The Constraining, Liberating, and Informational Effects of Nonbinding Law

Justin Fox and Matthew C. Stephenson

The Journal of Law, Economics, and Organization, 2015, vol. 31, issue 2, 320-346

Abstract: We show that nonbinding law can have a constraining effect on political leaders, because legal compliance is a costly signal to imperfectly informed voters that the leader is unbiased. Moreover, nonbinding law can also have a liberating effect, enabling some leaders to take action when they otherwise would have done nothing. In addition, we illustrate how voters may face a trade-off between the legal standard that induces optimal behavior of the current leader (i.e., that most effectively addresses the moral hazard problem) and the legal standard that optimizes selection of future leaders (i.e., that most effectively addresses the adverse selection problem). We discuss a range of positive and normative implications that follow from our analysis. (JEL D72, K40).

Date: 2015
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