Paper #1500

Title:

Minimizing errors, maximizing incentives: Optimal court decisions and the quality of evidence

Authors:

Juan José Ganuza, Fernando Gomez and Jose Penalva

Date:

March 2015

Abstract:

We characterize the best mechanism for a Court to impose liability (and generate incentives) in a setting in which the injurer's behavior is imperfectly observed and Courts also care about judicial errors. First, we show that the optimal decision rule is an evidentiary standard. Then, we make three main contributions. i) We develop a new methodological approach to deal with this classic problem: rewrite the incentive compatibility constraint in terms of Court errors. This approach can be applied to more general incentive problems, and greatly simplies the characterization of the optimal standard. ii)We state that the harshness of the optimal evidentiary standard decreases as the quality (informativeness) of the evidence increases. iii) When the informativeness of the evidence is determined by the injurer's choice of the care technology, the interests of Court and injurer are not aligned. The optimal Court policy is to penalize (even forbid) the use of the less informative care technology.

Keywords:

Incentives, evidentiary standards, judicial errors, statistical discrimination and informativeness.

JEL codes:

C44, D82, K13, K40

Area of Research:

Business Economics and Industrial Organization

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