WEBINAR TELE – THEORETICAL EUROPEAN LAW & ECONOMICS

Co-authored with Severin Lenhard (University of St. Gallen, Switzerland) and Francesco Parisi (University of Minnesota, USA)
Abstract: We study settlement bargaining under three alternative fee-shifting rules: the American Rule, the English Rule, and an optional fee-shifting regime in which the defendant chooses whether the case will proceed under the American or the English Rule. The defendant knows whether his conduct gives rise to liability while the plaintiff only has a noisy signal. This two-sided asymmetric information creates scope for strategic misrepresentation: defendants who face liability may try to pass as if they do not, while plaintiffs with weak evidence may act as if they have a strong case. Optional fee-shifting has an information-generating function which, however, can be distorted by strategic efforts to send misleading signals. When litigation costs are similar for both parties, optional fee-shifting reduces litigation rates more effectively than either the American or the English Rule alone.

Abstract: This paper develops a theoretical framework that integrates media reporting behavior into the optimal law enforcement model. Individuals cannot directly observe actual enforcement levels; instead, they rely on media information both to assess implemented law enforcement and to make private protective decisions that reduce potential crime harm. This information, however, may be biased. We show that when the potential harm from crime is low, demand for crime news is limited, and the media reports the true enforcement level. In this scenario, the government can influence deterrence by shaping the media's reporting strategies. On the other hand, when the potential harm from crime is high, the media misreports strict enforcement as weak, while individuals' demand for crime-related news increases as they seek to inform their private protection decisions. In this case, individuals remain uninformed about the actual enforcement level, and the government cannot influence deterrence. Our extensions demonstrate that self-interested governments with punitive preferences may choose strict enforcement even when the media portrays it as weak, creating misperception equilibria. Furthermore, media-exaggerated crime risks increase political demand for punitive sanctions through majoritarian voting.

co-author: Xinyu Hua (Hong Kong University of Science & Technology)

Abstract : The mediator’s proposal” (“mediator’s offer”) is a well-known procedure used by mediators and alternative dispute resolution (ADR) practitioners. The mediator proposes settlement terms and then each side communicates to the mediator whether they accept or reject the terms. The dispute is settled if both parties accept, but remains unresolved if either party rejects. This paper presents a game-theoretic analysis of the mediator’s proposal, with a particular focus on the impact of confidentiality: With confidential mediation, the mediator does not reveal the parties’ responses to the proposal; with open mediation, the responses are revealed. Confidentiality raises the settlement rate (and increases social welfare) for two reasons: (1) parties are less concerned about being perceived as weak, and (2) each party can learn more about the other’s type only when accepting the mediator’s proposal. Confidential mediation may however intensify competition (and reduce social welfare) should settlement fail.

Abstract: The economic analysis of tort law views damages rules as affecting the game being played. All kind of such rules have been shown to implement
the social welfare maximizing outcome as a Nash equilibrium. The present paper examines tort relations where, for whatever reasons, social welfare differs from relational welfare. Damages rules are proposed, which implement socially desired outcomes, i.e., outcomes that maximize social welfare, even if these outcomes fail to maximize relational welfare. The proposed rules allow the plaintiff to claim disgorgement of the enrichment caused by the defendant's deviation from the desired outcome whenever this enrichment exceeds the harm caused by it. The paper considers both simultaneous as well as sequential action choice.

Co-authored with Edward Iacobucci (University of Toronto, Canada)

Abstract : Economic analysis views voluntary exchange as mutually beneficial, assuming that each party would not agree to a transaction unless it improved their welfare. However, this assumption often overlooks the role of power asymmetries, where one party has significant control over outcomes that disproportionately affect the other. In many such contexts, the law intervenes—not solely for moral reasons or to prevent externalities, but to address deeper economic concerns about the creation and exploitation of power. This paper explores the circumstances under which the law restricts voluntary exchanges due to concerns about power, even when those exchanges appear beneficial to the involved parties. We define power as arising when one party has decision-making authority that imposes limited consequences on themselves but profound consequences on a counterparty. While the creation of such power can be valuable—for example, in employment relationships where employers must have the discretion to terminate underperforming employees—its exploitation can undermine the very incentives that justify granting such discretion. This creates a paradox: power is both necessary and potentially dangerous. To resolve this tension, legal and institutional constraints often render certain entitlements inalienable. By introducing frictions to transactions, these constraints prevent the supervisor’s decision-making authority from being subverted by monetary or in-kind transfers, thereby preserving the integrity and purpose of the power relationship. This enables the creation of a power relation by limiting the types of agreements that can be struck in its shadow. We argue that the prohibition of monetary payments—and, in some cases, of specific in-kind transfers—is essential to the maintenance of socially valuable power structures. Yet such prohibitions are also costly, as they force parties to rely on less efficient forms of exchange or forego potentially welfare-enhancing agreements. We show how legal, contractual, and social rules cope with this tradeoff, and why seemingly inefficient restrictions are actually necessary to preserve the long-term benefits of power relationships. This analysis extends and refines existing accounts of power in economics, particularly in contexts of contract incompleteness and asymmetric decision-making authority. Unlike prior work, we highlight the role of inalienability and the prohibition of transfers—monetary or otherwise—as structural features that support, rather than limit, the exercise of socially valuable power.

