Institutional Competition, Political Process and Holdup.

We compare the effect of legal and institutional competition for the design of labor institutions in an environment characterized by holdup problems in human and in physical capital. We compare autarky with the two country case assuming that capital is perfectly mobile and labor immobile. We distinguish two cases. In the first one, the political system is free from capture, while in the second, we examine the case where labor captured the institutional design problem. We find that in the former case, a competition of systems reduces welfare while in the latter case it improves the overall outcome.

Governance: Who Controls Matters

In this paper, we provide an outlook for further research on the topic of governance. We review four different approaches on the theory of the firm and discuss implications for governance, namely; nexus of contracts / agency theory, property rights / incomplete contracts, adaptation, and nexus of specific investments.governance, property rights, adaptation, nexus of contracts

Legal Liability when Individuals Have Moral Concerns

We incorporate normative motivations into the economic model of accidents and tort rules. The social norm is that one should avoid harming others and should compensate if nevertheless harm is caused. To some extent, this is internalized through intrinsic moral concerns; moreover, those thought not to adhere to the norm are met with social disapproval. Moral and reputational concerns are not strong enough, however, for injurers to willingly compensate their victims. Absent legal liability, normative concerns induce precautions to prevent harm but precautions are then socially inefficient. By contrast, perfectly enforced legal liability crowds out informal incentives completely (e.g., individuals causing harm suffer no stigma) but precautions are then socially efficient. Under imperfectly enforced legal liability, formal legal sanctions and normative concerns are complements and interact to induce more precautions than under no-liability.Intrinsic motivations, social norms, esteem, strict liability, negligence, crowding out

Real Options Theory for Law Makers

The formulation of legal rules is a challenging issue for lawmakers. Trade-offs are inevitable between providing more guidance by specific rules and enlarging the scope by general rules. Using real options theory we show that the degree of precision should be considered as a degree of flexibility which increases the value of the text. Thus, we derive a normative principle for a draftsman to choose between rules versus standards and to decide when the law should be enacted. In highly innovating environments, delaying the enactment allows lawmakers to obtain more information. Therefore, the lower the degree of precision of the law, the shorter the delay.degree of precision ; flexibility ; obsolescence ; rulemaking

Real Options Theory for Law Maker.

In rapidly changing areas of law, the writing of rules is a challenging issue for lawmakers. Obsolescence impede law to capture the objective of an underlying policy. The legislator, the judge and the regulator are considered as producers of law who have to decide whether or not to invest in a particular type of law. In order to get more information on the context, lawmakers may also choose to wait before investing in law. Using the real options framework, we show that the degree of precision should be considered as a degree of flexibility of legal rules and we describe how it affects the value of the investment. We then analyze the trade-off between waiting and reducing the degree of precision and we show that the degree of precision of legal rules positively affects the value of waiting in lawmaking.Obsolescence, Rulemaking, Degree of Precision, Real Options.

Legal Interpretative Process and Litigants’ Cognitive Biases

For contemporary legal theory, law is essentially an interpretative and hermeneutic practice (Ackerman (1991), Horwitz (1992)). A straightforward consequence is that legal disputes between parties are motivated by their divergent interpretations regarding what law says on their case. This point of view fits well the growing evidence showing that litigants' cognitive performances display the optimistic bias or self-serving bias (Babcock and Lowenstein (1997)). This paper provides a theoretical analysis of the influence of such a cognitive bias on pretrial negotiations. However, we also consider that this effetcs is mitigated because of litigants' confidence about their own ability to predict the verdict; we model this issue assuming that litigants are risk averse in the sense of Yaari (1987), i.e. they display a kind of (rational) probability distorsion which is also well documented in experimantal economics. In a model à la Bebcuck (1984), we show that the consequences of the self-serving bias are partially consistent with the "optimistic model", but that parties' risk aversion has more ambiguous/unpredictable effects. These results contribute to explain that the believes about the result of the trial are not sufficient by themselves to understand the behaviors of litigants. As suggested by legal theory, the confidence the parties have in their believes is probably more important.litigation, self-serving bias, risk aversion

Legal versus Normative Incentives under Judicial Error

We analyze the complementarity between legal incentives (the threat of being held liable for damages) and normative incentives (the fear of social disapproval or stigma) in situations where instances of misbehavior are not perfectly observable. There may be multiple equilibria within a given legal regime, as well as multiple socio-legal equilibria. In particular, there are high stigma-high evidentiary standard regimes versus low stigma-low standard ones. We argue that this may explain some of the differences between common law and civil law regarding the notions of fault or negligence. Our analysis also provides an explanation for trends currently observed in civil-law systems, in particular the weakening of evidentiary requirements in tort cases.Social interactions, socio-legal multiplier, stigma, judicial error, evidentiary standard

Informational Externalities and Settlements in Mass Tort Litigations

This paper elaborates on a basic model of mass tort litigation, highlighting the existence of positive informational externalities a¤orded by the discovery process (as a general technology of production of evidences) in order to study when a class action is formed, or when a sequence of individual trials is more likely. We illustrate the argument that when several plaintiffs file individually a lawsuit against the same tortfeasor, the resolution of the various cases through repeated trials produces positive informational externalities. When class actions are forbidden, these externalities only benefit to the later plaintiffs (through precedents, jurisprudence...). When they are allowed, the first filer may have an incentive to initiate a class action as far as it enables him to benefit from these externalities, through the sharing of information with later filers. We provide sufficient conditions under which a class action is formed, assuming a perfect discovery process. We also show that when contingent fees are used to reward attorneys' services, plaintiffs become neutral to the arrival of new information on their case.Mass Tort Class Action, information sharing, repeated litigation, contingent fees

Customary versus Technological. Advancement Tests.

In an environment where the optimal level of care is unknown, we ask under a state of the art defense which method is better able to induce parties to undertake optimal care. Assuming courts can see a noisy signal of research activities undertaken by a defendant and some of its competitors, we ask whether courts should use a biased or unbiased average to compare care. We find that the later is better.Tort law, standard of care, customary test, technological advancement test.

Informational Externalities and Settlements in Mass Tort Litigations

This paper elaborates on a basic model of mass tort litigation, highlighting the existence of positive informational externalities afforded by the discovery process (as a general technology of production of evidences) in order to study when a class action is formed, or when a sequence of individual trials is more likely. We illustrate the argument that when several plaintiffs file individually a lawsuit against the same tortfeasor, the resolution of the various cases through repeated trials produces positive informational externalities. When class actions are forbidden, these externalities only benefit to the later plaintiffs (through precedents, jurisprudence...). When they are allowed, the first filers may have an incentive to initiate a class action as far as it enables him to benefit from these externalities, through the sharing of information with later filers. We provide sufficient conditions under which a class action is formed, assuming a perfect discovery process. We also show that when contingent fees are used to reward attorneys' services, plaintiffs become neutral to the arrival of new information on their case.Mass Tort Class Action, information sharing, repeated litigation, contingent fees.