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Legal uncertainty as a welfare enhancing screen

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  • Lang, Matthias

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.

Suggested Citation

  • Lang, Matthias, 2017. "Legal uncertainty as a welfare enhancing screen," European Economic Review, Elsevier, vol. 91(C), pages 274-289.
  • Handle: RePEc:eee:eecrev:v:91:y:2017:i:c:p:274-289
    DOI: 10.1016/j.euroecorev.2016.10.007
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    Cited by:

    1. Yannis Katsoulacos & David Ulph, 2016. "Legal uncertainty, competition law enforcement procedures and optimal penalties," European Journal of Law and Economics, Springer, vol. 41(2), pages 255-282, April.
    2. Sven Hoeppner & Laura Lyhs, 2016. "Behavior Under Vague Standards: Evidence from the Laboratory," Jena Economic Research Papers 2016-010, Friedrich-Schiller-University Jena.
    3. Yannis Katsoulacos & David Ulph, 2014. "Decision Errors, Legal Uncertainty and Welfare: a General Treatment," Discussion Paper Series, Department of Economics 201408, Department of Economics, University of St. Andrews.

    More about this item

    Keywords

    Enforcement; Deterrence; Legal uncertainty; Regulation; Asymmetric information; Incomplete contracts;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • K2 - Law and Economics - - Regulation and Business Law
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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