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Judicial Errors and Innovative Activity

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Author Info
Giovanni Immordino
Michele Polo

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Abstract

We analyze the effect of judicial errors on the innovative activity of firms. If successful, the innovative effort allows to take new actions that may be ex-post welfare enhancing (legal) or decreasing (illegal). Deterrence in this setting works by affecting the incentives to invest in innovation (average deterrence). Type-I errors, through over-enforcement, discourage innovative effort while type-II errors (under-enforcement) spur it. The ex-ante expected welfare effect of innovations shapes the optimal policy design. When innovations are ex-ante welfare improving, laissez-faire is chosen. When innovations are instead welfare decreasing, law enforcement should limit them through average deterrence. We consider several policy environments differing in the instruments available. Enforcement effort is always positive and fines are (weakly) increasing in the social loss of innovations. In some cases accuracy is not implemented, contrary to the traditional model where it always enhances (marginal) deterrence, while in others it is improved selectively only on type-II errors (asymmetric protocols of investigation).

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 337.

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Date of creation: 2008
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Handle: RePEc:igi:igierp:337

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. A. Mitchell Polinsky & Steven Shavell, 2000. "The Economic Theory of Public Enforcement of Law," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 45-76, March. [Downloadable!] (restricted)
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  2. Louis Kaplow & Steven Shavell, 1996. "Accuracy in the Assessment of Damages," NBER Working Papers 4287, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Giovanni Immordino & Marco Pagano & Michele Polo, 2006. "Norm Flexibility and Private Initiative," Working Papers 314, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  4. Kaplow, Louis, 1994. "The Value of Accuracy in Adjudication: An Economic Analysis," Journal of Legal Studies, University of Chicago Press, vol. 23(1), pages 307-401, January.
  5. Png, I. P. L., 1986. "Optimal subsidies and damages in the presence of judicial error," International Review of Law and Economics, Elsevier, vol. 6(1), pages 101-105, June. [Downloadable!] (restricted)
  6. Gary S. Becker, 1968. "Crime and Punishment: An Economic Approach," Journal of Political Economy, University of Chicago Press, vol. 76, pages 169. [Downloadable!] (restricted)
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  7. Louis Kaplow & Steven Shavell, 1994. "Accuracy in the Determination of Liability," NBER Working Papers 4203, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Gual, Jordi & Hellwig, Martin F. & Perrot, Anne & Polo, Michele & Rey, Patrick & Schmidt, Klaus M. & Stenbacka, Rune, 2005. "An Economic Approach to Article 82," Discussion Papers in Economics 745, University of Munich, Department of Economics. [Downloadable!]
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  1. Giovanni Immordino & Marco Pagano & Michele Polo, 2009. "Incentives to Innovate and Social Harm: Laissez-Faire, Authorization or Penalties?," CSEF Working Papers 220, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
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