Steven Shavell

Risk Sharing and Incentives in the Principal and Agent Relationship

This article studies arrangements concerning the payment of a fee by a principal to his agent. For such an arrangement, or fee schedule, to be Pareto optimal, it must implicitly serve to allocate the risk attaching to the outcome of the agents activity in a satisfactory way and to create appropriate incentives for the agent in his activity. Pareto-optimal fee schedules are described in two cases: when the principal has knowledge only of the outcome of the agents activity and when he has as well (possibly imperfect) information about the agents activity. In each case, characteristics of Pareto-optimal fee schedules are related to the attitudes toward risk of the principal and of the agent.

On Moral Hazard and Insurance

I. Introduction, 541.—II. The model, 542.—III. Moral hazard when care is not observed by the insurer, 544.—IV. Moral hazard when care is observed by the insurer, 550.—Appendix, 561.

A MODEL OF THE OPTIMAL USE OF LIABILITY AND SAFETY REGULATION

A model of the occurrence of accidents is used to examine liability and safety regulation as means of controlling risks. According to the model, regulation does not result in the appropriate reduction of risk--because the regulator lacks perfect information--nor does liability result in that outcome--because the incentives it creates are diluted by the chance that parties would not be sued for harm done or would not be able to pay fully for it. Thus, neither liability nor regulation is necessarily better than the other, and as is stressed, their joint use is generally socially advantageous.

Liability for Harm Versus Regulation of Safety

Liability in tort and the regulation of safety are considered as means of controlling accident risks using the instrumentalist, economic method of analysis.Four general determinants of the relative social desirability of liability and regulation are first identified--differences in knowledge about risky activities as between a social authority and private parties; the possibility that parties would not be able to pay fully for harm done; the chance that they would not face suit for harm done; and administrative costs. On the basis of analysis of these determinants, it is suggested that the choices observed to be made between liability and regulation are, when broadly viewed, socially rational: Notably, activities that create the risk of the typical tort and that are little regulated characteristically display features leading us to say that they ought to be controlled mainly by liability. And activities that are much regulated -- especially ones involving significant hazards to health or to the environment -- ought to be directly constrained in important ways, taking into account their usual features.

The Judgment Proof Problem

Parties who cause harm to others may sometimes turn out to be ‘judgment proof,’ that is, unable to pay fully the amount for which they have been found legally liable.1 This possibility is an important and realistic one. Certainly individuals may readily be imagined to cause personal injury or property damage resulting in judgments that exceed their assets plus any liability insurance coverage; and the same is true of firms.2

The Optimal Payment of Unemployment Insurance Benefits over Time

The primary purpose of unemployment insurance (U.I.) is no doubt to insure individuals against loss of wage income. However, U.I. is commonly believed to adversely affect job search behavior and to lengthen the duration of unemployment. With these issues in mind, this paper asks how U.I. benefits ought to be paid out over time. Specifically, the paper uses a theoretical model to determine characteristics of the time sequence of benefits that maximizes the expected utility of the unemployed, given that they act in a self-interested way and given the total size of the U.I. budget.

Corruption and optimal law enforcement

Abstract We analyze corruption in law enforcement: the payment of bribes to enforcement agents, threats to frame innocent individuals in order to extort money from them, and the actual framing of innocent individuals. Bribery, extortion, and framing reduce deterrence and are thus worth discouraging. Optimal penalties for bribery and framing are maximal, but, surprisingly, extortion should not be sanctioned. The state may also combat corruption by paying rewards to enforcement agents for reporting violations. Such rewards can partially or completely mitigate the problem of bribery, but they encourage framing. The optimal reward may be relatively low to discourage extortion and framing, or relatively high to discourage bribery.

Acquisition and Disclosure of Information Prior to Sale

This article analyzes incentives to acquire information about the value of things before sales transactions, and voluntary versus required disclosure of such information. Two distinctions are emphasized: whether information is mere foreknowledge or instead can raise value -- has social value; and whether it is sellers or buyers who decide to acquire information. The main conclusions in the model are that voluntary disclosure results in socially excessive incentives to acquire information; mandatory disclosure is socially desirable for sellers; but for buyers, the freedom to keep silent may be needed to spur acquisition of socially desirable information.

The Optimal Structure of Law Enforcement

WHEN society endeavors to control undesirable behavior, it employs methods that differ in fundamental ways, and one wonders why it has made the choices that it evidently has. Why should society sometimes engage in outright prevention of acts-as when a policeman stops a person from shooting a gun-and other times employ the threat of sanctions to deter unwanted behavior-as when the state exacts fines for violation of safety regulations or imposes liability for causing harm? And when sanctions are applied, why should they sometimes be monetary in nature and at other times take the form of imprisonment? Further, why should society sometimes rely on private citizens to report violations of law, as happens under the tort system, and at other times resort to police or other public enforcement agents for that purpose? I will suggest in this article that these basic questions about the observed structure of law enforcement can be answered by reference to the theoretically optimal structure of enforcement; the actual pattern of enforcement seems to be broadly consistent with the pattern that is most effective in theory. To this end, I begin in Section I by defining socially desirable and socially undesirable acts. Next, in Section II, I set out what may be considered the principal dimensions of law enforcement and then describe important means of enforcement (including tort law, criminal law, and safety regulation) in terms of these dimensions. In Section III, I consider the determination of the theoretically optimal structure of en-

Amenities and property values in a model of an urban area

The dependence of property values on a schedule of ‘amenities’ is examined in the case of a ‘small’ and ‘open’ city and in the case of a ‘closed’ city. Questions concerned with the predictability and interpretation of changes in equilibrium property values following an improvement in amenities are considered in these cases. The problem of identifying the implicit demand for amenities from a single equilibrium rent schedule is also addressed.