Lewis A. Kornhauser

On Justifying Cost-Benefit Analysis

This essay considers two problems in the justification of cost‐benefit analysis. First, it argues that because cost‐benefit analysis values policies, variation in imputed “values of life” are not, in theory, cause for concern. Second, it argues that the current framework of justification, which focuses on the moral justification of the formal theory of cost‐benefit analysis, is inadequate because it ignores (1) the institutional context in which cost‐benefit analyses occur, (2) the comparative nature of the justification, and (3) the fact that justification might be indirect rather than direct.

Preference, Well‐Being, and Morality in Social Decisions

This review essay of Fairness versus Welfare evaluates the strategy of incorporation that Louis Kaplow and Steven Shavell use to defend the exclusive use of welfarist criteria in the evaluation of legal rules and institutions. The strategy of incorporation includes every concern that motivates the agent with the agents preference ordering. More specifically, this extended preference ordering encompasses her concerns arising from deontological constraints and consideration of justice. The essay argues that a strategy of incorporation presents two difficulties for an analyst committed to welfarist evaluation. First, incorporating concerns about rights does not resolve the tension between ex ante and ex post evaluation of institutions. Second, extended preferences should not be aggregated as welfarism directs. The strategy of incorporation ignores the distinction between “preference” (narrowly understood) and “judgment.”

The Good, the Bad and the Lucky: CEO Pay and Skill

CEO compensation varies widely, even within industries. In this paper, we investigate whether differences in skill explain these differences in CEO pay. Using the idea that skilled CEOs should be more likely to continue prior good performance and more likely to reverse prior poor performance, we develop a new methodology to detect whether skill is related to pay. We find that highly paid CEOs are more skilled than their less well paid peers when pay is performancebased and when there is a large shareholder. This detected link between pay and skill is strong even when we examine industry-wide declines: highly paid CEOs are more likely to reverse the firms fortunes. We also examine CEO turnovers and show that the firms post-turnover performance is related to differences between the two CEOs pay levels. These results highlight conditions where pay and skill are linked, and hence identify firms where high pay appears to have no justification.

Game Theoretic Analysis of Legal Rules and Institutions

We offer a selective survey of the uses of cooperative and non-cooperative game theory in the analysis of legal rules and institutions. In so doing, we illustrate some of the ways in which law influences behavior, analyze the mechanism design aspect of legal rules and institutions, and examine some of the difficulties in the use of game-theoretic concepts to clarify legal doctrine.

Only a Dictatorship is Efficient or Neutral

Social choice theory understands a voting rule as a mapping from preferences over possible outcomes to a specific choice or choices. However, actual election procedures often do not have this structure. Rather, in a typical election, although the outcome is an assembly comprising several people occupying different seats, voters cast their ballots for individual candidates, and these candidates have their votes tallied on a seat-by-seat basis. We prove two theorems: the only efficient seat-by-seat procedure is a dictatorship and the only neutral seat-by-seat procedure is a dictatorship.

Only a dictatorship is efficient

In many, if not most, elections, several different seats must be filled, so that a group of candidates, or an assembly, is selected. Typically in these elections, voters cast their ballots on a seat-by-seat basis. We show that these seat-by-seat procedures are efficient only under extreme conditions.

Comparisons of the Incentive for Insolvency under Different Legal Regimes

Abstract This paper compares the effects of joint and several liability on capital and production decisions with the effects of several‐only liability in the context of hazardous‐waste generation. Our main result shows that increased potential liability causes firms to decrease asset exposure but may also lead firms to create less waste. First, we find that both several‐only and joint and several liability induce firms to go bankrupt more often and create more waste than is socially optimal. Then we find that, for a given level of funds, joint and several liability induces firms to go bankrupt more often and to create more waste than does several‐only liability. This implies that society will be responsible for a larger share of cleanup under joint and several liability than under several‐only liability. Finally, we show that firms with potentially higher liabilities for cleanup will raise fewer funds, creating “smaller” firms and thus the possibility of less waste generated overall.

Virtue and Self-Interest in the Design of Constitutional Institutions

Constitutional political economy addresses four questions: (1) the causal question: What explains the constitutional institutions we observe? (2) the consequential question: What consequences do constitutional institutional have? (3) the ideal question: What constitutional institutions does justice require? and (4) the design question: What constitutional institutions are best for a polity given the constraints imposed by its current situation? Answers to the ideal and design questions require a theory of behavior that predicts how individuals will behave within constitutional institutions. Analysts usually assume that this theory of behavior corresponds to the explanatory theory developed to answer the second, consequential question. This essay argues that the assumption of rational self-interested behavior as the basis for a behavioral theory is not justified.

