A. Mitchell Polinsky

Corruption and optimal law enforcement

Abstract We analyze corruption in law enforcement: the payment of bribes to enforcement agents, threats to frame innocent individuals in order to extort money from them, and the actual framing of innocent individuals. Bribery, extortion, and framing reduce deterrence and are thus worth discouraging. Optimal penalties for bribery and framing are maximal, but, surprisingly, extortion should not be sanctioned. The state may also combat corruption by paying rewards to enforcement agents for reporting violations. Such rewards can partially or completely mitigate the problem of bribery, but they encourage framing. The optimal reward may be relatively low to discourage extortion and framing, or relatively high to discourage bribery.

Amenities and property values in a model of an urban area

The dependence of property values on a schedule of ‘amenities’ is examined in the case of a ‘small’ and ‘open’ city and in the case of a ‘closed’ city. Questions concerned with the predictability and interpretation of changes in equilibrium property values following an improvement in amenities are considered in these cases. The problem of identifying the implicit demand for amenities from a single equilibrium rent schedule is also addressed.

Punitive Damages: An Economic Analysis

Punitive damages law is one of the more controversial features of the American legal system. Trial and appellate courts have been struggling for many years to develop a coherent set of principles for assessing when punitive damages should be awarded, and at what level. In this Article Professors Polinsky and Shavell use economic reasoning to provide a relatively simple set of principles for answering these questions, given the goals of deterrence and punishment. With respect to the deterrence objective, upon which their Article focuses, their main point is that punitive damages ordinarily should be awarded if, but only if, an injurer has a significant chance of escaping liability for the harm he caused. When this condition holds, punitive damages are needed to offset the deterrence-diluting effect of the chance of escaping liability. (They mention as well a deterrence rationale for punitive damages that does not rest on the possibility of escape from liability -- that punitive damages may be needed to remove the socially illicit gains that individuals obtain from malicious acts.) Professors Polinsky and Shavell also discuss the tension between the implications of the deterrence objective and present punitive damage law, including the laws emphasis on the reprehensibility of a defendants conduct and on a defendants wealth. With respect to the punishment objective, Professors Polinsky and Shavell stress that the imposition of punitive damages on corporations may fail to serve its intended purpose (although the imposition of punitive damages on individual defendants accomplishes punishment in a straightforward manner). This is primarily because the payment of punitive damage awards by corporations often does not lead to greater punishment of culpable employees, but instead punishes the corporations shareholders and customers.

The Demand for Housing: A Study in Specification and Grouping

The low estimates of the income elasticity of housing demand obtained when individual households are the unit of observation are theoretically reconciled with the high estimates obtained when metropolitan-wide averages are used. The omission of the housing price term biases the ungrouped (whether stratified by metropolitan areas or not) estimate(s) downward and the grouped estimate upward. The inclusion of a metropolitan-wide average housing price term worsens the downward bias of the unstratified ungrouped estimate. The corresponding price elasticity estimate is biased upward (toward zero). These results are interpreted in terms of the theory of residential location and used to explain the empirical evidence. For the evidence considered, the true income and price elasticities are approximately .75 and -.75, respectively.

An Empirical Reconciliation of Micro and Grouped Estimates of the Demand for Housing

T is not uncommon for estimates of the income elasticity of housing demand based on metropolitan-wide averages to be 60% to 90% higher than estimates based on individual household data. Price elasticity estimates also vary greatly among micro and grouped studies, although no pattern has emerged. Such differences cannot be explained by the unit of observation since the grouping of observations in a correctly specified equation does not by itself affect the expectations of the estimates. Therefore, it seems likely that the housing demand equations have been misspecified, possibly in a number of different ways. The purpose of this paper is to show empirically that frequently made specification errors can account for the very different estimates obtained from micro and grouped equations, and that the correctly specified equations are reconcilable.1 Previous studies have not been able to examine these issues properly because of the absence in the micro demand equation of a housing price term that varies with each observation.2 A common practice has been to use micro housing expenditure and income data from one source in conjunction with a metropolitan-wide index of housing price from a completely different source. Aside from disparities in the data bases, this practice does not take into account the fact that the unit price of housing (for a standardized bundle of land and structure) varies substantially by location within a city. Such variation occurs because of differences among sites, for example, with respect to workplace accessibility. Thus, individuals with similar incomes residing at different locations would be expected to purchase different quantities of housing because they face different unit prices of housing. The present study is able to overcome this problem by developing a new technique for estimating the appropriate unit price of housing for each micro observation and then applying it to a unified data base. Section II describes the correctly specified and the misspecified micro and grouped demand equations to be estimated. In section III the technique for calculating micro housing prices is derived. Section IV discusses the data. Section V presents and analyzes the empirical results. Finally, in section VI the results are summarized and qualified.

