This chapter reviews the effectiveness of deterrence, in and of itself as well as relative to the influence of consensual models of regulation that rely upon legitimacy to motivate compliance. The law governing corporate criminal enforcement, and the law and economics scholarship designed to inform it, treats deterrence as the primary goal and coercion through threatened sanctions as the most effective tool to achieve this goal. Yet the available evidence on the causes of misconduct suggests that although people do respond to threatened sanctions, the influence of coercion is often overstated relative to its actual influence upon law-related behavior. In addition consensual approaches have been found to be more effective than is commonly supposed. Taken together these findings suggest the desirability of developing a broader approach to corporate regulation using both coercive and consensual models of regulation. Given the strength of the findings for consensual models, the persistence of coercive models as the dominant and even exclusive approach to corporate crime is striking. That dominance suggests the importance of focusing on the psychological attractions of coercion to people in positions of authority. It is suggested that those in authority are attracted to this approach not only because of evidence that it can be effective but also due to the psychological benefits it affords them.
Edited by Jennifer Arlen
Stephen J. Choi and A.C. Pritchard
This chapter reviews the existing empirical literature relating to government enforcement of the securities laws, particularly by the Securities and Exchange Commission (SEC), including comparative work, assessment of the impact of enforcement, and analysis of enforcement patterns. It also identifies particularly promising areas for future research. Little work has been done to date exploring the incentives faced by attorneys who conduct investigations on behalf of the SEC and how those incentives shape enforcement decisions. This chapter offers preliminary evidence on the career paths of SEC lawyers and how those career choices might influence the enforcement actions brought by the SEC.
Miriam H. Baer
The internal corporate investigation is now an integral component of corporate compliance. Corporations invest considerable resources in identifying and explaining wrongdoing. Government prosecutors and regulators, in turn, rely upon and strongly encourage these information-generating activities. This chapter argues that the corporate investigation’s greatest challenges stem from familiar problems of individual and entity-level efforts to evade detection. As employees take steps to conceal their misbehavior, corporate actors must navigate a difficult relationship between government enforcers on the one hand and corporate employees on the other. Mediating these relationships would be difficult enough under any circumstance, but a vexatious deficiency of trust between corporate actors and government enforcers causes corporate actors to cling ever more intently to legal doctrines such as the corporate attorney-client privilege, while simultaneously conducting more intensive, intrusive and expensive investigations. The chapter concludes by noting two developments: the Department of Justice’s latest attempt to secure cooperation from corporate defendants in identifying culpable employees (the so-called “Yates Memo”), and the increasing emphasis on workplace privacy. These two developments will place even greater pressure on the corporate investigator as she attempts to reassure the corporation’s employees and regulators that each side can in fact trust the corporation to investigate itself thoroughly yet fairly.
Marieke Bos, Susan Payne Carter and Paige Marta Skiba
An emerging literature explores how people choose between and use forms of consumer credit. In their chapter, Bos, Carter, and Skiba reflect on the existing literature that analyzes the choice between traditional forms of credit and non-traditional forms of credit such as pawnshop loans and payday loans. The authors add to this literature by introducing new data on observed choices of customers switching to pawnshop loans when payday loans are not available. They bring together these facts to discuss the behavioral economics of choice across these credit markets. They outline the relevant behavioral economics theory, which they hope will inform regulators’ choices in governing alterative credit markets.
Barbara Luppi and Francesco Parisi
Luppi and Parisi illustrate how different behavioral problems can be incorporated into the standard economic model of tort law. Through this exercise, the authors develop a modeling language that can be utilized by law and economic scholars when considering the effect of behavioral biases and cognitive imperfections in tort law. They use these models in conjunction with the standard taxonomy of psychological biases to show the effect of different biases on the behavior of tort agents. The models they present are applicable to a wide range of tort problems, and have the potential for application to a broader range of legal problems.
Humans have adapted to their uncertain environment by the method of trial and error. This evolutionary process made them reason about uncertain facts the way they do. Behavioral economists censure this mode of reasoning for violating the canons of mathematical probability that a rational person must obey. Based on insights from probability theory and the philosophy of induction, Stein argues that a rational person need not apply mathematical probability in making decisions about individual causes and effects. Instead, she should be free to use common sense reasoning that generally aligns with causative probability. Stein also shows that behavioral experiments miss their target when they ask reasoners to extract probability from information that combines causal evidence with statistical data. Because it is perfectly rational for a person focusing on a specific event to prefer causal evidence to general statistics, Stein argues, those experiments establish no deviations from rational reasoning.
Jonathan Baron and Tess Wilkinson-Ryan
Baron and Wilkinson-Ryan outline the conceptual foundations of behavioral law and economics. The authors concentrate on the behavioral concepts imported into the field from psychology and experimental economics, and survey the normative models, descriptive theories, and prescriptive approaches featured in behavioral law and economics research. They endeavor to point out common themes in the research in an effort to tie together various groups of findings and counter the criticism that the field lacks the cohesion of standard law and economics.
Sumit Agarwal and Brent W. Ambrose
Agarwal and Ambrose examine the effect of direct mail (commonly referred to as junk mail) advertising on individual financial decisions by studying consumer choice in relation to home equity debt contracts. Consistent with the theoretical predictions, the authors find that financial variables underlying the relative pricing of debt contracts are the leading factors explaining consumers’ home equity debt choice. Furthermore, they also find that the intended use of debt proceeds significantly impacts consumer choice. However, when they study consumers who received a direct mail solicitation for a particular debt contract (line versus loan), they find evidence that the relative pricing variables are less relevant in explaining consumer contract choice, even though they were presented with a full menu of debt contracts. Thus, their results are consistent with the view that advertising is persuasive.
Claudia M. Landeo
Vertical restraints have been the subject of lively policy and academic discussions. This chapter argues that experimental law and economics might strengthen the contributions of economic theories of vertical restrains to the design and implementation of antitrust institutions. First, experimental law and economics provides empirical evidence of the robustness of economic theories of antitrust. Second, the combination of economic theory and experimental work represents the application of scientific research methods. Third, experimental law and economics studies of antitrust involve the replication of complex and abstract economic theories using simple environments. These settings might facilitate policy-makers’ understanding of economic theories of antitrust. The chapter assesses the validity of claims regarding the contributions of experimental law and economics by investigating the methodological characteristics of seminal experimental work on vertical restraints and the outcomes produced by these studies.