Fernando Gomez

Realistic Standards: Optimal Negligence with Limited Liability

We study the standard economic model of unilateral accidents under the assumption that the injurers have limited assets. We identify a second‐best optimal rule that selects as due care the minimum of first‐best care and a level of care that takes into account the wealth of the injurer. We show that such a rule in fact maximizes the precautionary effort by a potential injurer. The idea is counterintuitive: being softer on an injurer, in terms of the required level of care, actually improves the incentives when he or she is potentially insolvent. We extend the basic result to an entire population of potentially insolvent injurers and find that the optimal general standards of care do depend on wealth and the distribution of income. We also show that, under certain conditions, wealthier populations should be subject to higher general standards of care in the case of accidents.

Civil and criminal sanctions against blackmail: an economic analysis

Abstract The rationale behind the legal prohibition of blackmail and its effects have worried lawyers, economists and philosophers. The paper tries to offer a new perspective on the issue by introducing a simple game-theoretic model of the blackmail interaction under three alternative legal regimes: blackmail as a legally enforceable contract, blackmail as a voidable contract, and criminal blackmail. We show that the first two are substantially equivalent, and are unable to prevent a successful blackmail equilibrium outcome. Making blackmail a crime can instead alter this result for some parameters of the model. We also explore the justification for criminalizing blackmail and find it, in line with previous Law and Economics literature on blackmail ( Ginsburg and Shechtman (1993) , Coase (1988) ), in the correction (albeit incomplete) of misaligned incentives to acquire information and the revelation and no revelation outcomes involved in the blackmail transaction. This justification could be undermined by the advantages of what seems to be a superior legal regime in terms of efficiency: no legal regulation of blackmail. This hands-off system can also destabilize, in a one-shot interaction, the successful blackmail outcome. In plausible dynamic interactions, however, it fails to do so and, in fact, its effects actually resemble those of blackmail as an enforceable contract. This result might explain why most legal systems stick to the criminalization of blackmail.

The Harmonization of Contract Law through European Rules: a Law and Economics Perspective