co-authored with Kevin Collins (Washington University in Saint Louis, USA)

Abstract

Abstract : I provide an axiomatic characterization of a criminal punishment scheme and use it to critique retributivist theories of criminal punishment and defend consequentialist theories. I argue that to have a retributivist punishment scheme, it is necessary to rank order all crimes completely and transitively according to their moral gravity. (Necessary but not sufficient; one still has to grapple with the cardinality problem.) I question whether it is possible for a retributivist ranking to be complete or to satisfy transitivity. That is, I question whether retributivist punishment can satisfy ordinal proportionality (let alone cardinal proportionality). I point out that my critique has less bite for consequentialism. I therefore question whether it is possible to have a pure/true retributivist punishment scheme. My approach parallels the development of utility theory, and I turn critiques of utility theory against retributivism.

co-authored with Avraham Tabbach (Tel Aviv University, Israel)
Abstract : In various legal scenarios, litigants often seek court approval for settlements that are questionable, yet mutually advantageous for the parties. Examples abound: in class actions, settling parties frequently seek excessive attorneys' fees; in plea-bargains, a lenient sentence is often pursued; in tort cases, parties seek the sealing of settlements, and so forth. This paper explores the dynamics of this "bargain" between litigants and judges, in the presence of asymmetric information. On one hand, judges approving requested benefits may facilitate settlements, but on the other hand, such approvals can foster further demands. Our analysis reveals that while granting these benefits may lead to a substantial reduction in trial rates, judges should generally deny such requests (unless they are not aligned with the interests of the judiciary). Further, we propose practical mechanisms that capitalize on this dynamic to incentivize truthful benefit demands and facilitate settlements that judges could approve.

Abstract : A jury is informed of the amount of leniency or concession promised to an eyewitness for testifying against a defendant, which provides information on the credibility of the testimony. This paper shows that a higher concession amount reduces the credibility even though a higher concession attracts honest testimonies as well as perjuries. When making an offer to a potential eyewitness, a prosecutor therefore faces the trade-off that a higher amount of concession produces more testimonies (both truth and perjury), but reduces the testimonies' credibility. By endogenizing the payment for testimony, this paper shows that an increase in the probability of detecting perjury or in the perjury sanction may increase the incentive to purchase testimonies and have the unintended consequences of increasing the chance of perjury and increasing the chance of wrongly convicting a defendant. A court that cares about the Type 1 and Type 2 errors should adjust the standard of the proof higher when the prosecutor can pay for testimonies. Under the optimal standard of proof, the court benefits from a higher probability of perjury detection.

co-authored with Alessandro De Chiara (University of Barcelona, Spain), Juan José Ganuza (University Pompeu Fabra), Fernando Gómez (University Pompeu Fabra) and Adrian Segura (University Pompeu Fabra).

Abstract. This paper presents a framework where sellers, an online platform with monopoly power, and consumers transact. We aim to study the interaction between the imposition of liability on the platform, the reputational sanctions exerted by consumers, and the internal measures adopted by the platform to keep in check the sellers, whenever a product generates losses to consumers. We show that introducing direct legal liability of the platform may have both positive and negative effects for safety investments. Additionally, when sellers are heterogeneous (with respect to their sensitivity to the sanctions from consumers or from the platform), legal liability on the platform will have an impact on the selection of participating sellers, although the sign and size of the effect largely depend on parameter values.

co-authored with Giuseppe Dari-Mattiacci (University of Amsterdam, Faculty of Law)

Abstract: We show how legal uncertainty can enable simple legal standards to produce socially useful differentiation in incentives that better accommodates heterogeneity. First, legal uncertainty smooths out the discontinuities in incentives that coarse legal standards would otherwise produce. Second, individuals rationally form beliefs about legal standards in part by projecting their own circumstances. We apply our analysis to a range of issues in legal design, including the choice between rules and standards, the optimal degree of legal complexity, and the choice between “sanctions” (e.g., the negligence rule) and “prices” (e.g., strict liability).