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A Theory of Legal Presumptions

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Author Info
Antonio Bernardo () (Finance Area)
Eric L. Talley () (Law School)
Ivo Welch () (International Center for Finance)

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Abstract

This paper develops a theoretical account of presumptions, focusing on their capacity to mediate between costly litigation and ex ante incentives. We augment a standard moral hazard model with a redistributional litigation game in which a legal presumption parameterizes how a court "weighs" evidence offered by the opposing sides. Strong pro-defendant presumptions can foreclose lawsuits altogether, but also lead to shirking. Strong pro-plaintiff presumptions have the opposite effects. Moderate presumptions give rise to equilibria in which productive effort and suit occur probabilistically. The socially-optimal presumption trades off litigation costs against agency costs, and could be either strong or moderate, depending on the social importance of effort, the costs of filing suit, and the comparative advantage that diligent agents have over their shirking counterparts in mounting a defense. We posit three applications of the model: the business judgment rule in corporations law, fiduciary duties in financially-distressed firms, and the doctrine of res ipsa loquitur in accident law.

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Publisher Info
Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm118.

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Date of creation: 04 May 1999
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Handle: RePEc:ysm:somwrk:ysm118

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Web page: http://mba.yale.edu/
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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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  3. Manuel Willington & Roy Costilla, 2007. "Endogenous Verifiability and Optimality in Agency: A non-contingent approach," ILADES-Georgetown University Working Papers inv189, Ilades-Georgetown University, School of Economics and Bussines. [Downloadable!]
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  5. Ivo Welch & Bris, Arturo, 2001. "The Optimal Concentration of Creditors," Cowles Foundation Discussion Papers 1338, Cowles Foundation, Yale University, revised Jan 2002. [Downloadable!]
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  6. Robert Cooter & Winand Emons, 2001. "Truth-Bonding and Other Truth-Revealing Mechanisms for Courts [technical version]," Berkeley Olin Program in Law & Economics, Working Paper Series 1117, Berkeley Olin Program in Law & Economics. [Downloadable!]
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  10. Itzhak Gilboa & David Schmeidler, 2001. "Inductive Inference: An Axiomatic Approach," Cowles Foundation Discussion Papers 1339, Cowles Foundation, Yale University. [Downloadable!]
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  11. Jesse Bull, 2006. "Costly Evidence Production and the Limits of Verifiability," Working Papers 0611, Florida International University, Department of Economics. [Downloadable!]
  12. Feess,Eberhard & Muehlheusser,Gerd & Walzl,Markus, 2004. "Unfair Contests," Research Memoranda 050, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
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  14. Che, Yeon-Koo & Severinov, Sergei, 2007. "Lawyer Advising in Evidence Disclosure," MPRA Paper 6101, University Library of Munich, Germany. [Downloadable!]
  15. Jesse Bull, 2006. "Costly Evidence and Systems of Fact Finding," Working Papers 0612, Florida International University, Department of Economics. [Downloadable!]
  16. Mehmet Bac & Parimal Kanti Bag, 2000. "Law Enforcement Costs and Legal Presumptions," Econometric Society World Congress 2000 Contributed Papers 0194, Econometric Society. [Downloadable!]
  17. Kathryn Zeiler, . "Medical Malpractice and Contract Disclosure: An Equilibrium Model of the Effects of Legal Rules on Behavior in Health Care Markets," American Law & Economics Association Annual Meetings 1071, American Law & Economics Association. [Downloadable!]
  18. C. Manuel Willington, 2004. "Hold-Up under Costly Litigation and Imperfect Courts of Law," Econometric Society 2004 Latin American Meetings 231, Econometric Society. [Downloadable!]
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  19. Winand Emons, 2001. "Perjury versus Truth-Revelation: Quantity or Quality of Testimony," Diskussionsschriften dp0103, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
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  20. Jesse Bull & Joel Watson, 2002. "Evidence Discloure and Verifiability," University of California at San Diego, Economics Working Paper Series 2000-16r, Department of Economics, UC San Diego. [Downloadable!]
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