regulation vs litigation - carmen

7/23/2019 Regulation vs Litigation - Carmen

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Regulation vs.Regulation vs.

LitigationLitigation


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Regulation vs. LitigationRegulation vs. Litigation

RegulationRegulation Designed to __________ behaviorDesigned to __________ behavior

Liability RulesLiability Rules generally aimed at resolving private disputesgenerally aimed at resolving private disputes But the rules have evolved to perform aBut the rules have evolved to perform a

regulatory function:regulatory function: __________________________________________behaviorbehavior

Eiciency of the ommon La!" hypothesisEiciency of the ommon La!" hypothesis #ociety has a mi$ of liability rules and#ociety has a mi$ of liability rules and

regulationsregulations

%hy&%hy&


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v , y,vs. Regulation of Safetyvs. Regulation of Safety

(1984)(1984) Eiciency:Eiciency:

De'ned as ma$imi(ingDe'ned as ma$imi(ing ___#ocial !elfare________#ocial !elfare_____

#ocial !elfare: B)#ocial !elfare: B)

*arties" bene'ts from activities +B,*arties" bene'ts from activities +B, osts of harms and controller action +,osts of harms and controller action +,

-nternal.e$ternal harms-nternal.e$ternal harms

*revention activities*revention activities

___administration e$pense____________administration e$pense_________

/oal:/oal: 0se mi$ of litigation 1 regulation that0se mi$ of litigation 1 regulation that

ma$imi(es B ) ma$imi(es B )


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Liability vs. RegulationLiability vs. Regulation

%hat aects relative ability of%hat aects relative ability of

controller +regulator or privatecontroller +regulator or private

parties through the courts, toparties through the courts, to

ma$imi(e social !elfare&ma$imi(e social !elfare&

2323 Dierence in 4no!ledge about ris4yDierence in 4no!ledge about ris4yactivitiesactivities

5353 6bility to pay for harm6bility to pay for harm7373 hance that parties !ill not be suedhance that parties !ill not be sued

8383 9agnitude of administrative costs9agnitude of administrative costs


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1. Dieren!e in "no#le$ge about ris"y1. Dieren!e in "no#le$ge about ris"ya!tivitiesa!tivities

-f private parties have _better info__ legal-f private parties have _better info__ legal

system is bettersystem is better

-f regulators have _better info_ reg3 is better-f regulators have _better info_ reg3 is better

;bvious _ ris4s: *rivate parties 4no! best;bvious _ ris4s: *rivate parties 4no! best

_


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Liability vs. RegulationLiability vs. Regulation%. &rivate 'arties ability to 'ay for%. &rivate 'arties ability to 'ay for

harmharm

___=udgement *roof *roblem______:___

=udgement *roof *roblem______:*arty is*arty isunli4ely to be able to pay for the full cost ofunli4ely to be able to pay for the full cost of

harm createdharm created less incentive to avoidless incentive to avoidcreation of the harmcreation of the harm

___9oral


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%. &rivate 'arties ability to 'ay for%. &rivate 'arties ability to 'ay for

harmharm

Regulation has an advantage !hereRegulation has an advantage !here>udgment proof problems agency>udgment proof problems agency

problems or moral ha(ard is li4elyproblems or moral ha(ard is li4ely

to occurto occurE$amples: E$$on ?alde( *ostE$amples: E$$on ?alde( *ost

?alde(+6gency *roblem,?alde(+6gency *roblem,


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. *han!e that !ul'able 'arties #ill. *han!e that !ul'able 'arties #illnot be sue$not be sue$

__Dispersed


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. *han!e that !ul'able 'arties. *han!e that !ul'able 'arties#ill not be sue$#ill not be sue$

6s chance of being sued falls6s chance of being sued fallsincentive to act safely +deterrentincentive to act safely +deterrenteect, fallseect, falls

Regulation may be preferable !henRegulation may be preferable !henchance of suit occurring is smallchance of suit occurring is small

E$amples: irritation serious in>uryE$amples: irritation serious in>uryasbestosasbestos


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4. +agnitu$e of a$ministrative4. +agnitu$e of a$ministrative!osts!osts

