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Judicial Errors, Legal Standards and Innovative Activity

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Abstract

We analyze the effects of judicial errors on the innovative activity of firms. Successful research investment allows to take a new action that may be ex-post welfare enhancing or welfare decreasing (illegal). Deterrence in this setting works by affecting both the incentives to invest in research and the ex-post choice of the action (marginal deterrence). The two goals may contrast each other and their relative importance shapes the optimal policy. For increasing probabilities of social harm, the enforcer initially promotes research and disregards marginal deterrence: in this case no accuracy is chosen and the policy adopts first a per-se legality and then a (moderately enforced) per-se illegality rule. Conversely, for higher likelihood of social harm, the enforcer favors marginal deterrence eliciting the ex-post efficient actions at the cost of depressing firm’s investment: the optimal policy calls for positive .nes and improved accuracy, with a stronger effort to reduce type-I than type-II errors and the adoption of asymmetric protocols of investigation. Improved accuracy allows to discriminate between beneficial and harmful actions, an instance of effect-based legal standard.

Suggested Citation

  • Giovanni Immordino & Michele Polo, 2008. "Judicial Errors, Legal Standards and Innovative Activity," CSEF Working Papers 196, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 04 Jun 2010.
  • Handle: RePEc:sef:csefwp:196
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    8. 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.
    9. Kaplow, Louis & Shavell, Steven, 1996. "Accuracy in the Assessment of Damages," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 191-210, April.
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    Cited by:

    1. Immordino, Giovanni & Pagano, Marco & Polo, Michele, 2011. "Incentives to innovate and social harm: Laissez-faire, authorization or penalties?," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 864-876, August.
    2. Matteo Rizzolli & Luca Stanca, 2012. "Judicial Errors and Crime Deterrence: Theory and Experimental Evidence," Journal of Law and Economics, University of Chicago Press, vol. 55(2), pages 311-338.
    3. Yannis Katsoulacos & David Ulph, 2009. "On Optimal Legal Standards For Competition Policy: A General Welfare‐Based Analysis," Journal of Industrial Economics, Wiley Blackwell, vol. 57(3), pages 410-437, September.

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    More about this item

    Keywords

    norm design; innovative activity; enforcement; errors;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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