Henrik Lando

When is the Preponderance of the Evidence Standard Optimal

This paper defines the preponderance of the evidence standard and establishes it as a benchmark, optimal under certain idealized conditions. The main conditions are: only efficiency matters (not fairness); people are risk–neutral; sanctions are socially cost–free; and a suit may be brought even if no violation of the law has occurred. Concerning the definition of preponderance of the evidence, a distinction is made between standards based on probability of guilt and standards based on the evidence. It is stressed that the latter does not include ex ante information concerning the offender’s type, and should hence not be associated with a probability of guilt in a Bayesian sense.

An attempt to incorporate fairness into an economic model of tort law

Abstract This paper incorporates fairness into a simple economic model of tort law and discusses the difficulties of doing so. People are assumed to adhere to either the negligence or the strict norm and to incur a cost if liability is not imposed in accordance with their norm. The optimal standard of negligence is determined in a trade-off between fairness and efficiency. Conditions are derived under which preferences for fairness do not affect the optimal negligence standard. The modeling difficulties concern the ad hoc nature of the fairness norms. They are argued to be inherent to the subject.

The Size of the Sanction Should Depend on the Weight of the Evidence

The paper argues that society should vary the sanction applied to a criminal defendant with the weight of the evidence against him or her. This is optimal when it is costly for society to apply sanctions, since it can yield the same degree of deterrence while requiring fewer resources to be spent on sanctioning. Furthermore, when the unfairness of convicting an innocent defendant increases with the size of the sanction, this provides a further rationale for graduating sanctions with the probability of guilt. Some objections are briefly discussed, mainly that it is inherently unfair to apply different sanctions on people, who have committed the same offense, and that the legal system will lose legitimacy if it allows sanctions to vary in the way suggested.

On the Optimal Negligence Standard in Tort Law When One Party is a Long-run and the Other a Short-run Player

It is well established that courts should and in fact do require a higher level of care by people working within their profession than by amateurs. Adequate care is simply more within reach for the professional than for the amateur (less ‘costly’). This article analyzes whether a further distinction between the professional and the amateur should influence the way courts set negligence standards: the professional is more likely to invest in acquiring information concerning negligence standards, and the professional is hence more likely than the amateur to be influenced by the standards. This issue is analyzed for the case where the professional is the injurer and the amateur is the victim. The amateur is assumed not to acquire any information concerning standards, and the behavior of the amateur is taken as exogenously fixed. Under this assumption, the negligence standard applied to the professional may be either higher or lower than first best, depending on whether care levels by the injurer and the victim are substitutes or complements and on whether, in the absence of information, the amateur over- or under-estimates the standard applied to him or her.

On the Choice Between Such Simple Mechanisms as Individual Ownership and the First-Come First-Serve Rule When Renegotiation is Costly

This article compares a set of often used simple contracts or mechanisms in terms of how well they allocate decision rights between two agents over time. A basic assumption is that agents incur a fixed cost each time they renegotiate. The contracts or mechanisms studied are: individual ownership and authority, the first-come first-serve rule, the alternating rule and the sign-up rule. One trade-off that arises is the following: when usage of the asset is flexible in the sense that it does not matter in which period it occurs, agents may rely on obtaining the asset through arriving first at some point, while when an agent needs to time and plan the use of the asset, he or she may wish to hold stronger rights or to use the sign-up rule as a simple form of contracting.

Are Delegation and Incentives Complementary Instruments

It is natural to suppose that delegation and incentives are complementary both in the sense that when more decisions are delegated to a lower level of an organizational hierarchy, more use should be made of incentives at that level, and in the sense that more use of incentives should be accompanied by more delegation. This issue is analyzed within a Principal-Agent framework in which there are two decisions to be made: an effort decision which can only be made by the Agent, and some other decision which can be made by either the Principal (i.e. be centralized) or by the Agent (i.e. be delegated). Within this framework it is shown that delegation and incentives are not necessarily complementary instruments; some decisions should be centralized when incentives are introduced.

Flexibility and uncertainty in the housing market1

Abstract This paper provides one reason why the level of trading in the housing market is volatile. We show that when uncertainty is high and can be expected to be resolved in the near future, both buyers and sellers have an incentive to postpone trading until uncertainty has been resolved. In the model, agents trade in the housing market either now, when there is uncertainty concerning the future tax rule for house owners, or later, when this uncertainty has been resolved. Under the assumption of risk neutrality (and high transaction costs), we show that any rational expectations equilibrium involves all trading being postponed. When agents are risk averse, this result holds less generally; we show that it does hold when changes in the tax rule are expected not to affect the future price of houses too strongly.

Why are Sales Law Remedies of Limited Duration

In the sales law of most countries the duration of the buyers claim for remedies is cut off by a statute of limitations. The present article argues that there is a rationale for cutting off the buyers claim, and also determines the optimal length of the cut-off period. Essentially, allowing claims strengthens the sellers incentive to provide goods of durable quality, but may lead the parties to incur costs, e.g. for inspections, to resolve the validity of claims. With the passage of time after purchase, the incentive effect decreases, while the incentives for the parties to spend resources on resolving claims remains constant. The model derives a simple expression for the optimal cut-o¤ period based on these forces, exemplifi es the usefulness of the theory by applying it to the question of whether the cut-off period should be shorter for used goods, and presents empirical evidence consistent with the theory.

Why Cut off Buyers’ Claims by a Limitation Period?

In a sales contract the buyer’s claim is cut off after the expiration of the limitation period unless the parties have specified a longer duration in their contract. This means that by default the buyer is prevented from seeking remedies although the good’s dysfunction was due to a defect present at the time of purchase. Since the existence of limitation periods lowers the incentive for the seller to deliver goods that perform according to the reasonable expectations of the buyer, limitation periods have been the subject of controversy. This article argues that establishing a limitation period as a legal default can be rationalized by the ratio of transaction costs to deterrent effect falling over time. The ratio falls for two reasons. First, a good that has endured for some period of time is, in general, likely to be closer to adequate quality than a good which breaks down shortly after purchase, and so the importance of the deterrent effect of allowing an early claim is larger than that of allowing a later claim, even when both claims are valid. Second, a larger fraction of claims that arise later is likely to be unwarranted, since the number of breakdowns that cannot be considered defects increase over time, and buyers are likely to mistake some of these breakdowns for defects. It will be argued that if claims are allowed indefinitely, the transaction costs of handling claims will at some point more than outweigh the positive incentive effect. Some empirical evidence is provided in support of the rationale.

On the Drafting of Confidentiality Agreements

This is not a theoretical paper but an application of existing law and economic contract theory to the issue of how to draft a specific kind of contract. It is addressed to practitioners and is intended for practical use. It will be part of a Wiki (as in Wikipedia) for contract drafting, which IACCM (International Association for Contract and Commercial Management) has initiated. The main theoretical aspect of the article concerns the application of the value maximization principle (the Coase theorem) to the drafting of confidentiality agreements. While the article is not theoretical, its prescriptions are open to theoretical dispute; this may especially be the case for the section on the size of damages.