In the theory of public enforcement of law the choice of the liability rules is between strict liability and fault-based liability. In this paper, we study the determinants of compliance when in addition to standard economic incentives wrongdoers take into account stigmatization costs. In this context, this cost is not simply a transfer of resources. We show that a non-guiltiness standard-the fault standard equal to the deterrence level-is never optimal. In this scenario, we show how the optimal policy choice depends on the interplay between the magnitude of the harm and the stigmatization cost.
We analyse a duopoly setting with complementary products, in which a firm has a bias about its absolute advantage. We show that the bias can internalize parts of the negative externality that the complementarity of goods creates implying a higher producer's surplus. Moreover, we analyse additional conditions, which lead to an increase in the consumer's surplus. Counterintuitively, we show that the presence of a bias can lead to a positive welfare effect.
We relax the common assumption of homogeneous beliefs in principal-agent relationships with adverse selection. Principals are competitors in the product market and write contracts also on the base of an expected aggregate. The model is a version of a cobweb model. In an evolutionary learning set-up, which is imitative, principals can have different beliefs about the distribution of agents’ types in the population. The resulting nonlinear dynamic system is studied. Convergence to a uniform belief depends on the relative size of the bias in beliefs.
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