Fairness vs Welfare Comments June 25, 2002

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

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

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

  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

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

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?

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?