Foreword

The collection of articles in this Special Issue is based on an international conference on Advances in the Behavioral Analysis of Law: Markets, Institutions, and Contracts that took place on December 8, 2009 at the University of Haifa Faculty of Law in Israel. The conference addressed cuttingedge legal issues at the intersection of law, economics, and psychology from a diverse set of viewpoints, bringing together scholars engaged in both theoretical and experimental behavioral analyses of law

On Contractual Defaults and Experimental Law and Economics

Sloof et al.\u27s [2006] elegant study of default breach remedies illustrates both the potential and limitations of experimental law and economics (ELE). Potentially, the rigorous methodology of experimental economics can provide fully controlled tests of relationships among legally significant variables. Human behavior is context-dependent, however. The validity of ELE would therefore be limited if it were, for example, to disregard legal institutions and context in an automatic adherence to all conventions of experimental economics

Understanding Behavioral Antitrust

Behavioral antitrust – the application to antitrust analysis of empirical evidence of robust behavioral deviations from strict rationality – is increasingly popular and hotly debated by legal scholars and the enforcement agencies alike. This Article shows, however, that both proponents and opponents of behavioral antitrust frequently and fundamentally misconstrue its methodology, treating concrete empirical phenomena as if they were broad hypothetical assumptions. Because of this fundamental methodological error, scholars often make three classes of mistakes in behavioral antitrust analyses: First, they fail to appreciate the variability and heterogeneity of behavioral phenomena; second, they disregard the concrete ways in which markets, firms, and other institutions both facilitate and inhibit rational behavior by antitrust actors; and, third, they erroneously equate all deviations from standard rationality with harm to competition. After establishing the central role of rationality assumptions in present-day antitrust and reviewing illustrative behavioral analyses across the field – from horizontal and vertical restraints, through monopolization, to merger enforcement practices – the Article examines the three classes of mistakes, their manifestation, and their consequences in antitrust scholarship. It concludes by offering two sets of essential lessons that the behavioral approach already can offer to make antitrust law and policy more realistic and effective in protecting competition: One concerning the value of case-specific evidence in antitrust adjudication and enforcement, the other showing how antitrust law can and should account for systematic and predictable boundedly rational behavior that is neither constant nor uniform

Boundedly Rational Entrepreneurs and Antitrust

This article examines entrepreneurial activity and its implication for policy and antitrust law from a behavioral perspective. In particular, the analysis here focuses on the role of two sets of behavioral phenomena—overconfident beliefs and risk-seeking preferences—in facilitating boundedly rational entrepreneurship. Boundedly rational entrepreneurs may engage in entrepreneurial activity, such as the starting of new business ventures, under circumstances in which rational entrepreneurs would decline to do so. Consequently, overconfident or risk-seeking entrants compete with their more rational counterparts and create a post-entry landscape that differs markedly from the picture assumed by traditional economic accounts of entrepreneurial activity. The behaviorally informed analysis of entry sheds new light on the dynamics of competition among entrepreneurs and on its implications for policy and antitrust law

The Methodology of the Behavioral Analysis of Law

This article examines the behavioral analysis of law, meaning the application of empirical behavioral evidence to legal analysis, which has become increasingly popular in legal scholarship in recent years. Following the introduction in Part I, this Article highlights four central propositions on the subject. The first, developed in Part II, asserts that the efficacy of the law often depends on its accounting for relevant patterns of human behavior, most notably those studied by behavioral decision scientists. This Part therefore reviews important behavioral findings, illustrating their application and relevance to a broad range of legal questions. Part III then argues that the behavioral approach is empirically driven, engaging in both the theoretical application of extant empirical findings to the law and the generation of new, legally relevant, experimental and observational evidence. As this Part shows, moreover, each of these behavioral genres possesses different methodological strengths and weaknesses, and they therefore both substitute for and complement one another, in different respects. Part IV explains that the behavioral approach encounters a series of gaps between the type of empirical evidence provided by behavioral decision researchers and the data required to resolve legal questions. Legal scholars should therefore be aware of these gaps, which may limit the usefulness of extant behavioral evidence for legal analysis. This Part also addresses what legal scholars may do to overcome these gaps and distinguish real gaps from imaginary ones. Part V completes the body of the Article, arguing that the behavioral analysis of law is simultaneously normatively neutral and normatively relevant. It is normatively neutral because the behavioral analysis of law is not committed to any specific legal goal or value system. This fundamental neutrality, in turn, makes the behavioral approach a versatile instrument, which can help generate important normative conclusions in the service of scholars evaluating the law based on any normative criteria - from justice to welfare and more. Part VI concludes

The Innocence Effect

Nearly all felony convictions—about 95 percent—follow guilty pleas, suggesting that plea offers are very attractive to defendants compared to trials. Some scholars argue that plea bargains are too attractive and should be curtailed because they facilitate the wrongful conviction of innocents. Others contend that plea bargains only benefit innocent defendants, providing an alternative to the risk of a harsher sentence at trial. Hence, even while heatedly disputing their desirability, both camps in the debate believe that plea bargains commonly lead innocents to plead guilty. This Article shows, however, that the belief that innocents routinely plead guilty is overstated. We provide varied empirical evidence for the hitherto neglected innocence effect, revealing that innocents are significantly less likely to accept plea offers that appear attractive to similarly situated guilty defendants. The Article further explores the psychological causes of the innocence effect and examines its implications for plea bargaining. Positively, we identify the striking cost of innocence, wherein innocents suffer harsher average sanctions than similarly situated guilty defendants. Yet our findings also show that the innocence effect directly causes an overrepresentation of the guilty among plea bargainers and an overrepresentation of the innocent among those who choose trial. In this way, the innocence effect beneficially reduces the rate of wrongful convictions—including accepted plea bargains—even when compared to a system that does not allow plea bargaining. Normatively, our analysis finds that both detractors and supporters of plea bargaining should reevaluate, if not completely reverse, their long-held positions to account for the causes and consequences of the innocence effect. The Article concludes by outlining two proposals for minimizing false convictions, better protecting the innocent, and improving the plea bargaining process altogether by accounting for the innocence effect

