Fairness vs Welfare

1. Fairness vs Welfare Comments June 25, 2002

2. Basic Premise • Legal rules should be selected based on their effect on human welfare, not on their fairness a taste for fairness is just one dimension of welfare • Power is in the variety of important cases that suggest that a fairness-based approach will not always be optimal Costs matter Provides way for a poor country to prioritize which services will be delivered by its judicial system

3. Legal rules tend to be desirable when: • They can induce good behavior • Good behavior can be achieved at low cost • Bad behavior can be contested at low cost

4. Case 1: Debt recovery • Deterrence is unlikely • Uncertainty of seller of own profitability and profitability of purchaser • Recovery is unlikely given lack of information over location of assets • Good behavior would reduce the profitability of the seller, often risking bankruptcy • Litigation is conducted primarily by company lawyers, who receive low pay Debt cases may not make economic sense

5. Case 2: Restitution • There is no action that the defendant could take to avoid the conflict • The litigation usually requires costly legal advice and questionable property titles Restitution may not make economic sense

6. Case 3: Bribery of official • The defendant could take action to avoid crime • The cost to the defendant is the foregone bribes • The probability of a sanction is low, given the lack of trust of potential witnesses in the state and the absence of instruments such as plea bargains, immunity, and sting operations The sanction would have to be much, much greater than the harm inflicted

7. Implications • If in transition and developing countries many types of cases just don’t make economic sense, then should their courts have very limited jurisdiction? • Should the Bank create ‘guarantees’ to subsidize the cost of litigation, on the assumption that many cases will never reach court?

8. But… • Costs are endogenous • Case 1: Information about location of assets will improve over time, with pressure from creditors • Case 2: Market for lawyers’ services is very underdeveloped, suggesting high prices may fall as more individuals are attracted into profession • Case 3: Probability of sanction can increase with criminal procedures reform and professionalization of judiciary • How much ‘fine tuning’ of procedure is desirable? • Is fairness efficient on average, especially given difficulty of redistribution and aversion to downside risk? Fine-tuning imposes costs as well as risks of abuse. • Is ‘evolutionary economics’ an alternative paradigm?