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,

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

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

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.

THE CORE OF PURE ECONOMIC LOSS

Should loss of earnings be compensated? The established law and economics wisdom considers pure economic loss as a transfer of wealth from the victim to a third party, whose earnings increase as a consequence of the accident. Such transfers do not amount to a social loss and, hence, should not be compensated. We revisit these arguments and show that the social loss should be calculated by taking into account that: (a) pure economic loss often involves impairment costs resulting from the fact that valuable resources cannot be temporarily used; and (b) the third-party earnings come at the cost of increased capacity. This increased capacity mitigates the expected harm and, hence, is a form of precaution. By taking into account these factors, we show that most pure economic loss cases do result in a socially relevant loss. In addition, we argue that the absence of a social loss is a necessary, but not sufficient, condition for the denial of compensation. The victim (or a third party) may have actually paid for protection against purely private losses. Thus, compensation should be awarded irrespective of whether national law treats the case under tort or contract (where compensation is undisputed). Finally, we offer considerations on the optimal design of liability rules.economic loss, financial loss, tort, damage, compensation,

When Will Judgment Proof Injurers Take Too Much Precaution?

Judgment proof injurers can be expected to take less than optimal precaution, as they bear only a part of the accident loss. However, it has been showed that under certain conditions the judgment proof problem can lead to overprecaution. We argue that overprecaution can never occur in magnitude models (where more precaution only reduces the magnitude of the harm) as opposed to the probability models traditionally used in the literature (where more precaution only reduces the probability of the accident). We also analyze mixed models and discuss the policy implications of our analysis.insolvency, judgment proof problem, liability, bankruptcy, overprecaution,

Disappearing Defendants v. Judgment Proof Injurers: Upgrading the Theory of Tort Law Failures

Do injurers’ insolvency and victims’ reluctance to sue affect accident prevention in the same way? Are these circumstances less of a problem under the negligence rule than under strict liability? We argue, contrary to the literature, that the answer is, in most cases, negative and make three main points. First, the judgment proof problem and the disappearing defendant problem are shown to have different effects on injurers’ behavior and hence yield dissimilar levels of social welfare. Second, when these two problems occur simultaneously they may have offsetting effects. Third, the negligence rule is superior to strict liability only under some conditions, which are not always satisfied when cause in fact is considered. In this case, we find that social welfare under negligence may actually be less than, the same as, or greater than under strict liability. Our model encompasses different precaution technologies as well as monetary vs. non-monetary precautions

Unexpected Effects of Expected Sanctions

The economic analysis of law enforcement holds that greater expected sanctions lead to greater compliance. The literature on positive and negative incentives holds that rewards and sanctions – or carrots and sticks – have identical first-order incentive effects. We extend the basic model of law enforcement in three ways. We allow agents to opt out of the regulatory regime, we allow for enforcement errors, and we model agents who vary in at least one trait in addition to their cost of compliance. We show that following these three realistic modifications of the basic model, the two fundamental conclusions just described do not hold. Greater expected sanctions do not necessarily lead to greater compliance; carrots and sticks are not substitutes in their incentive effects. We also show that adding taxes and subsidies to the regulatory toolkit does not expand the set of achievable outcomes