Center for Contract and Economic Organization
Uncertain legal standards are pervasive but understudied. The key theoretical result showing an ambiguous relationship between legal uncertainty and optimal deterrence remains largely undeveloped, and no alternative conceptual approaches to the economic analysis of legal uncertainty have emerged. This Article offers such an alternative by shifting from the well-established and familiar optimal deterrence theory to the new and unfamiliar probabilistic compliance framework. This shift brings the analysis closer to the world of legal practice and yields new theoretical insights. Most importantly, lower uncertainty tends to lead to more compliant positions and greater private gains. In contrast, the market for legal advice tends to reduce compliance over time—a trend that a regulator may counter either by clarifying the law or by reiterating the law’s continuing ambiguity. If detection is uncertain, the probabilistic compliance framework reveals why, contrary to the prevailing view, the standard damages multiplier should be used to counter detection uncertainty but not legal uncertainty. The Article also reconciles economists’ and lawyers’ understanding of probabilities, highlights the challenges of modeling risk-bearing costs resulting from uncertain legal commands, and provides theoretical support for gain-based sanctions beyond the limited settings where the complete deterrence theory has justified their use thus far.
Yale Journal on Regulation, Summer 2017; Columbia Law and Economics Working Paper No. 525
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/1948