Unilateral, Anticompetitive Acquisitions of Dominance or Monopoly Power

The prohibition of certain types of anticompetitive unilateral conduct by firms possessing a substantial degree of market power is a cornerstone of competition law regimes worldwide. Yet notwithstanding the social costs of monopoly modern legal regimes refrain from prohibiting it outright. Instead, competition laws prohibit monopolies or dominant firms from engaging in those types of anticompetitive conduct that amount to monopolizing or an abuse of dominant position. Importantly, anticompetitive conduct can take place both on the road to monopoly and, later on, once substantial market power has been achieved. Legal regimes nevertheless tend either to ignore or pay only limited attention to the unilateral conduct of firms lacking substantial market power. This Article argues, however, that such conduct merits legal attention where it led or would lead if unstopped to the acquisition of substantial market power. Specifically, competition law regimes that fail to incorporate an appropriately-designed unilateral conduct liability in this area are unable to address some increasingly important classes of potentially harmful unilateral practices, such as those that concern cheap exclusion, multi-product (but not necessarily dominant) firms, network tipping effects, and more. This failure, moreover, may lead to distortions in other areas of unilateral conduct policy in these regimes that seek to compensate for the absence of any liability for the conduct of non-dominant firms. The analysis concludes by drawing together the lessons from the critical evaluation of the EU and the U.S. approaches for the appropriate design of unilateral conduct regimes worldwide

The Methodology of the Behavioral Analysis of Law

This article examines the behavioral analysis of law, meaning the application of empirical behavioral evidence to legal analysis, which has become increasingly popular in legal scholarship in recent years. Following the introduction in Part I, this Article highlights four central propositions on the subject. The first, developed in Part II, asserts that the efficacy of the law often depends on its accounting for relevant patterns of human behavior, most notably those studied by behavioral decision scientists. This Part therefore reviews important behavioral findings, illustrating their application and relevance to a broad range of legal questions. Part III then argues that the behavioral approach is empirically driven, engaging in both the theoretical application of extant empirical findings to the law and the generation of new, legally relevant, experimental and observational evidence. As this Part shows, moreover, each of these behavioral genres possesses different methodological strengths and weaknesses, and they therefore both substitute for and complement one another, in different respects. Part IV explains that the behavioral approach encounters a series of gaps between the type of empirical evidence provided by behavioral decision researchers and the data required to resolve legal questions. Legal scholars should therefore be aware of these gaps, which may limit the usefulness of extant behavioral evidence for legal analysis. This Part also addresses what legal scholars may do to overcome these gaps and distinguish real gaps from imaginary ones. Part V completes the body of the Article, arguing that the behavioral analysis of law is simultaneously normatively neutral and normatively relevant. It is normatively neutral because the behavioral analysis of law is not committed to any specific legal goal or value system. This fundamental neutrality, in turn, makes the behavioral approach a versatile instrument, which can help generate important normative conclusions in the service of scholars evaluating the law based on any normative criteria - from justice to welfare and more. Part VI concludes

Illustrating a Behaviorally Informed Approach to Antitrust Law: The Case of Predatory Pricing

One of the core assumptions of the traditional economic approach to antitrust law is that competitors are perfectly rational, profit-maximizing, decision makers. Sometimes, this assumption serves as a useful simplification of business behavior, providing an effective foundation for antitrust doctrine. At other times, however, assuming strictly rational behavior on the part of competitors is not “approximately right” but, instead, “perfectly wrong.” In these latter cases, the reliance on the perfect rationality assumption can lead scholars to mispredict market behavior and, possibly, advocate erroneous prescriptions for antitrust policy. In contrast, a behaviorally informed approach to antitrust law is based on scientific findings regarding actual human behavior. The hallmark of behavioral law and economics is the replacement of homo economicus – the perfectly rational actor – with a “boundedly rational” decision maker who, apart from being affected by emotion and motivation, has only limited cognitive resources. To function effectively in a complex world, boundedly rational actors must rely on various simplifying cognitive heuristics. Even when they are, overall, beneficial and often correct, however, these mental rules-of-thumb inevitably lead people to make some systematic decision errors, such that their behavior deviates from rational actor models in predictable ways. Potentially, empirical findings on boundedly rational judgment and decision making can provide better descriptions of market behavior and more effective prescriptions for competition policy than those based on the often unrealistic theoretical assumptions of rational actor models. In the context of antitrust law, moreover, systematic deviations of market participants’ behavior from neo-classical assumptions are especially important: Actual behavioral patterns of judgment and decision making reveal that certain anticompetitive practices are more or less likely to occur than the traditional economic approach deems. In considering Section 2 predatory pricing behavior, for instance, if managers of dominant firms were shown to be risk seeking – that is, engaging in negative expected value business practices – under certain circumstances, some costly predatory pricing could occur even where recoupment prospects are dim. With respect to antitrust law in general, a behavioral approach may even reveal that some business practices are altogether more or less anticompetitive than previously thought