Decision errors, legal uncertainty and welfare: a general treatment

David Tregear Ulph, Yannis Katsoulacos

    Research output: Working paperDiscussion paper

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    Abstract

    This paper provides a general treatment of the implications for welfare of legal uncertainty. We distinguish legal uncertainty from decision errors: though the former can be influenced by the latter, the latter are neither necessary nor sufficient for the existence of legal uncertainty. We show that an increase in decision errors will always reduce welfare. However, for any given level of decision errors, information structures involving more legal uncertainty can improve welfare. This holds always, even when there is complete legal uncertainty, when sanctions on socially harmful actions are set at their optimal level. This transforms radically one’s perception about the “costs” of legal uncertainty. We also provide general proofs for two results, previously established under restrictive assumptions. The first is that Effects-Based enforcement procedures may welfare dominate Per Se (or object-based) procedures and will always do so when sanctions are optimally set. The second is that optimal sanctions may well be higher under enforcement procedures involving more legal uncertainty.
    Original languageEnglish
    PublisherUniversity of St Andrews
    Pages1-29
    Number of pages29
    Publication statusPublished - Feb 2014

    Publication series

    NameSchool of Economics & Finance Discussion Paper
    PublisherUniversity of St Andrews
    No.1408
    ISSN (Print)0962-4031
    ISSN (Electronic)2055-303X

    Keywords

    • optimal law enforcement
    • optimal penalties
    • legal uncertainty
    • decision errors

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