.

There is extensive literature on whether courts or legislators produce efficient rules, but which of them produces rules efficiently? Is there an optimal mix of litigation and legislation? The law is inevitably subject to a certain degree of uncertainty ex ante; uncertainty makes the outcomes of trials difficult to predict and, hence, prevents parties from settling disputes out of court. Conversely, the law is necessarily certain ex post: litigation fosters the creation of precedents that reduce uncertainty. We postulate that there is a natural balance between the degree of uncertainty of a legal system (kept under control by litigation) and its litigation rate (sustained by uncertainty). We describe such equilibrium rates of litigation and uncertainty in a formal model, study how they are affected by two different policies -litigation fees/subsidies and legislation - and compare the costs and benefits of the legislative and the judicial process of lawmaking. We then extend the analysis to explore the implications of this approach.incompleteness of law, complexity of law, litigation, judge-made law, legislation.

Commitment, Liquidity and Control in Business Organizations

In this dissertation I reflect on business organizations, as ways to legally organize economic activities. In Chapter 1, I build on extant literature to define a theory of business organizations that is orthogonal and complementary to the theory of the firm. The central question this theory addresses is: What legal form should a firm take? I argue that the “property turn” that has characterized recent advancements in the theory of the firm has yet to fully take place in the theory of business organizations and attempt to make several steps in that direction. In particular, I show that a central issue for organizations is whether the capital provided by investors is committed for the long period or not. Different organizational forms are characterized by different levels of commitment. Historically, the enforceability of commitments to invest for the long was slow to be granted and involved politically-charged process. Once established, long-term commitment of capital unleashed a series of developments that are now well understood to characterize modern markets. In Chapter 2, I build on these ideas to propose a formal model of the commitment of capital for the long term. In the model, two organizational forms are contrasted: one with short-term capital (a “partnership”) and one with capital committed for the long term (a “corporation”). By starting from this basic difference, I show that a series of implications follow. In particular, investors in the corporation have to compensate the loss of liquidity entailed by the long-term commitment with a more liquid market for shares ex post. In turn, liquidity in the market depends endogenously on the degree of asymmetric information that characterizes trade. Thus, for the commitment of capital to be sustainable, shares have to be liquid, which in turn implies that shareholders need to be (in expectation) relatively uninformed so that outside (fully uninformed) investors do not demand too large a discount when purchasing their shares. This mechanism yields implications for the typical size of different organizational forms, with corporations faring better than partnerships in terms of share value when the number of equity holders is large, and vice versa when it is small. In addition, the separation between ownership and control in large corporations, which is typically seen with preoccupation, emerges endogenously from the model as a necessary feature that guarantees liquidity in the secondary market and, in turn, increases share value in the primary market. In Chapter 3, I apply the model to shed light on the regulation of exit. The commitment of financial resources to a project is essential for long-term investment but brings about both a loss of control and a loss of liquidity for investors. Therefore, investors are ordinarily given an exit option. In this chapter, I contrast three common ways to exit: tradability of one's equity position, liquidation rights and redemption rights. I show that they balance liquidity and control very differently. Large safe projects are better associated with tradability, because the risk of inefficient continuation is low and the market provides enough liquidity. Small risky projects are better associated with redemption rights, because they can sort inefficient liquidations from inefficient continuations. Liquidation rights are desirable when redemption rights fail because of high costs of capital or the risk of runs on the company's cash