Plea Bargains Only for the Guilty

A major concern with plea bargains is that innocent defendants will be induced to plead guilty. This paper argues that the law can address this concern by providing prosecutors with incentives to select cases in which the probability of guilt is high. By restricting the permissible sentence reduction in a plea bargain the law can preclude plea bargains in cases where the probability of conviction is low (L cases). The prosecutor will therefore be forced to – (1) select fewer L cases and proceed to trial with these cases; or (2) select more cases with a higher probability of conviction (H cases) that can be concluded via a less-costly plea bargain. As long as the probability of conviction is positively correlated with the probability of guilt, this selection-of-cases effect implies a reduced number of innocent defendants that accept plea bargains. We argue that the Federal Sentencing Guidelines in fact achieve, albeit inadvertently, this socially desirable selection effect. We further argue that more limited discretion in sentencing facilitates the selection-of-cases effect. In this respect, the Federal Guidelines are superior to some of the state-level guidelines that leave considerable room for discretion in sentencing

Bundling and Consumer Misperception

This Essay studies bundling of two (or more) products as a strategic response to consumer misperception. In contrast to the bundling and tying studied in the antitrust literature-strategies used by a seller with market power in market A trying to leverage its market power into market B-bundling in response to consumer misperception may occur in intensely competitive markets. The analysis demonstrates that such competitive bundling can be either welfare enhancing or welfare reducing. The Essay considers several unbundling policies that can protect consumers and increase welfare in markets where bundling is undesirable

Algorithmic Price Discrimination When Demand Is a Function of Both Preferences and (Mis)perceptions

Sellers are increasingly utilizing big data and sophisticated algorithms to price discriminate among customers. Indeed, we are approaching a world in which each consumer will be charged a personalized price for a personalized product or service. Is this type of price discrimination good or bad? The normative assessment, I argue, depends on the target of the discrimination. Sellers are interested in the consumer’s willingness to pay (WTP) for their goods or services: they maximize profits by charging a price that is as close as possible to the consumer’s WTP. This WTP is a function of consumer preferences on the one hand and consumer (mis)perceptions on the other hand. When algorithmic price discrimination targets preferences, it harms consumers but increases efficiency. When price discrimination targets misperceptions, specifically demand-inflating misperceptions, it hurts consumers even more and might also reduce efficiency. In such cases, legal intervention may be needed. In particular, when sellers use personalized pricing, regulators should fight fire with fire and seriously explore the potential of personalized law

Willingness to Pay: A Welfarist Reassessment

From a welfarist perspective, willingness to pay (WTP) is relevant only as a proxy for individual preferences or utilities. Much of the criticism levied against the WTP criterion can be understood as saying that WTP is a bad proxy for utility, or that WTP contains limited information about preferences. Specifically, critics of WTP claim wealth effects prevent it from serving as a good proxy for utility. I formalize and extend this critique by developing a methodology for quantifying the informational content of WTP. The informational content of WTP depends on how WTP is measured and applied. First, I distinguish between two types of policies: (i) policies that are not paid for by the individuals they affect and (ii) policies that are paid for by the individuals they affect. Second, I distinguish between two types of WTP measures: (i) individualized WTP and (ii) uniform, average WTP (like the value of a statistical life). When the cost of the policy is not borne by the affected individuals, individualized WTP has low informational content and increases wealth disparity. Uniform, average WTP has higher informational content and reduces wealth disparity, at least in the case of universal benefits. Therefore, when possible, a uniform, average WTP should be preferred in this scenario. When the cost of the policy is borne by the affected individuals, individualized WTP has high informational content but increases wealth disparity. Uniform, average WTP has lower informational content and indeterminate distributional implications. Here, the choice between individualized WTP and uniform, average WTP is more difficult

Consent and Exchange

In some cases, the law permits a party that unilaterally provides a benefit to another party to recover the estimated value of this benefit. Despite calls for expanding the set of cases to which such a restitution rule applies, the law commonly applies a mutual consent rule under which a party providing another with a benefit cannot obtain any recovery without securing the advance consent of the beneficiary to the transaction. We provide an efficiency rationale for the undesirability of broad use of the restitution rule by identifying significant adverse ex ante effects of the rule that are avoided by the consent requirement. Even assuming that courts' errors in estimating buyer benefits would be unbiased, a restitution rule would strengthen sellers' hand by providing them with a put option that they may but do not have to use. As a result, the restitution rule would encourage inefficient market entry by low-quality sellers that would not contribute to any efficient transactions but would be able to extract payments from buyers seeking to avoid an exchange with them. Furthermore, the restitution rule would discourage efficient market entry by some or all potential buyers of a good or service. Beyond the restitution rule, we extend our analysis to show that similar adverse effects can also arise from other "pricing" rules that provide buyers or sellers with call or put options to force an exchange at a judicially-determined price.