Louis Kaplow

Accuracy in the Determination of Liability

Many legal rules, notably rules of procedure and evidence, are concerned with achieving accuracy in the outcome of adjudication. In this article, we study accuracy in the conventional model of law enforcement. We consider why reducing error in determining liability is socially valuable and how error and its reduction affect the optimal probability and magnitude of sanctions.

Optimal taxation with costly enforcement and evasion

This paper analyzes the relationship between optimal taxation -- where the literature considers raising revenue with minimum distortion -- and optimal tax enforcement where much of the literature emphasizes raising revenue at the least cost. A central question concerns the extent to which revenue should be raised through higher tax rates, which distort behavior, or greater enforcement, which distorts behavior because it raises marginal effective tax rates and also entails direct resource costs. It is demonstrated that, under each of several assumptions about evasion and enforcement, some expenditure on enforcement is optimal despite its resource cost, its distortionary effect, and the availability of other revenue sources having no enforcement costs. Rules for optimal tax rates and enforcement expenditures are derived, which also indicate the marginal cost of government funds and optimal enforcement priorities for a tax collection agency

Economic Analysis of Law

This entry for the forthcoming The New Palgrave Dictionary of Economics (Second Edition) surveys the economic analysis of five primary fields of law: property law; liability for accidents; contract law; litigation; and public enforcement and criminal law. It also briefly considers some criticisms of the economic analysis of law.

On the (Ir)Relevance of Distribution and Labor Supply Distortion to Government Policy

Should the assessment of government policies, such as the provision of public goods and the control of externalities, deviate from first-best principles to account for distributive effects and for the distortionary cost of labor income taxation? For example, is the optimal extent of public goods provision smaller than indicated by the Samuelson rule because finance is distortionary? Or should environmental regulations fail to internalize externalities fully if the incidence of the regulations is regressive? It is suggested that these questions are best addressed by considering distribution-neutral implementation, in which budget balance is achieved by choosing an adjustment to the income tax that offsets the distributive impact of the policy in question. In basic cases, both distribution and labor supply distortion are moot because the target policy and the tax adjustment produce offsetting effects on each. Thus, traditional first-best principles provide good benchmarks for policy analysis after all. Moreover, even when actual implementation will not be distribution neutral in aggregate, distribution-neutral policy analysis has many conceptual and practical virtues that render it quite useful to investigators.

Moral Rules, the Moral Sentiments, and Behavior: Toward a Theory of an Optimal Moral System

How should moral sanctions and moral rewards—the moral sentiments involving feelings of guilt and of virtue—be employed to govern individuals’ behavior if the objective is to maximize social welfare? In the model that we examine, guilt is a disincentive to act and virtue is an incentive because we assume that they are negative and positive sources of utility. We also suppose that guilt and virtue are costly to inculcate and are subject to certain constraints on their use. We show that the moral sentiments should be used chiefly to control externalities and further that guilt is best to employ when most harmful acts can successfully be deterred whereas virtue is best when only a few individuals can be induced to behave well. We also contrast the optimal use of guilt and virtue to optimal Pigouvian taxation and discuss extensions of our analysis.

On the Optimal Burden of Proof

The burden of proof, a central feature of adjudication and other decision-making contexts, constitutes an important but largely unappreciated policy instrument. The optimal strength of the burden of proof, as well as optimal enforcement effort and sanctions, involves trading off deterrence and the chilling of desirable behavior, the latter being absent in previous work. The character of the optimum differs markedly from prior results and from conventional understandings of proof burdens. There are important divergences across models in which enforcement involves monitoring, investigation, and auditing. A number of extensions are analyzed, in one instance nullifying key results in prior work.

The Social Evaluation of Intergenerational Policies and its Application to Integrated Assessment Models of Climate Change

Assessment of climate change policies requires aggregation of costs and benefits over time and across generations, a process ordinarily done through discounting. Choosing the correct discount rate has proved controversial and highly consequential. To clarify past analysis and guide future work, we decompose discounting along two dimensions. First, we distinguish discounting by individuals, an empirical matter that determines their behavior in models, and discounting by an outside evaluator, an ethical matter involving the choice of a social welfare function. Second, for each type of discounting, we distinguish that due to pure time preference from that attributable to curvature of the pertinent function: utility functions (of consumption) for individuals and the social welfare function (of utilities) for the evaluator. We apply our analysis to leading integrated assessment models used to evaluate climate policies. We find that past work often confounds different sources of discounting, and we offer suggestions for avoiding these difficulties. Finally, we relate the standard intergenerational framework that combines considerations of efficiency and distribution to more familiar modes of analysis that assess most policies in terms of efficiency, leaving distributive concerns to the tax and transfer system.

Optimal sanctions and differences in individuals' likelihood of avoiding detection

Gary Becker (1968) argued that society can economize on enforcement resources by reducing the probability of apprehension while increasing sanctions, thereby maintaining the same deterrent effect at reduced cost. The implication is that optimal sanctions are maximal. This insight has been explored and qualified in a variety of subsequent work.’ This paper considers the implications for optimal enforcement policy of the possibility that individuals are not all equally easy to apprehend. Upon reflection, it seems clear that the probability of apprehension will depend not only on enforcement effort, but also on particular characteristics of the actor and the situation. For example, experienced actors may be more difficult to detect because of their expertise or easier to identify because of their track record (e.g., fingerprints on file), and an act may have been committed in front of witnesses who know the actor or when no one else was present. The factors that make an individual easy or difficult to apprehend may be known to the individual but not to the government, particularly before the government expends some enforcement effort or apprehends the individual. Thus, when choosing its level of enforcement effort for a given act, the government may not know the experience of the actor or the identity of witnesses (if any). In such cases, it will not know in advance the effectiveness of a given level of enforcement effort. Rather, it will know, based on experience, only the portion of all committing such an act who will be apprehended. As a result, individuals committing acts that appear the same to the government will face different probabilities of apprehension. We analyze op-

The Optimal Probability and Magnitude of Fines for Acts that Definitely are Undesirable

Even when society would wish to deter all acts of some type, such as tax evasion and many common crimes, the benefits from deterrence often will be insufficient to justify the expenditures on enforcement that would be required to deter everyone. If some individuals are not deterred, however, they will bear risk when fines are employed as a sanction. As a result, it may be optimal to reduce total risk-bearing costs by reducing the number of individuals who bear any risk. This can be accomplished by increasing enforcement above the level that would be justified considering only the benefits of deterrence and the direct costs of enforcement. Another possibility is that it may be optimal reduce the risk borne by those who act, by employing fines below the maximum feasible level. This latter result constitutes an instance in which the well-known implication of Beckers analysis that it is optimal to employ extreme sanctions for all offenses is invalid.

Should Legal Rules Favor the Poor? Clarifying the Role of Legal Rules and the Income Tax in Redistributing Income

In our 1994 article in this Journal, we demonstrated that legal rules should not be adjusted to disfavor the rich and favor the poor in order to redistribute income, because the income tax and transfer system is a more efficient means of redistribution. In this article, we revisit our argument and others that favor relying on the income tax system to redistribute income, and we then focus on qualifications to our argument that we previously offered. In particular, we elaborate on a qualification that is the subject of Chris Sanchiricos article in this issue of the Journal and explain why it has only a tangential bearing on the question whether legal rules should favor the poor and why it is of doubtful practical importance.