1. Monitoring and Supervision in the Economic Analysis of Safety and Security Louis Visscher Erasmus University Rotterdam Rotterdam Institute of Law and Economics (RILE)

2. ‘Monitoring’ and ‘Supervision’ Observing the behavior of an actor, in order to establish whether he has acted according to the applicable norms or standards of behavior.

3. Economic Approach to Safety and Security Rational choice: people choose what they believe is their best alternative Negative externalities: negative consequences for others (pollution, noise, risk)  not all costs are borne by the actor  too much activity; too little care

4. Internalization of externalities Tort Law: liability for harm Regulation: detailed rules; permits Criminal Law: fines and imprisonment

5. Division of instruments for internalization Norm formulation: ex ante or ex post Enforcement: government or individual Intervention: direct or indirect Timing: preclusion, act-based, harm-based

6. Tort Law Criteria: mostly ex post (open norm), individual, indirect, harm-based Relative strengths: low costs (open norm, ex post); parties’ information Relative weaknesses: low probability of conviction; judgment proof But: vicarious liability  principal liable for torts of actor  monitoring by principal!

7. Regulation Criteria: ex ante (detailed norm), government, direct, preclusion or act-based Relative strengths: regulator’s information; economies of scale; no judgment proof; low probability of conviction is no problem Relative weaknesses: Public Choice; high system costs (detailed norms; ex ante  monitoring costs irrespective of behavior)

8. Criminal Law Criteria: ex ante, government, direct and indirect, preclusion/act-based/harm-based Relative strengths: non-monetary sanctions solve judgment proof; low probability of conviction offset by high sanctions; self- enforcement (social norms) Relative weaknesses: expensive (punitive element; safeguards; much evidence before trial; costly imprisonment; monitoring of officials)

9. Preference for Tort Law Private parties know their own preferences best; Often: parties have adequate information; Possible problems: too low probability; judgment proof; information asymmetry  regulation or criminal law Low system costs (open norm, ex post, harm- based);

10. Optimal Enforcement – Timing (1) Size of sanction: preclusion < act-based < harm-based Limited size  increase probability  higher monitoring costs! Monitoring costs: If high for behavior  preclusion or harm- based If high for harm (e.g. causal problems)  preclusion or act-based

11. Optimal Enforcement – Timing (2) Information: If good for parties  harm-based If good for regulator  preclusion or act- based Enforcement costs: If high  preclusion Advantage harm-based over act-based: applied less often

12. Optimal Enforcement – Timing (3) Technological developments (examples): Speeding Police officers  mostly harm-based, some act-based Radar  act-based becomes the standard Intelligent Speed Adaptation (ISA)  preclusion? Note: development can trigger countermeasures!

13. Optimal Enforcement – Timing (4) Drunk driving Breath test  mostly harm-based, some act-based (time, place!) Alcohol lock  preclusion

14. Optimal Enforcement – Information Parties: strict liability Courts: negligence Government: regulation, criminal law Tort law: low information costs Victim sues  no harm-monitoring needed Strict liability: injurer utilizes information  no act-monitoring needed

15. Example: environmental policy (1) Improve effectiveness of monitoring: Firms that did not comply will be monitored more often, and sanction are tougher; Audit firms that are most easy to detect; Audit firms that value pollution least;

16. Example: environmental policy (2) Induce self-reporting: Require firms to report violations of standards; Base sanctions on (in)correct reports; Desirable if firms can monitor at lower cost; But: this introduces new costs: audit of self- reports

17. Conclusions Different instruments for internalization exist; All have relative strengths and weaknesses; Optimal enforcement requires mix of instruments; Role and costs of monitoring differs per instrument; Monitoring is one of many elements.

18. Monitoring and Supervision in the Economic Analysis of Safety and Security Louis Visscher Erasmus University Rotterdam Rotterdam Institute of Law and Economics (RILE)