The current process of attempting to harmonize Contract Law in Europe – both at the level of the existing consumer Acquis, but also affecting national Contract Laws of the European countries – is not just a challenging technical task for legal scholars in Private Law and Comparative Law. Even beyond the new rules and principles that may become the Law governing contractual relationships for firms and consumers – already a tremendous scope – the process involves a fundamental institutional choice that will shape economic and social development in Europe for a long time. From a Law and Economics perspective, the process can bring substantial benefits, in terms of improved and more efficient default rules for contractual transactions, removal of barriers to cross-border trade, and achieve economies of scale in legal reform. But the current process may well impose costs, arising from several factors: The disregard for heterogeneous preferences in European societies, and also divergent economic conditions; the responses from the contracting parties and the implementation of rules by very diverse judiciaries as an essential part of Contract Law in action; the inadequate attention paid to the economic perspectives on contracting behaviour and the empirical evidence on how firms and consumers interact in real-world markets. Résumé: La tentative actuelle d’harmoniser – au niveau de l’acquis communautaire concernant le consommateur ainsi qu’au niveau national, dans les droits des contrats des Etats membres – le droit des contrats en Europe n’est pas seulement une tâche très technique pour les spécialistes de Droit Privé et de Droit Comparé. Au-delà des nouveaux règles et principes qui peuvent un jour devenir le droit régissant les relations contractuelles des entreprises et consommateurs – ce qui représente déjà une grande envergure – ce processus implique un choix fondamental institutionnel qui marquera le développement économique et social en Europe pour longtemps. D’une perspective de Droit et Économie, ce processus peut apporter d’importants avantages en termes de règles améliorés et plus efficaces concernant les transactions contractuelles, la démolition d’obstacles au commerce transfrontalier et peut, en plus, atteindre des Économies D’échelle en réforme juridique. Mais le processus actuel occasionnera aussi des dépenses, et cela à cause de plusieurs facteurs: l’indifférence quant à la hétéro* I am grateful to participants at seminars on the role of (internationally) mandatory rules in a multi-level European system of private law at the University of Amsterdam, and on the future of European contract law – the Draft Common Frame of Reference – at ERA for helpful comments and suggestions. All remaining errors are, of course, my own. ** Professor of Law and Economics, Universitat Pompeu Fabra, Barcelona, Spain. E-mail: fernando.gomez@upf.edu. généité préférée par les sociétés Européennes ainsi que des conditions économique divergents; les réponses des parties contractantes et la mise en œuvre de règles par différents juristes en tant que partie essentielle d’un droit des contrats en action; l’attention inappropriée prêtée à la perspective économique sur le comportement contractuel et la preuve empirique concernant la question d’interaction d’entreprises et consommateur dans les marchés réels. Kurzfassung: Der derzeitige Harmonisierungsprozess in Europa – und zwar sowohl auf EG-Ebene als auch in den nationalen Vertragsrechten – stellt nicht nur Privatrechtler und Rechtsvergleicher vor eine Herausforderung. Hier geht es auch nicht allein um die neuen Normen und Prinzipien, die die Vertragsbeziehungen von Verbrauchern und Unternehmen regeln sollen – schon dies eine ungemein anspruchsvolle Aufgabe. Vielmehr wird auch eine grundlegende Entscheidung institutioneller Art getroffen, die die wirtschaftliche und soziale Entwicklung Europas für lange Zeit erheblich beeinflussen wird. Aus Sicht der ökonomischen Analyse des Rechts ist wichtig, dass der Prozess einerseits erhebliche Vorteile bringen kann und zwar, indem dispositives Vertragsrecht verbessert und effizienter gestaltet wird, indem Behinderungen im grenzüberschreitenden Verkehr abgebaut und indem Skalenerträge bei Gesetzgebung und Rechtsreform erzielt werden. Genauso wichtig ist jedoch umgekehrt, dass dieser Prozess auch erhebliche Kosten mit sich bringen kann, dies auf Grund mehrerer Faktoren: Die Regeln mögen fortan weniger gut auf die heterogenen Präferenzen in verschiedenen Regionen Europas zugeschnitten sein und auch auf unterschiedliche wirtschaftliche Rahmenbedingungen; sowohl die Vertragsparteien als auch die Gerichtssysteme mögen auf die einheitlichen Regeln unterschiedlich reagieren, wodurch deren Vorund Nachteile unterschiedlich zum Tragen kommen können; es mögen auch die Erkenntnisse der Verhaltensökonomie nicht hinreichend berücksichtigt werden, desgleichen die empirischen Erkenntnisse über Verhaltensweisen von Unternehmen und Verbrauchern in den tatsächlich existierenden Märkten.

Soft Negligence Standards and the Strategic Choice of Firm Size

In risky activities the extrinsic incentives for care are driven mainly by liability rules and by the asset levels of potential injurers. When the level of assets of the potential injurer is endogenous, we show that softer standards outperform the traditional standards based on first-best behavior, as well as strict liability: firms have incentives to choose to be larger, the lower the standards are. We also show that liability standards should increase in the costs of reducing assets and liability exposure. This means, counterintuitively, that when other instruments that restrict firms’ size are relaxed, the optimal response is to relax, and not to tighten, liability standards. Also, in a regulatory competition setting we find that a country lowering its regulatory standards will not attract worse firms in terms of size. On the contrary, the best firms in terms of assets and care will be those benefiting from regulatory competition.

