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Legal Uncertainty as a Welfare Enhancing Screen

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  • Matthias Lang

    () (Max Planck Institute for Research on Collective Goods, Bonn)

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

  • Matthias Lang, 2014. "Legal Uncertainty as a Welfare Enhancing Screen," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2014_17, Max Planck Institute for Research on Collective Goods, revised Oct 2016.
  • Handle: RePEc:mpg:wpaper:2014_17
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    References listed on IDEAS

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    Cited by:

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    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. Fiocco, Raffaele & Guo, Dongyu, 2020. "Regulatory risk, vertical integration, and upstream investment," European Economic Review, Elsevier, vol. 128(C).
    4. Buechel, Berno & Feess, Eberhard & Muehlheusser, Gerd, 2020. "Optimal law enforcement with sophisticated and naïve offenders," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 836-857.
    5. 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.
    6. Yannis Katsoulacos & David Ulph, 2014. "Decision Errors, Legal Uncertainty and Welfare: a General Treatment," Discussion Paper Series, School of Economics and Finance 201408, School of Economics and Finance, University of St Andrews.

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    More about this item

    Keywords

    Enforcement; Deterrence; Legal Uncertainty; Regulation; Asymmetric Information; Incomplete Contracts;
    All these keywords.

    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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