Litigation and Regulation

Joshua Schwartzstein and Andrei Shleifer

No 14752, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We ask whether regulation can usefully supplement litigation in a model of optimal social control of harmful externalities. In our model, firms choose activity levels in addition to precautions. In contrast to the usual analysis, we assume that social returns to activity are higher than private returns before taking harmful externalities into account. We also assume that both courts and regulators make errors in assessing whether it is efficient for a given firm to take precautions. We show that regulation can, in some circumstances, improve resource allocation. Regulatory preemption of litigation may be efficient when social returns to activity exceed the expected harm that could result from a firm taking too few precautions. The optimal structure of law enforcement is influenced by the divergence between private and social returns to activity as well as the competence of regulators and courts.

JEL-codes: D62 K13 K40 L51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-law and nep-reg
Date: 2009-02
Note: LE
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