Law and Choice in Consumer Contracts: Views from Law and Economics

Choice in Contract Law, including consumer contracts, has become a focal point for theoretical and policy debate on contracting. In this essay we do not cover all issues of choice surrounding optional sets of Contract Law rules such as CESL. At the same time we do not intend to limit the reach of some of our ideas to CESL. But we do intend to explore several issues concerning choice of legal rules in settings of contracts between firms and consumers, as being revealed by the debate following the publication of CESL. We frame our contribution along two different, albeit related, lines. One is—sorry for the lack of modesty—our own previous work on legal harmonization and European Contract Law. In a first wave of papers we analyzed how efficiency-minded lawmakers should set legal standards in settings of pre-existing divergent legal systems and where building markets across national borders can be expected to produce social welfare gains. The second wave addressed more directly optional sets of legal rules governing contractual interactions, and tried to provide an stylized model of firm’s choice when confronted with optional European rules and diverse national rules. Now we introduce a broader set of economic arguments concerning Law and choice in consumer contracts. The article will be organized as follows: in Sect. 28.2 we present the issue of choice in consumer contracting. In Sect. 28.3 we address the view that optional sets of rules would produce choice only for the wrong (having consumers’ welfare in mind) reasons. Section 28.4 refers to the effectiveness of choice in the presence of optional rules, focusing on the behaviour of the firm. Section 28.5 analyzes the claims of insufficient (for firms) choice in the current legal framework of consumer contracts in Europe, and present economic arguments to undermine the soundness of those claims. Section 28.6 briefly concludes.

Termination as a Remedy in the Common European Sales Law: A Law and Economics Approach

The aim of this paper is to contribute to the understanding of the implications of CESL for European Contract Law by looking into the remedies available to the parties for the breach of a sales contract, and in particular to examine the legal regime of termination for breach of contract. Our approach emphasizes the strategic and economic dimensions induced by the legal solutions in CESL as this is a particularly promising way to evaluate the likely impact of proposed legal solutions. We focus on the heterogeneity of the effects that termination may induce both in terms of incentives and overall social costs. Our findings lend some support to the policy option in CESL of a more liberal termination regime for consumers in B2C contracts than for commercial parties. Résumé: Le but de cet article est de contribuer à la compréhension des implications de DECV (droit européen commun de la vente) pour le droit européen des contrats en examinant les sanctions disponibles au profit des parties en cas de violation des obligations du contrat de vente, et en particulier d’explorer le régime juridique de la résolution du contrat pour inexécution. Notre approche souligne les dimensions stratégiques et économiques induites par ce régime, dans la mesure où celles-ci constituent une voie instructive pour évaluer l’incidence probable des solutions proposées. Nous mettons en avant l’hétérogénéité des effets que la résolution peut entraîner, en termes à la fois d’incitations et de coûts sociaux. Nos conclusions viennent au soutien du choix politique du DECV en faveur d’un régime de résolution plus libéral pour les consommateurs dans les contrats B2C que pour les professionnels. Zusammenfassung: Ziel dieses Beitrages ist es, die Auswirkungen des GEK auf das Europäische Vertragsrecht in Fragen der Rechtsbehelfe bei Vertragsbruch zu Fernando Gómez: Professor of Law and Economics, Universitat Pompeu Fabra, E ˗ Mail: fernando.gomez@upf.edu Marian Gili-Saldaña: Assistant Professor of Law, Universitat Pompeu Fabra, E ˗ Mail: mangels.gili@upf.edu ERCL 2014; 10(3): 331–364

Insurance and Tort: Coordination Systems and Imperfect Liability Rules

Three methods compete, both across and within different legal systems, for coordinating insurance or like benefits (social security, employer provided benefits, etc.) and Tort liability awards: Collateral Source Rule (cumulation), collateral benefits offset (deduction), and subrogation of insurer or provider. It is known in the economics literature that the optimal insurance contract contains subrogatory provisions (Shavell 1987, Sykes 2001). In the presence of a liability system, however, it has been overlooked that subrogation and its alternatives, however, make sense only in a world in which liability rules don’t operate perfectly. Under an imperfect strict liability regime, solely subrogation can induce optimal incentives for risk coverage. In addition, collateral offset reduces, compared to the other two alternative regimes, injurer’s incentives to take care. Under an uncertain negligence rule incorporating causation subrogation still outperforms the other regimes, and especially the benefits deduction rule. Finally, the paper also discusses in informal terms the apparently strong advantage in terms of administrative costs of the collateral offset over subrogation, and points out at several factors that might seriously undermine this opinion. The paper casts doubts upon the trend favoring the elimination of the Collateral Source Rule and adoption of deduction systems, which has already been shown empirically to reduce deterrence (Rubin and Shepherd 2007).