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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:

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    2. Matthias Lang, 2023. "Stochastic contracts and subjective evaluations," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 104-134, March.
    3. Sven Hoeppner & Laura Lyhs, 2016. "Behavior Under Vague Standards: Evidence from the Laboratory," Jena Economics Research Papers 2016-010, Friedrich-Schiller-University Jena.
    4. Fiocco, Raffaele & Guo, Dongyu, 2020. "Regulatory risk, vertical integration, and upstream investment," European Economic Review, Elsevier, vol. 128(C).
    5. 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.
    6. Katsoulacos, Yannis & Ulph, David, 2014. "Legal Uncertainty, Competition Law Enforcement Procedures and Optimal Penalties," SIRE Discussion Papers 2015-12, Scottish Institute for Research in Economics (SIRE).
    7. Kusi-Sarpong, Simonov & Orji, Ifeyinwa Juliet & Gupta, Himanshu & Kunc, Martin, 2021. "Risks associated with the implementation of big data analytics in sustainable supply chains," Omega, Elsevier, vol. 105(C).
    8. Igor Kotlán & Daniel Němec & Zuzana Machová, 2019. "Právní nejistota v daňové oblasti a její dopady na nabídku práce v České republice [Legal Uncertainty in Taxation and Its Impacts on Labour Supply in the Czech Republic]," Politická ekonomie, Prague University of Economics and Business, vol. 2019(4), pages 371-384.
    9. Katsoulacos, Yannis & Ulph, David, 2014. "Decision Errors, Legal Uncertainty and Welfare: a General Treatment," SIRE Discussion Papers 2015-09, Scottish Institute for Research in Economics (SIRE).

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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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