The Role of Social Image Concerns in the Design of Legal Regimes

We consider situations where legal liability yields insufficient incentives for socially efficient behavior, e.g., individuals who cause harm are not always sued or are unable to pay fully for harm done. Some individuals nevertheless behave efficiently because of intrinsic prosocial concerns. Others have no such concerns but would like people to believe that they do. We show that fault-based liability is generally more effective than strict liability in harnessing social image concerns. This extends to the case where courts can make mistakes. The rules of proof then affect the inferences drawn from court decisions and therefore the stigma attached to an adverse judgment. If fault is a rare event, plaintiffs or prosecutors should bear the burden of proving the defendant’s fault; otherwise there are cases where defendants should prove compliance with the legal standard of behavior. Under either assignment of the burden of proof, incentives to comply are maximized by a standard of proof stronger than a mere preponderance of evidence.