Kolstad, Ulen and Johnson (1990) have conjectured that exclusive use of negligence liability leads to suboptimal choice of precaution in the presence of uncertainty and that ex ante regulation can correct these inefficiencies. We complete their argument by making a mild additional premise.

This article considers a bilateral externality problem, in which injurers and victims choose activity levels and levels of care. The incentive effects of liability rules and fines for harm done are analyzed. It is shown that in general socially optimal behaviour can only be induced if fines are...

This paper illustrates in a simple model how the presence of asymmetric information can make it impossible to achieve ex post efficient trade decisions in negotiations.

This paper discusses the literature that explores the effects of anticipated renegotiations on investment incentives. The results depend upon whether or not a party’s investment has a direct externality on another party’s payoff.

The property rights approach to the theory of the firm suggests that ownership structures are chosen in order to provide ex ante investment incentives, while bargaining is ex post efficient. In contrast, transaction cost economics emphasizes ex post inefficiencies. In the present paper, a party...

We use a simple, three-item test for cognitive abilities to investigate whether established behavioral biases that play a prominent role in behavioral economics and finance are related to cognitive abilities. We find that higher test scores on the Cognitive Reflection Test of Frederick (2005)...

Recent work in the field of mechanism design has led some researchers to propose institutional changes that would permit parties to enter into nonmodifiable contracts, which is not possible under current contract law. This article demonstrates that it may well be socially desirable not to...

Majority rules are frequently used to decide whether or not a public good should be provided, but will typically fail to achieve an efficient provision. We provide a worst-case analysis of the majority rule with an optimally chosen majority threshold, assuming that voters have independent...

The efficiency of two different means of controlling hazardous economic activities, namely ex post liability for harm done and ex ante safety regulation, is re-examined. Some researchers have stressed that the complementary use of these two instruments can be socially advantageous. Here it is...

In a pioneering approach towards the explanation of the phenomenon of "yes man" behavior in organizations, Prendergast (1993) argued that incentive contracts in employment relationships generally make a worker distort his privately acquired information. This would imply that there is a trade-off...