Behavioral Law & Economics

Date and Time: January 26/27, 2017

Outline: The block course is paper-based and taught in English. It builds on recent

developments in the area of behavioral economics (both theoretical and experimental)

and discusses applications in classical fields of Law & Economics such as torts, contracts,

litigation and law enforcement. Each session is centered around one or two papers on

the reading list (indicated in bold face).

Background Reading: A good general introduction to behavioral Economics is Angner

(2016). As for applications of these concepts and methods to Law & Economics, good

starting points are the book by Sunstein (2000), the surveys by Jolls et al. (1998),

Camerer and Talley (2007), Arlen and Talley (2008), and the forthcoming collected

volume Zeiler and Teitelbaum (2017). Levitt and List (2007) and Falk and Heckman

(2009) provide a general discussion of the pros and cons of using experiments in economic

research, while Croson (2002) provides a primer for the legal arena. See Moffatt (2015)

for an empirical methods for experiments in economics.

Prerequisites: Solid knowledge of microeconomics, game theory and microeconometrics,

familiarity with crucial concepts of behavioral and experimental economics.

Assessment: Participants are required to write an academic referee report on one of the

(non-survey) papers of their choice on the reading list (Deadline March 15, 2017).

Syllabus

1 Introduction: A Primer on Behavioral Economics

•  Overview over some systematic deviations from the predicted behavior under the

homo oeconomicus paradigm.

•  Background reading: Angner (2016)

2 Biases in Bilateral Bargaining

2.1 Endowment Effects and the Coase-Theorem

•  Theory: Coase (1960)

•  Experiment: Kahneman et al. (1990), Hoffman and Spitzer (1982)

 Background reading: Zeiler (2016), Horowitz and McConnell (2002)

2.2 Impasse in Settlement Negotiations

•  Theory:

- Basic models with differing perceptions: Shavell (1982), Priest and Klein (1984)

- Seminal models of asymmetric information: Bebchuk (1984) (screening) and Reinganum and Wilde (1986) (signaling)

- Combining asymmetric information and self-serving bias: Farmer and Pecorino (2002)

- Differences in evaluating gains and losses (reference-point dependent preferences): Kahneman and Tversky (1979) (Prospect Theory), Köszegi and Rabin (2006) (endogenous reference points)

•  Experimental Studies:

- Self-Serving Bias: Babcock et al. (1995), Loewenstein et al. (1993)

- Framing: Guthrie et al. (2001), Rachlinski (1996)

- More stuff : Landeo et al. (2007a) (split-awards), Landeo et al. (2007b) (court errors), Babcock and Pogarsky (1999), Pogarsky and Babcock (2001) (damage caps), Massenot et al. (2016) (American versus English rule)

•  Background reading: Landeo (2014), Babcock and Loewenstein (1997), Camerer and Talley (2007)

3 Contracts

3.1 Incentive Effects of Breach Remedies

•  Theory: Shavell (1980), Rogerson (1984), Shavell (1984)

•  Experiments: Sloof et al. (2003), Sloof et al. (2006)

3.2 Contracts as Rent-Seeking Devices

3.2.1 Breach Penalties and the Role of Renegotiation

•  Theory: Aghion and Bolton (1987), Spier and Whinston (1995)

•  Empirical Evidence: Landeo and Spier (2016), Feess, Gern, and Muehlheusser (2015)

•  More stuff : Hart and Moore (2008); Fehr, Zehnder, and Hart (2009); Fehr, Hart,and Zehnder (2011, 2015) (contracts as reference points)

3.2.2 Exclusive Dealing Provisions

•  Theory: Rasmusen, Ramseyer, and Wiley (1991), Segal and Whinston (2000)

•  Experiments: Landeo and Spier (2009), Smith (2011), Boone, Muller, and Suetens 2014)

•  Background reading: Landeo (2015)

4 Intrinsic Motivation and the Enforcement of Law and Norms

4.1 Delegated Enforcement

•  Buechel and Muehlheusser (2016), Polinsky (1980), Cosgel et al. (2011)

•  Background reading: Becker (1968)

4.2 Fines and Intrinsic Motivation

•  Gneezy and Rustichini (2000a), Gneezy and Rustichini (2000b)

•  Background reading: Gneezy, Meier, and Rey-Biel (2011), Frey and Jegen (2001)

References

Aghion, P. and P. Bolton (1987): "Contracts as a Barrier to Entry," American

Economic Review, 77, 388-401.

Angner, E. (2016): A Course in Behavioral Economics (2nd edition), Palgrave Macmillan.

Arlen, J. and E. L. Talley (2008): "Experimental law and economics," New York

University Law and Economics Working Paper No. 8-1-2008.

Babcock, L. and G. Loewenstein (1997): "Explaining bargaining impasse: The

role of self-serving biases," The Journal of Economic Perspectives, 11, 109-126.

Babcock, L., G. Loewenstein, S. Issacharoff, and C. Camerer (1995): "Biased

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1343.

Babcock, L. and G. Pogarsky (1999): "Damage Caps and Settlement: A Behavioral

Approach," The Journal of Legal Studies, 28, 341-370.

Bebchuk, L. A. (1984): "Litigation and settlement under imperfect information," The

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Boone, J., W. Muller, and S. Suetens (2014): "Naked exclusion in the lab: The

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Buechel, B. and G. Muehlheusser (2016): "Black Sheep or Scapegoats? Implementable

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of Legal Studies, 45, 331-366.

Camerer, C. and E. Talley (2007): "Experimental Study of Law," in Handbook of

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--------- (2000b): "Pay enough or do not pay at all," Quarterly Journal of Economics,

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