A Model of Optimal Fines for Repeat Offenders

This paper analyzes optimal fines in a model in which individuals can commit up to two offenses. The fine for the second offense is allowed to differ from the fine for the first offense. There are four natural cases in the model, defined by assumptions about the gains to individuals from committing the offense. In the case fully analyzed it may be optimal to punish repeat offenders more severely than first-time offenders. In another case, it may be optimal to impose less severe penalties on repeat offenders. And in the two remaining cases, the optimal penalty does not change.

Products Liability, Consumer Misperceptions, and Market Power

This paper compares alternative liability rules for allocating losses from defective products when consumers under- estimate these losses and producers may have some market power. If producers do not have any market power, the rule of strict liability .leads to both the first-best accident probability and industry output. If producers do have some market power, strict liability still leads to the first-best accident probability, but there will now be too little output of the industry. It is shown that if market power is sufficiently large, a negligence rule is preferable. Under this rule, firms can still be induced to choose the first-best accident probability, but now the remaining damages are borne by consumers. Since consumers underestimate these damages, they buy more than under strict liability. However, there is a limit to how much the negligence rule can encourage extra consumption. It is shown that if market power is sufficiently large, the rule of no liability may then be preferred to the negligence rule. Without any liability imposed, producers will not choose the first-best accident probability. However, this may be more than compensated for by the increased output of the industry.

The Welfare Implications of Costly Litigation for the Level of Liability

important result in this theory is that, assuming litigation is costless, the rule of strict liability with compensatory damages leads the injurer to choose the appropriate level of care. This follows because, under strict liability with compensatory damages, the injurers problem-minimizing his cost of care plus his cost of liability-is identical to societys problem. The analysis of strict liability with compensatory damages is affected in two ways when litigation costs are taken into account. First, it is no longer true (as was implicitly assumed in the preceding argument) that whenever a victim suffers harm he will sue the injurer; only victims whose losses exceed their cost of litigation will sue. This difference could lead the injurer to take less care (because he will not have to pay for all of the losses he causes) or more care (because, by reducing the harm suffered by victims, he can reduce the number who sue). Second, the social problem

Aligning the Interests of Lawyers and Clients

The potential conflict of interest between lawyers and clients is well known. If a lawyer is paid for his time regardless of the outcome of the case, the lawyer may wish to bring the case even when it is not in the best interest of the client, may spend more hours working on the case than the client would want, and may reject a settlement when the client would be better off if it were accepted. Alternatively, if the lawyer is compensated according to the conventional contingent fee arrangement--under which he is paid a fraction of any trial award or settlement but bears all of the cost of litigation--the lawyer may have an insufficient incentive to bring the case, may spend too little time working on it if it is brought, and may encourage a settlement when the client would be better off going to trial. In this article we propose a method of compensating lawyers that overcomes the conflict of interest between the lawyer and the client. Our system is a variation of the conventional contingent fee system, but, in contrast to that system, we would have the lawyer bear only a fraction of the cost of litigation--the same fraction that the lawyer obtains of the award or settlement. We demonstrate that when the fraction of the cost that the lawyer bears equals the fraction of the award or settlement that he obtains, he will have an incentive to do exactly what a knowledgeable client would want him to do with respect to accepting the case, spending time on the case, and settling the case. Under our modified contingent fee system, a third party would compensate the lawyer for a certain fraction of his costs, in return for which the lawyer would pay that party an up-front fee. In this way, the client would not bear any costs, even if the case were lost, just as under the conventional contingent fee system. Copyright 2003, Oxford University Press.

On offense history and the theory of deterrence

Abstract This article uses a two-period version of the standard economic model of deterrence to study whether sanctions should depend on an individual’s record of prior convictions—his offense history. The principal contribution of the article is to demonstrate that it may be optimal to treat repeat offenders disadvantageously because such a policy serves to enhance deterrence: When an individual contemplates committing an offense in the first period, he will realize that if he is caught, not only will he bear an immediate sanction, but also—because he will have a record—any sanction that he bears in the second period will be higher than it would be otherwise.