Document Type

Article

Publication Date

2013

Abstract

Legal regulation of behavior requires information. Acquiring information about the regulated party's conduct, setting benchmarks by which that conduct is measured, and establishing the correct scale of payoffs for violating or following regulation are costly and require expertise and motivation. Thus, economic theories of rulemaking are often based on the relative information advantages that different regulatory bodies have and how that information can be harnessed to enhance incentives and thereby improve welfare. Government regulators, on average, do not have informational advantages. They are not paid for performance and thus may lack adequate incentives. They are not disciplined by market forces and are only imperfectly disciplined by career concerns or by the political process. Moreover, they commonly lack the most advanced tools for information acquisition, aggregation, and prediction. Courts, for example, do not search for information independently, but instead receive only what parries present to them through the litigation process, which is costly, ad hoc, and as a result often bypassed by crude settlements. Courts are also ill-equipped to recognize the distribution of characreristics from which any given case is sampled.

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