Enforcement by Hearing: An Integrated Model of Evidence Production
This paper is a theoretical analysis of incentive setting via civil litigation, with a focus on incentives for care in activities that may be harmful to others (torts). It makes two main contributions: one directly policy-relevant, one conceptual. In most existing research, litigation is modeled in reduced form, as a sort of costly audit, without explicit specification of the fact-finding process. In such models it is always more costly to implement higher levels of care, implying that the second best level of care is lower than the first. Here we explicitly consider the court's information problem (in a single agent model; Sanchirico (1997) considers multiple parties). We find that implementation costs tend to decline in care level and the second best tends to exceed the first. This result in hand, we suggest that the familiar claim that current tort systems "overdeter" may in fact be no indictment. A second contribution of the paper is its "integrated" conception of evidence production, endogenous cost evidence. Evidence production in court is modeled as costly signaling, where signal costs are endogenous to unobserved choices made outside the courtroom. Care is inspired to the extent that it reduces signaling costs and so increases payoffs at the subsequent proceeding. These signaling/evidence costs are in turn costs of incentive setting via evidence production. In contrast to existing models and conventional wisdom, this view has the ironic implication that "perfect" (non-falsifiable) evidence may not be good enough: less perfect evidence which is sufficiently - but not infinitely - more costly for disobedient actions is likely to be cheaper all around and this a more efficient means of setting incentives. While the paper's focus is on tort law, the model it introduces applies generally to situations in which a principal attempts to influence the hidden behaviour of an agent based on information that the agent herself supplies.
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