Legal Uncertainty as a Welfare Enhancing Screen
28 Pages Posted: 13 Dec 2016
There are 3 versions of this paper
Legal Uncertainty as a Welfare Enhancing Screen
Legal Uncertainty as a Welfare Enhancing Screen
Legal Uncertainty as a Welfare Enhancing Screen
Date Written: November 08, 2016
Abstract
Consider legal uncertainty as uncertainty about the legality of a specific action. In particular, suppose that the threshold of legality is uncertain. I show that this legal uncertainty raises welfare. Legal uncertainty changes deterrence in opposite directions. The probability of conviction increases for firms below the threshold, while the probability of conviction decreases for firms above the threshold. Hence, legal uncertainty acts as a welfare enhancing screen and increases welfare. Legal uncertainty discourages some actions with low private benefits, while it encourages other actions with high private benefits.
Keywords: enforcement, deterrence, legal uncertainty, regulation, asymmetric information, incomplete contracts
JEL Classification: D800, K200, K400, L500
Suggested Citation: Suggested Citation