Alexander Stremitzer

Promises and Expectations

We investigate why people keep their promises in the absence of external enforcement mechanisms and reputational effects. In a controlled laboratory experiment we show that exogenous variation of second-order expectations (promisors expectations about promisees expectations that the promise will be kept) leads to a significant change in promisor behavior. We provide clean evidence that a promisors aversion to disappointing a promisees expectation leads her to keep her promise. We propose a simple theory of lexicographic promise keeping that is supported by our results and nests the findings of previous contributions as special cases.

Insolvency and Biased Standards - The Case for Proportional Liability

We analyze liability rules in a setting where injurers are potentially insolvent and where negligence standards may deviate from the socially optimal level. We show that proportional liability, which sets the measure of damages equal to the harm multiplied by the probability that it was caused by an injurers negligence, is preferable to other existing negligence-based rules. Moreover, proportional liability outperforms strict liability if the standard of due care is not set too low. Our analysis also suggests that courts should rely on statistical evidence and bar individualized causal claims that link the harm suffered by a plaintiff to the actions of the defendant. Finally, we provide a result which might be useful to regulators when calculating minimum capital requirements or minimum mandatory insurance for different industries.

Stretch It But Don't Break It: The Hidden Cost of Contract Framing

Recent research suggests that loss-framed contracts are an effective instrument for principals to maximize the effort of their agents. Framing effects arise from defining quantity and quality thresholds that vary the salience of losses and gains even while preserving the payoff equivalence of the underlying contract. While plausible interpretations of prospect theorys loss-aversion insight suggest that a loss frame would lead to more effort, we show that contract thresholds also exert a norm-framing effect on performance that can trump the impact of loss aversion. Loss framing therefore carries a risk: poorly selected thresholds may reduce effort. Principals may prefer to avoid this risk by offering contracts that impose no threshold at all.

The Robustness Case for Proportional Liability

Abstract In important areas like medical malpractice and environmental torts, injurers are potentially insolvent and courts may make errors in determining liability (e.g. due to hindsight bias). We show that proportional liability, which holds a negligent injurer liable for harm discounted with the probability that the harm was caused by the injurer’s negligence, is less susceptible to these imperfections and therefore socially preferable to all other liability rules currently contemplated by courts. We also provide a result which might be useful to regulators when calculating minimum capital requirements or minimum mandatory insurance for different industries.

Der Einwand rechtmäßigen Alternativverhaltens - Rechtsvergleich, Ökonomische Analyse und Implikationen für die Proportionalhaftung

The German doctrine of Rechtmassiges Alternativverhalten is a defence which allows the tortfeasor to steer free from any compensatory claim for harm that would also have occurred if he had exercised due care. A comparative legal analysis reveals that this doctrine and its equivalent in common law, often viewed as an issue of causation, are recognized across jurisdictions. Its purpose is to prevent over-compensation. From an economic perspective, over-compensation can be shown to be harmful in a negligence based liability system, if court decisions are bound to be imprecise due to difficulties in fact-finding. Hence, under this very realistic scenario, the doctrine serves an important efficiency purpose by improving the quality of negligence based liability rules. However, the defence and its functional equivalents are not generally recognized by courts if the hypothetical course of action under due care is uncertain. This is because under standard rules of proof, the court would often have to rule against the plaintiff if the latter cannot establish up to a certain probability threshold that the defendants deviation from due care caused the harm. In this case the courts often rule against the defendant, effectively ignoring the defence. This reintroduces the identified inefficiencies due to over-compensation. Assessing liability proportional to the probability that harm was caused by the defendant can be shown to solve this problem. Moreover, the article agues that the application of the proportional liability rule also has a strong doctrinal appeal. It follows from the consistent application of the doctrine of Rechtmassges Alternativverhalten and the causation requirement to situations of uncertainty.

On and Off Contract Remedies Inducing Cooperative Investments

A party dissatisfied with the contractual performance of a counterparty is typically able to pursue a variety of legal recourses. Within this apparent variety are two fundamental alternatives. The aggrieved party may (i) affirm the contract and seek money damages or specific performance, or (ii) disaffirm the contract with the remedy of rescission and seek restitution. This simple dichotomy of contract remedies applies broadly in both common law and civil law practice. We show here that this remedial regime allows parties to write simple contracts that induce first-best cooperative investments. Copyright 2012, Oxford University Press.

Exploiting Plaintiffs Through Settlement: Divide and Conquer – Comment

CHE AND SPIER [2008] consider a model of a single defendant and N plaintiffs where the total cost of litigation is fixed on the plaintiff side. As litigation cost is shared among the suing plaintiffs, a plaintiff’s settlement decision creates a negative externality on the others. Failure to internalize this externality can be exploited by the defendant by making discriminatory settlement offers (divide-and-conquer strategy; see SEGAL [2003]). Compared to the benchmark case without externalities, this leads to a redistribution in favour of the defendant and dilutes the defendant’s incentives to take precaution. Although redistribution has no welfare effect per se, it nevertheless creates incentives for plaintiffs to organize (at a cost) in order to internalize the externalities. The welfare effect of diluted incentives depends on whether the defendant was over- or underdeterred to begin with. Assuming that incentives were right in the benchmark, policies that promote the internalization of externalities (e.g., by facilitating the organization of plaintiffs) or prevent defendants from exploiting them (e.g., by prohibiting discriminatory offers) are potentially welfare-increasing. Yet, even then, there is a trade-off, as these policies lead to lower settlement rates in a setting of asymmetric information, which pushes up society’s cost of litigation. CHE AND SPIER [2008] find these results robust in several variations of their leading case. In the following, I shall briefly sketch their analysis but then focus on an extension – not considered in their paper – under which the results are reversed.

If you Give Shareholders Power, do they Use it?

Whether expanding voting rights of shareholders leads to improved corporate governance is a matter of controversy. BEBCHUK [2005, p. 836] argues that increased voting rights lead to better-aligned incentives of managers. ROMANO [1993, pp. 56f.] has a more skeptical view and maintains that, in the absence of mechanisms to overcome free riding, the expansion of shareholder voting rights is unlikely to increase the clout of shareholders. BAINBRIDGE [2006, p. 1751], on the other hand, fears that such rights will be exercised and could be abused by publicity-seeking shareholders. LISTOKIN [2010] presents empirical evidence and concludes that increased voting rights are indeed ineffective. His argument starts out from the observation that in the 1980s and early 1990s many U.S. states enacted anti-takeover protection (ATP) statutes. They were mostly implemented as default regimes differing in one important aspect: whether to opt out of the provisions requires managers’ consent or not. The evidence shows that those states that do not grant managers veto powers do not experience higher rates of opt-out. According to Listokin, this can be explained by one of the two following hypotheses: Either ATP statutes are efficient, so that shareholders do not wish to opt out of them, or shareholders, despite their voting rights, still do not have enough power. If the former hypothesis were true, he claims that one would expect to see contractually created ATP in those states without ATP statutes. Yet, evidence suggests that this is not the case. Hence, the author concludes that failure to opt out of ATP must be due to the fact that increased voting rights are ineffective. In the following I present a few explanations that are equally consistent with the observed empirical data but do not lead to the author’s conclusion. They still need to be addressed in order to make the author’s point more compelling.