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A Theory of Legal Presumptions

Listed author(s):
  • Antonio Bernardo


    (Finance Area)

  • Eric L. Talley


    (Law School)

  • Ivo Welch


    (International Center for Finance)

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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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
Handle: RePEc:ysm:somwrk:ysm118
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