SUBSTITUTING COMPLEMENTS

The presence of multiple sellers in the provision of (nonsubstitutable)complementary goods leads to outcomes that are worse than thosegenerated by a monopoly (with a vertically integrated productionof complements), a problem known in the economic literatureas complementary oligopoly and recently popularized in the legalliterature as the tragedy of the anticommons. We ask the followingquestion: how many substitutes for each complement are necessaryto render the presence of multiple sellers preferable to a monopoly?Highlighting the asymmetries between Cournot (quantity) andBertrand (price) competition and their dual models, we showthat the results crucially depend on whether firms compete bycontrolling price or quantity. Two substitutes per componentare sufficient when firms choose price. However, when firmschoose quantity, the availability of substitutes, regardlessof their number, is ineffective. Considering more complex casesof multi-complementarity, we ask the related question of howmany complements need to be substitutable and offer commentson equilibrium prices and quantities under different scenarios.     

The Cost of the Game: A Taxonomy of Social Interactions

This paper considers the role of reciprocity rules in various strategic settings. After distinguishing four typical categories of social interaction, the paper examines three forms of reciprocity constraints. An ideal rule of perfect incentive alignment (structural reciprocity) serves as a benchmark for the analysis of a golden rule of reciprocity, characterized by a mechanical linking of one player's strategy to that of the other player; and a silver rule of stochastic reciprocity, characterized by a probabilistic symmetry in the relationship between the players.     

Choice of law and legal evolution: rethinking the market for legal rules

We consider the impact of different choice-of-law regimes on the evolution of formal law. We follow an evolutionary approach to explain possible patterns of legal harmonization and competition. Some of them predict the universal diffusion of a single rule, even though not necessarily efficient. Permissive choice-of-law may lead countries to keep inefficient legal rules and firms to opt out of domestic law, leading to a dichotomy between the rules existing in the books and those utilized in commercial relationships. The emergence of such lex mercatoria may further undermine the legislative incentives to switch to more efficient rules.     

Judicial precedents in civil law systems: A dynamic analysis

This paper uses a simple dynamic model to describe the evolution of judicial decision making in civil law systems. Unlike the common law systems, civil law jurisdictions do not adopt a stare decisis principle in adjudication. In deciding any given legal issue, precedents serve a persuasive role. Civil law courts are expected to take past decisions into account when there is a sufficient level of consistency in case law. Generally speaking, when uniform case law develops, courts treat precedents as a source of “soft” law, taking them into account when reaching a decision. The higher the level of uniformity in past precedents, the greater the persuasive force of case law. Although civil law jurisdictions do not allow dissenting judges to attach a dissent to a majority opinion, cases that do not conform to the dominant trend serve as a signal of dissent among the judiciary. These cases influence future decisions in varying ways in different legal traditions. Judges may also be influenced by recent jurisprudential trends and fads in case law. The evolution of case law under these doctrines of precedents is modeled, considering the possibility for consolidation or corrosion of legal remedies and the permanence of unsettled case law.     

Litigation and legal evolution: does procedure matter?

Gordon Tullock’s critique of the common law runs against much of the conventional wisdom in the law and economics literature. In this paper we revisit one of the most controversial aspects of Tullock’s critique. By applying Tullock’s own model of rent-seeking to litigation, we study the effect of alternative procedural rules on civil litigation. Our results provide support for Tullock’s controversial critique of the common law, revealing an evolutionary bias in the production of legal rules by courts. We extend the standard litigation model to study the effects of alternative procedural systems on the evolution of the common law.     

Optimal liability for optimistic tortfeasors

As Alicke and Govorun (The self in social judgment, Psychology Press, New York, 2005, p. 85) observed, “most people are average, but few people believe it.” Optimism and other forms of inflated perception of the self lead parties to exercise suboptimal precautions when undertaking risky activities and often undermine the incentive effects of tort rules. In this paper, we show that the presence of optimism undermines several critical assumptions, upon which law and economics scholars have relied when modeling the incentive effects of tort law. We construct a model representing the incentives of “optimistic” tortfeasors and victims, and consider mechanisms for mitigating the effects of biased decision-making. We show that in the presence of optimism, comparative negligence rules are preferable to contributory negligence rules (i.e., the traditional equivalence between contributory and comparative negligence does not hold). Further, we discover the surprising conclusion that the most effective way to correct optimism may often simply be to “forgive” it, shielding optimistic individuals from liability, rather than holding them liable for the harms they cause.     

Seeking rents in the shadow of Coase

In this paper, we study a two-stage rent-seeking game. In the first stage, contestants compete à-la-Tullock; in the second stage, the winner can resell the rent à-la-Coase. We consider a complete information Tullock game in which the contestants have different valuations for the rent. The analysis focuses on the ex ante effects of a secondary market on efforts, payoffs, rent-dissipation and rent-misallocation. We show that the secondary market, while correcting possible misallocations, may exacerbate rent dissipation. In some situations, the increase in rent dissipation more than offsets the allocative advantage, so that a secondary market might reduce welfare. We further show how the effect of ex post tradeability on welfare depends on the parties’ bargaining power and valuations of the rent, also considering the case of endogenous bargaining power.     

Incentive effects of class actions and punitive damages under alternative procedural regimes

In an economic perspective, punitive damages and class actions can be viewed as sharing a common economic function—creating optimal deterrence. Building on Parisi and Cenini (Class actions for Europe: perspectives from law and economics, ELGAR, 2010), we study the effect of alternative procedural regimes on the effectiveness of punitive damages and class actions. Specifically, we compare the workings of punitive damages and class actions in the American and English (“loser-pays”) regimes. Our findings help explain the limited use and late adoption of class actions and punitive damages in Europe.