A conspiracy to conceal information is a central allegation in prominent mass tort claims totaling billions of dollars. Analysis of such claims can be informed by evaluating firms' economic incentives to conceal substantive information. We show that these incentives — and thus the potential merit of such allegations — relies on the dynamic nature of the "markets" for information and innovation, which determine current and future expected public information dissemination and determine the likelihood of successful concealment of information.

This outstanding book focuses on how economics can contribute to the design, implementation and appraisal of legal systems that create the 'right' incentives for environmental protection. The sixteen original and specially commissioned contributions – written by some of the leading names in their field – span many of the important areas of contemporary interest and employ case study material combined with theoretical, empirical and experimental research.

In this paper we develop a game-theoretic model to: (i) investigate settlement incentives under two different legal regimes: the Securities Exchange Act, 1934 and the Private Securities Litigation Reform Act of 1995 (1995 Reform), and (ii) assess the correspondence between settlements and merits for these two regimes. We model settlement negotiations in a game with three players: a plaintiff and two defendants. The two defendants are a firm/manager and an independent auditor. We found that the negotiation process between the plaintiff and defendants ends in settlement rather than litigation under both legal regimes. However, the regimes elicit different negotiation strategies on the part of the plaintiff which, in turn, precipitates different settlement/merits disparities. We found that under the 1995 Reform, equilibrium settlements reflect the underlying merits for the auditor more closely for a broad range of parameters, although not for all parameter levels.

This paper investigates the settlement and litigation incentives of auditors under two legal regimes: the joint and several regime and the several only regime. The model's predictions are that if all defendants have full solvency, then auditors have lower expected liabilities under the joint and several regime than under the several only regime. This follows since securities law does not treat auditors and their codefendants symmetrically. That is, auditors are not liable if the financial statements are not materially misstated. However, as the codefendant's (firm's) wealth falls, auditors eventually have lower expected liability under several only liability. The reason is that as the wealth of the codefendant falls, the auditor bears an increasing fraction of total expected damages under joint and several liability. However, under several only liability, an auditor's liabilities do not depend on the solvency of codefendants.

This paper investigates settlement incentives in securities litigation when a plaintiff seeks to recover damages from multiple co-defendants (here an auditor and a manager/firm). We extend previous research in two ways. First, we model how U.S. securities law creates a special case of joint and several liability, under which auditors' liability is conditioned, not only on their own fault, but also on the fault of the manager. Second, we allow the plaintiff to proceed sequentially against the defendants, rather than requiring simultaneous settlement negotiations. Our model provides three findings. First, when the manager has sufficient wealth to pay all damages and his litigation costs, the plaintiff proceeds first against the manager and collects a settlement based on the manager's fault (i.e., the probability that the manager produced misstated financial statements). This settlement also reflects the fact that under joint and several liability, the manager can be held liable in court for the total amount of damages. After the manager settles, the plaintiff settles with the auditor for an amount which reflects the residual damages not paid by the manager and the fault level of both defendants. In this case the manager pays the majority of the total settlement. Second, we find that when the manager's wealth is sufficiently constrained, the plaintiff proceeds against the auditor first. In addition to the fault of the manager, the auditor's settlement reflects both his own fault (i.e., the probability of nonconformance to GAAS) and the total amount of damages. The plaintiff then proceeds against the manager for the residual (up to the manager's wealth level). In this case the auditor may pay the larger share of the total settlement. Third, we find that the auditor's share of the total settlement can exceed the actual merits of the case when either litigation is costly and/or the manager's wealth is constrained. These findings support the claims of the accounting industry about the settlement/merits disparity.

Abstract Liability for injury due to hazardous products often hinges on the safety of the defendants product relative to the safety of similar products. For instance, firms that can show their product's safety was "state of the art" can in some cases have their liability removed. This paper explores the legal definition of what it means to be state of the art and considers whether or not the availability of the defense is likely to improve product safety. The state of the art defense's effect on safety is found to depend on whether courts rely on a "technological advancement" or a "customary practice" tests of state of the art. When,consumers,are under- informed regarding product risks, the technological advancement test improves safety, and welfare, in a broad set of situations. Key Words: product safety, liability, state of the art, customary practice

A president's power to veto is widely recognized as an important weapon in the struggle with Congress over legislation. In this paper we investigate the effectiveness of the veto weapon with a simple model of presidential powers that incorporates informal institutional structure-the president's unique position as the focus of public attention-into an otherwise standard agenda-control model of the formal institutional structure governing the legislative process. We show that the president can exploit this public attention to make commitments regarding his veto intentions that, given the formal institutional structure, will enhance the value of the veto. One implication of the model is that commitment over "principles" (e.g., no taxes) will sometimes be more effective than commitment over "degree" (e.g., 3.2% tax rate). In addition, a president can sometimes improve his utility by making commitments that ultimately lead to a veto that is overridden.

Although the formal institutional structure that defines the temporal order of play in a policy game between the Congress and President ought to provide Congress with agenda power, the President is traditionally treated as the dominant player in this relationship. We show that if the President can make “clear-cut” commitments, presidential commitment can counter the dominance hierarchy and the complexion of equilibrium outcomes. Thus, the details of political interactions (in particular, the possibilities for commitment) may be as important as the formal specification of institutional structure.

This paper develops a game-theoretic model of political competition that attempts to confront the disparities between the predictions of standard spatial models and the data, while retaining the compelling features of the spatial paradigm. By contrast with standard models, but in the spirit of Downs, here (1) voters are fundamentally uncertain about the post-election outcomes associated with any candidate and (2) incumbent candidates are distinguished from challenges in their strategic positions and through voters' perceptions. Equilibrium always exists in the model, and its characterization differs sharply from previous results; for example, equilibrium candidate positions are unique and distinct. A set of comparative statics and dynamics completes the predictions of the model.

Stylized institutions for direct democracy referenda are examined in a dynamic full information environment with myopic voters. Competitive-agenda (median-voter) processes are contrasted with monopolistic (controlled-agenda) processes by extending existing static analyses to a class of dynamic institutions not previously characterized, the status quo reversion rule. This highlights the dependence of the progression of real equilibrium allocations over time on institutional structure. By delineating the restrictions implied by each institutional form the model explains some persistent empirical regularities. In particular, a strict ceteris paribus ordering of the magnitudes of budgets by institutional form is derived for a wide portion of the parameter space.