N-Defendant Litigation and Settlement: The Impact of Joint and Several Liability

This article generalizes the analysis of settlement under joint and several liability from lawsuits involving one plaintiff and two defendants to those involving n≥2 defendants. We demonstrate that, depending upon the correlation of outcomes among the defendants, but regardless of the distribution of liability shares, joint and several liability may encourage plaintiffs to select some defendants for litigation while settling with those remaining. In particular, under joint and several liability, when each defendant is grouped with others sharing correlated outcomes, and the plaintiffs probability of success against any defendant is sufficiently high, we show that, in all Nash equilibrium, the plaintiff litigates against the defendant from each group with the smallest share and settles with all other defendants. There are a continuum of equilibria but they are all payoff-equivalent up to permutation. Plaintiffs payoff is identical in all equilibria; only the payoffs of the members with the smallest share within a group are permuted. We also show that, for sufficiently high plaintiffs probability of success, this result holds even when the defendants are allowed to form coalitions, and derive the set of offers in the behaviorally unique coalition proof Nash equilibrium; as before, these offers induce litigation against the defendant with the smallest share in each group and settlement with all other defendants.

Control of conflicts of interest in class-action suits

Concluding remarksThis paper has presented a simple model of conflicts of interest in class litigations. An agent/attorney represents a number of principals each interested only in maximizing the remedy personal to herself. The agent acts to maximize his own return which depends on the aggregate award. He (in conjunction with the defendant) must propose a settlement. The court, with knowledge of the preferences of class members but ignorant of the value of the claim, must decide whether to accept or reject the proposed settlement.The analysis has been more suggestive than conclusive. While one may object to the particular characterization of acceptable settlements or find the model of the class attorneys choice of proposed settlement too naive, these simple devices do illuminate a variety of perplexing legal and economic questions. First, the model provides insight into the general management problems of class actions. Characterizing the class action as a problem of allocating common costs suggests criteria for class certification. Courts should examine carefully the relation of joinder to the costs of litigation. Similarly, the analysis of the selection of proposed settlements by attorney and defendant suggest that attorneys fees should be calculated on the basis of the total value of the settlement and not on the monetary aspect of the award.Second, and more significantly, the model underscores the importance of the asymmetry of information that exists between court and litigants. Thus, Corollary 3.1 establishes that only substantive rules that require implausible amounts of judicial knowledge will constrain attorneys to propose acceptable settlements. This result is likely to withstand a variety of changes in the narrow model in which it is proven. For instance, it is unlikely to depend significantly on any compensation rule that depends only on the values delivered to the subclasses. Nor should a more sophisticated analysis of the choice of settlement proposal greatly alter the conclusion. Indeed, one expects that the conclusion depends little on the class-action context; substantive rules frequently require courts to act on information they do not have.Third, the model gives some insight into the procedural rules used by courts. Most obviously, the voting and intervention rules may serve in part to mitigate the informational asymmetry noted above. Intervention rules may develop additional information for the court about the value of the claims. Voting rules may reveal the preferences of various subclasses in those instances when the preferences are somewhat obscure, such as when injunctive relief is involved. The investigation of intervention rules, moreover, indicates some possible lines of further study. The interaction among legal allowability, economic feasibility, and the standing rule governing which objections are valid for which objectors is sufficiently rich to suggest that stronger results from the efficacy of intervention rules might be derived. Furthermore, intervention rules are widespread in litigation; the characterization of intervention used here may generalize to other legal contexts.Fourth, the attorney compensation rules were not carefully analyzed. As the litigation progresses the attorney learns about the value of the claim he has brought. It may be that sophisticated compensation rules that exploit the process of gaining information may better constrain the attorney than the simple rule used here.Finally, the analysis may direct attention to two distinct but potentially rich areas of economic research. As noted in the introduction, class actions constitute only one instance of a broad class of situations in which many principals are represented by a single agent. Before we understand this general class of problems, it may be necessary to investigate in some detail selected instances of it. Similarly, such investigation should demonstrate that economic analysis can illuminate legal concerns of fairness and equity as well as legal concerns for efficiency.This paper was written while the author was a Fellow at the Center for Advanced Study in the Behavioral Sciences, for whose support, the support of the Andrew W. Mellon Foundation, and that of the New York University Law School Research Program the author is grateful.