Alon Klement

The Economics of Stigma: Why More Detection of Crime May Result in Less Stigmatization

This paper establishes that there may be an inverse relation between the rate of detection and the deterrent effects of stigma. The more people are detected and stigmatized, the less deterrence there may be. This conclusion is based on a search model in which the costs of searching for law‐abiding partners increase with the rate of detection. The model distinguishes between willing stigmatizers, who refrain from business or social contacts with someone they believe has committed an offense (whether he is detected or not), and unwilling stigmatizers, whose main concern is not to be associated with the stigmatized yet are indifferent to whether that person has actually committed an offense. The inverse relation between the rate of detection and the deterrent effect of stigma is possible when the percentage of unwilling stigmatizers in the population is sufficiently high.

Does Information about Arbitrators’ Win/Loss Ratios Improve Their Accuracy?

This paper examines how providing litigants with information about arbitrators’ win/loss ratios affects arbitrators’ incentives in deciding the cases before them in an impartial and unbiased manner. We show that if litigants are informed about arbitrators’ past decisions, then arbitrators might want to make an incorrect decision when a correct decision would raise the suspicion that they are biased. Therefore, providing information about arbitrators’ past decisions might create adverse incentive effects and reduce the accuracy of arbitration. We compare the accuracy of arbitrators’ decisions under different arbitrator selection procedures and discuss the implications for the design of arbitration rules by arbitration and dispute resolution providers and by court-administered arbitration programs.

Judicial Decision Making: A Dynamic Reputation Approach

We seek to contribute to an understanding of how judicial elections affect the incentives and decisions of judges. We develop a theoretical model suggesting that judges who are concerned about their reputation will tend to decide against their prior decisions as they approach elections. That is, judges who imposed a large number of severe sentences in the past and are thus perceived to be strict will tend to impose less severe sentences prior to elections. Conversely, judges who imposed a large number of light sentences in the past and are thus perceived to be lenient will tend to impose more severe sentences prior to elections. Using data from the Pennsylvania Commission on Sentencing, we test, and find evidence consistent with, the predictions of our model.

The Class Defense

Lawmakers, courts, and legal scholars have long recognized that consolidating the claims of dispersed plaintiffs with similar grievances may promote justice and efficiency. In this Article, we argue that justice and efficiency also mandate that similarly positioned defendants be provided with an adequate procedure for consolidating their claims. We explore the circumstances under which costly litigation and collective action problems will prevent dispersed defendants with plausibly valid defense claims from confronting plaintiffs in court and analyze the troubling fairness and deterrence implications of such failure. We then demonstrate that aggregated claims will rectify the imbalance between the common plaintiff and defendants. To achieve defendant consolidation, we propose to implement what we label as the class defense device. We outline the novel features that will make the class defense both effective and fair - i.e., that will provide class attorneys with proper incentives, adequately protect the due process rights of absentee defendants, and keep to a minimum the omnipresent risk of collusion. Finally, we show that the class defense procedure affords would-be defendants greater protection than its alternatives. Specifically, we demonstrate that the class defense is a superior framework for resolving many disputes - such as lawsuits against credit card and cable companies - that currently take the form of class actions.

Civil Justice Reform: A Mechanism Design Framework

The main goal of the court system is to differentiate between those who obeyed the law and those who did not. We describe a mechanism design framework that facilitates the characterization of a set of procedural mechanisms that would minimize the resources used to achieve this goal. This framework can also help to formulate and evaluate procedural rules, and to identify necessary and sufficient conditions for deciding disputes according to substantive law with minimal costs of litigation and delay. We illustrate our approach using three examples: fee-shifting rules, discovery rules, and third-party alternative dispute resolution mechanisms.