___Regulatory____ osts:___Regulatory____ osts: ertainly borne by governmentertainly borne by government

Enforcement +through inspections andEnforcement +through inspections and

administration of 'nes.legal proceedings,administration of 'nes.legal proceedings,

can be costlycan be costly


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4. +agnitu$e of a$min. !osts4. +agnitu$e of a$min. !osts __Legal___ osts:__Legal___ osts:

;nly borne if party is not deterred;nly borne if party is not deterred

eectively and harm occurseectively and harm occurs 9ost cases +AC, settled out of court9ost cases +AC, settled out of court Enforcement is privateEnforcement is private

et: -f litigation is an eectiveet: -f litigation is an eectivedeterrent __legal____ costs !ill bedeterrent __legal____ costs !ill becheaper than ___regulatory___ costscheaper than ___regulatory___ costs

E$ample: @ree trimming rulesE$ample: @ree trimming rules


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#ummary of Eects#ummary of Eects

actors generally favoring _legalactors generally favoring _legal

rules_____rules_____ Dierence in 4no!ledge about ris4y activitiesDierence in 4no!ledge about ris4y activities

9agnitude of administrative costs9agnitude of administrative costs

actors generally ___favoringactors generally ___favoring

regulation_____regulation_____6bility to pay for harm6bility to pay for harm

hance that parties !ill not be suedhance that parties !ill not be sued


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-mplications-mplications ;ften times both legal rules and;ften times both legal rules and

regulations are appropriateregulations are appropriate

-f both are used regulations don"t have-f both are used regulations don"t have

to be as onerous as !hen onlyto be as onerous as !hen only

regulations are usedregulations are used


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9arty 9unch o!ns a large company in ;hio that manufactures9arty 9unch o!ns a large company in ;hio that manufacturesbra4e pads3 @he company #ure)#top -nc3 has F2G billion inbra4e pads3 @he company #ure)#top -nc3 has F2G billion inassetsassets(u$gement 'roof)(u$gement 'roof) in ;hio and does not carryin ;hio and does not carryliability insuranceliability insurance.(no moral ha-ar$).(no moral ha-ar$) Bra4e pads if theyBra4e pads if theyare not manufactured properly can come apart during theare not manufactured properly can come apart during theoperation of an automobile3 @his in turn may lead a driveroperation of an automobile3 @his in turn may lead a driverto lose control of their vehicle and get in an accident3 -f suchto lose control of their vehicle and get in an accident3 -f suchan accident occurs the damages to the victims are li4ely toan accident occurs the damages to the victims are li4ely tobe substantial and immediate3 6 routine investigation ofbe substantial and immediate3 6 routine investigation ofsuch an accident !ill readily reveal that the bra4e pads aresuch an accident !ill readily reveal that the bra4e pads areat faultat fault.(Litigation $eals #ith this 'roblem).(Litigation $eals #ith this 'roblem)

9arty has hired the best of the best3


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6 large number of small companies are6 large number of small companies arepromoting herbal remedies that +they claim,promoting herbal remedies that +they claim,

prevent diabetes3 -n fact scienti'c testingprevent diabetes3 -n fact scienti'c testing

has demonstrated that these concoctions nothas demonstrated that these concoctions notonly have no eect on diabetes but also sho!only have no eect on diabetes but also sho!

that the remedies cause cancer in 2C ofthat the remedies cause cancer in 2C of

consumers 5G years after using the remedy3consumers 5G years after using the remedy3

@he manufacturers of these remedies@he manufacturers of these remedies

typically each sell to 2GGG consumers a yeartypically each sell to 2GGG consumers a yearhave no scienti'c or medical e$pertise andhave no scienti'c or medical e$pertise and

have assets of less than F2GGGGG3 %ouldhave assets of less than F2GGGGG3 %ouldregulation or liability be more li4ely to resultregulation or liability be more li4ely to result

in the eicient deterrence of negligentlyin the eicient deterrence of negligentlymar4eted herbal supplements&mar4eted herbal supplements&

regulation vs litigation - carmen

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