An Economist Listens to Serial

Virtually nothing about what makes Serial so compelling has much to do with economics. But the central question of the series—the guilt or innocence of Adnan Syed—does connect with a powerful and important branch of economic theory dealing with asymmetries of information, instances where one party knows something the other doesn’t. For example, policyholders may know more about their riskiness than their insurers do; criminal defendants may know more about their guilt or innocence than the state does; and so on. Of course, people often have reasons to conceal or distort their private information, so the challenge posed by so-called “screening” models is to devise rules, incentives or institutions that induce self-interested actors to reveal what they know. Could Serial itself, by its very existence, serve as such a truth-inducing mechanism? Sarah Koenig seemed to toy with this idea when—at the very end of episode 12, as she was wrapping up the series— she wondered “. . . why on earth would a guilty man agree to let me do this story, unless he was cocky to the point of delusion.” Put slightly differently, can we learn anything about Adnan Syed’s guilt or innocence from the fact that (before the investigation began) Syed gave permission for his case to be investigated and his story to be told

You Do Have to Keep Promises: A Disgorgement Theory of Contract Remedies

Contract law is generally understood to require no more of a person who breaches a contract than to give the injured promisee the “benefit of the bargain.” The law is thus assumed to permit a promise-breaker to keep any profit remaining from breach, after putting the victim in the position he would have been in had the promise been performed. This conventional description is radically wrong: across a wide range of circumstances, standard contract doctrines actually do require people to keep their promises, or to disgorge their entire profit from breach if they do not. Rather than protecting the expectation interest of injured promisees, therefore, the law of contract remedies is better characterized as enforcing “promisor expectation” or disgorgement, a regime that puts breaching promisors in the position they would have been in had they performed, even when that means overcompensating injured victims. We offer two explanations for why we so often see “promisor expectation” remedies, even though contracting parties would prefer the remedy of perfect promisee expectation damages. First, promisor expectation is often much easier for courts to compute or implement than promisee-based remedies. Second, promisors themselves prefer to be subject to the promisor expectation regime because it allows them to commit credibly to perform their promises. Such commitments are valuable but cannot be sustained if the law awards damages that fall short of perfect promisee expectation, as it invariably does. By agreeing to a remedial scheme that makes it unprofitable or impossible for them to profit from breach, promisors can credibly commit to perform and thus realize a higher contract price ex ante. An “overcompensatory” remedy thus paradoxically serves the interests of promisors by providing them a valuable bonding mechanism

Allocating Resources among Prisons and Social Programs in the Battle against Crime

This article evaluates the cost and crime-reducing potential of prisons and social spending, setting forth the conditions under which a shift in resources from an expanding prison population into social spending would lead to a reduction in total crime. Preschool enrichment programs coupled with family intervention have generated impressive results in reducing crime in a number of different studies. Targeting of resources toward those children most at risk of criminal behavior is necessary to generate cost-effective crime reduction, but this may be difficult to achieve because of political or constitutional constraints. Given precise targeting, and if a broadly implemented preschool program (more enriched than the current Head Start program) could generate half the crime-reduction benefits achieved in the pilot studies, then cutting spending on prisons and using the savings to fund intensive preschool education would reduce crime. The elasticity of crime with respect to incarceration is taken to be .15

Tontines for the Invincibles: Enticing Low Risks Into the Health-Insurance Pool With an Idea from Insurance History and Behavioral Economics

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 concept comes from the tontine life insurance that fueled the rise of the U.S. insurance industry in the late 19th Century. A largely forgotten casualty of the 1906 pacification of the life insurance industry, the tontine idea holds great promise for making health insurance attractive to the invincibles today. The tontine feature frames the health insurance purchase as a smart investment, rather than a way to spend money for something the customer does not think he needs. Tontines make insurance more attractive to the uninsured, without wasting funds by subsidizing those who are already covered. We identify a particular class of individuals (the invincibles), show how a specific cognitive bias accounts for their irrational behavior, and design an insurance mechanism (tontines or deferred dividends) to overcome the effects of this bias. The final sections of the paper offer an empirically calibrated pricing demonstration for a tontine health policy and an analysis of the legality of tontines in this context

Behavioral Economics and Insurance Law: The Importance of Equilibrium Analysis

Because choosing insurance requires consumers to assess risks and probabilities, the demand for insurance has proven to be fertile ground for identifying deviations from rational behavior. Consumers often shun the insurance against large losses that they rationally should want (e.g., floods); and they are attracted to insurance against small losses (extended warranties, low deductibles) that no rational individual should purchase. But the welfare consequences of behavioral anomalies in insurance are complex, because consumers’ irrational behavior takes place in a market profoundly shaped by informational asymmetries. Under some conditions, deviations from rational behavior may actually generate insurance market equilibria that produce greater welfare than would be achieved in a market in which all consumers are rational. We summarize the literature and discuss the legal and policy implications of this conclusion