1. Fairness vs Welfare
Comments
June 25, 2002

2. Basic Premise
Legal rules should be selected based on their effect on human welfare, not on their fairness
a taste for fairness is just one dimension of welfare
Power is in the variety of important cases that suggest that a fairness-based approach will not always be optimal
Costs matter
Provides way for a poor country to prioritize which services will be delivered by its judicial system

3. Legal rules tend to be desirable when:
They can induce good behavior
Good behavior can be achieved at low cost
Bad behavior can be contested at low cost

4. Case 1: Debt recovery Deterrence is unlikely
Uncertainty of seller of own profitability and profitability of purchaser
Recovery is unlikely given lack of information over location of assets
Good behavior would reduce the profitability of the seller, often risking bankruptcy
Litigation is conducted primarily by company lawyers, who receive low pay
Debt cases may not make economic sense

5.   Case 2: Restitution
There is no action that the defendant could take to avoid the conflict
The litigation usually requires costly legal advice and questionable property titles
Restitution may not make economic sense

6. Case 3: Bribery of official
The defendant could take action to avoid crime
The cost to the defendant is the foregone bribes
The probability of a sanction is low, given the lack of trust of potential witnesses in the state and the absence of instruments such as plea bargains, immunity, and sting operations
The sanction would have to be much, much greater than the harm inflicted

7. Implications
If in transition and developing countries many types of cases just don’t make economic sense, then should their courts have very limited jurisdiction?
Should the Bank create ‘guarantees’ to subsidize the cost of litigation, on the assumption that many cases will never reach court?

8. But… Costs are endogenous
Case 1: Information about location of assets will improve over time, with pressure from creditors
Case 2: Market for lawyers’ services is very underdeveloped, suggesting high prices may fall as more individuals are attracted into profession
Case 3: Probability of sanction can increase with criminal procedures reform and professionalization of judiciary
How much ‘fine tuning’ of procedure is desirable?
Is fairness efficient on average, especially given difficulty of redistribution and aversion to downside risk? Fine-tuning imposes costs as well as risks of abuse.
Is ‘evolutionary economics’ an alternative paradigm?