Fundamental Characteristics of Incentive Streams Created by Legal Systems

Abstract

The law shapes people’s behaviour by creating incentives. For example, tort law induces motorists to drive carefully by making them pay compensation for the accidents they may cause. This study analyses the way the law can create incentives in those cases in which the courts or the administrative bodies that have to apply the law have imperfect information concerning parties’ behaviour – for example it might be difficult to ascertain which party to an accident was negligent – and in those cases in which injurers lack sufficient assets to pay damages to victims – for example the harm caused might be so great that it exceeds the injurer’s wealth. The analysis concerns various areas of accident and contract law and examines a number of problems by employing formal economic models and discussing their results, both in relation to the existing literature on law and economics and concerning to some policy implications. Chapter 1 and chapter 10 provide an introduction and conclusions respectively. Chapter 2 illustrates the economic theory of accident law and provides and intellectual history thereof. Chapter 3 discusses a rather methodological issue - the definitions of care and activity level in the economic theory of torts -, shows that the traditional definitions are inappropriate, provides more precise definitions and constructs on them an explanation for the choice of different legal rules over time and in different areas of torts. Chapter 4 studies a specific tort law rule, comparative negligence, and shows that this rule might have a filtering effect on accidents, as it prevents the most harmful accident and leads to smaller social losses than other rules. Chapter 5 to 7 deal with the problem of insolvency and show that insolvency creates different effects on injurer’s behaviour depending on whether injurers can reduce the probability of the accident or the magnitude of the harm by means of precaution. Moreover, different solutions available within tort law and some regulatory solutions are examined. Chapter 8 presents a study of vicarious liability in Roman and in modern law and focuses on the cost of monitoring borne by the vicariously liable party, an issue overlooked in the literature. Chapter 9 studies the relationship between employers and employees and analyses the incentive properties of different contract arrangements: efficiency wages, conditional bonuses and punitive damages. It is shown that efficiency wages are never superior to the remaining two mechanisms and therefore lack an economic justification as means to induce employee’s effort.