Products Liability, Signaling and Disclosure. Comment

In their paper, Daughety and Reinganum (henceforth, DR) consider a model with a monopolistic firm that produces either safe or unsafe products (Daughety and Reinganum [2008]). Safety is exogenous. It is not chosen or controlled by the monopolist. The monopolist knows whether it produces safe or unsafe products, but consumers do not. In the terminology of Bayesian games, the safety of the monopolists product is the monopolists type. A monopolist that produces safe products is henceforth referred to as a safe monopolist, or of the safe monopolist type, and a monopolist that produces unsafe products is henceforth referred to as the unsafe monopolist, or of the unsafe monopolist type. It is assumed that the demand for the monopolists product is strictly increasing in the perceived safety of the product. DR consider two variants of their model: one in which the marginal cost of production is increasing in the products safety, and another in which the marginal cost of production is decreasing in the products safety. Both assumptions are plausible. This is because the total cost of production is composed of the direct cost of production, which presumably is higher for a safer product, and of liability cost, which is higher for an unsafe product. If the difference between the direct costs of production of a safe and an unsafe product is smaller than the difference between the expected liability associated with an unsafe and a safe product, then the marginal cost of production of the safe product is higher. But if it is the other way around, then the marginal cost of production of the unsafe product is higher. The monopolist can affect the perceived safety of its product in two different ways: (i) it can fully disclose the safety of its product, at a cost, or (ii) it can signal the safety of its product through the price it charges. For simplicity, it is assumed that (1) the production of both safe and unsafe products enhances social welfare, but that (2) a high-safety product is socially preferred to a lowsafety product. The first result of the paper is straightforward.

In-Kind Transfers and the Law of Torts

The state and charitable institutions provide in-kind services for distributive purposes. Such services generally benefit recipients but in particular instances may also cause them harm. We discuss the optimal tort regime that should apply when such harm occurs. We show that the optimal level of care applicable to such services is lower than if the same services are provided by ordinary injurers in the general market. We further demonstrate that the social optimum can be induced by a lenient gross-negligence standard, whereas the standard regimes of ordinary negligence and strict liability both lead to inefficient outcomes. These conclusions are robust to variations in the distribution of recipients’ valuations of the service and to possible agency problems in the state or charity.

Diffusion of Legal Innovations: The Case of Israeli Class Actions

In law and economics, it is standard to model legal rules as an opportunity structure. The law’s subjects maximize expected profit, given these constraints. In such a model, the reaction to legal innovation is immediate. This is not what we observe after class action is introduced into Israeli law. For a long time, the new remedy is almost unused. Then the adoption process gains momentum. We discuss alternative options for theorizing the effect. We find that market entry is not only explained by the available information about profitability, but also by the adoption pattern of others. When deciding whether to bring further claims, law firms also react to the experiences they have made themselves. We thus explain the pattern by individual and social learning, and cannot exclude mere social imitation.

Consumer Fraud, Misrepresentation and Reliance

It is a deeply-entrenched principle in the law of misrepresentation that a false statement can be actionable only upon a showing of reliance. In order to prevail, plaintiffs must establish not only that a misstatement was wrongly conveyed, but also that they were exposed to the information, acted upon it, and suffered harm as a consequence. A mere potential for deception is not enough; plaintiffs must show that they were actually deceived. Yet, despite the reliance requirements intuitive appeal, this paper argues that it should be abandoned. It shows that conditioning recovery on reliance leads to inadequate deterrence of misrepresentations, which in turn results in a host of inefficient effects: from allocative inefficiency to wasteful investments and rentseeking activities. Instead of reliance, recovery should depend on a showing of a ‘price impact’, namely that the statement triggered an increase in market price. Once an effect on price is established, liability should extend to all representees—relying and non-relying alike. * Tel Aviv University, Buchman Faculty of Law † Tel Aviv University, Berglas School of Economics ‡ Interdisciplinary Center (IDC) Herzliya, Radyzner Law School

Private Selection and Arbitrator Impartiality

This paper examines the effect of private selection of arbitrators over arbitrators’ incentives in deciding the cases before them in an impartial and unbiased manner. We argue that the private selection of arbitrators might adversely affect the accuracy of arbitrators’ decisions. Arbitrators might want to make an incorrect decision when a correct decision may raise the suspicion that they are biased. We compare the accuracy of arbitrators’ decisions under different arbitrator selection procedures and discuss the implications for the design of arbitration rules by arbitration and dispute resolution providers.