In this article I first describe the basic principles that parents employ in disciplining their children. The description is based on a survey of parents, the major results of which are that parental sanctions are premised on wrongdoing—not on the mere causation of harm; that parental sanctions tend to be greater when wrongdoing results in harm than when it does not; that parental sanctions for intentionally harmful conduct exceed those for negligence; and that parental sanctions are not raised when the probability that wrongdoing would be discovered is low. I then develop a theory to explain the principles of discipline as functional for parents. The kernel of the theory is that the rules of discipline maximize the expected utility of parents—assuming that the utility of parents is reduced by the occurrence of harm and also reflects the well–being of their children. After elaborating the theory, I comment on several related issues, including the possible influence of childhood experience on our preferences as adults over legal rules; and I remark on the similarity between the principles of criminal law and those applied by parents in disciplining their children.

Although the obvious effect of settlement is to save litigants the costs of trial, settlement also influences deterrence—and for two reasons. First, because settlement is agreed upon by plaintiffs, it raises their expected return from litigation and thus the probability of suit. This augments deterrence. Second, because settlement is agreed upon by defendants, it lowers their expected costs of litigation and therefore dilutes deterrence. The primary objective of the article is to identify the net effect of settlement on deterrence and on social welfare in a model of accidents, liability, and litigation. The conditions for the bringing of suit in the model are not only that plaintiffs be willing to go to trial, but also that their anticipated settlements would exceed their pretrial costs. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

The myriad uncertainties common to the process of adjudication—concerning evidence that opposing parties will present, legal issues that will become relevant, illness of witnesses, and the like—lead to two social problems. First, when unanticipated events occur, the information that parties will be able to provide to courts may be inadequate. And second, preparation effort invested by parties may be wasted; whereas parties will tend to prepare for numerous possible events in adjudication, many will not come to pass and thus much effort will be for nought. Both of these problems are addressed by the granting of continuances: inability to present evidence for want of time will be directly remedied by the giving of continuances; and wasted preparation effort will be reduced because the ability to obtain continuances when uncertain events occur will lessen the need to prepare for them. But the use of continuances involves various costs of delay, meaning that the decision to grant continuances should be guided by an economic calculus. That calculus is developed in the theory presented in this article and the actual use of continuances is discussed. (JEL D8, K4, K41)

The primary causal requirement that must be met for a negligent party to be held liable for a harm is a demonstration that the harm would not have occurred if the party had not been negligent. Thus, for a speeding driver to be found liable for harm done in a car accident, it must be shown that the accident would not have happened if the driver had obeyed the speed limit. The main point made here is that this basic causal requirement may be difficult to satisfy and hence may interfere with the discouragement of negligence. Therefore, an alternative and usually easier-to-meet causal requirement is proposed—that the harm would not have occurred if the party not been engaged in his activity (if the driver had not been driving).

The prison time actually served by a convicted criminal depends to a significant degree on decisions made by the state during the course of imprisonment-notably, on whether to grant parole.We study a model of the adjustment of sentences assuming that the state's objective is the optimal deterrence of crime.In the model, the state can lower or raise a criminal's initial sentence on the basis of deterrence-relevant information obtained during imprisonment.Our focus on sentence adjustment as a means of promoting deterrence stands in contrast to the usual emphasis in sentence adjustment policy on avoiding recidivism.

This article proposes a scheme of liability that would desirably control accident risks in the coming world in which motor vehicles will be predominantly autonomous. In that world, the typical traveler will not be an active driver, which will render liability premised on driver fault largely irrelevant as a means of reducing vehicle accident dangers. Moreover, no other conventional principle of individual or of manufacturer liability would serve well to do so. Indeed, strict manufacturer liability, recommended by many commentators, would tend to leave accident risks unchanged from their levels in the absence of any liability. However, a new form of strict liability—the hallmark of which is that damages would be paid to the state—would be superior to conventional rules of liability in alleviating accident risks and would be easy to implement.

This Article revisits the best known example of successful private ordering in the economics literature: the Maghribi Jewish merchants who engaged in both local and long-distance trade across the Islamic Mediterranean in the eleventh century. Drawing on a case study of over 200 Maghribi merchant letters, it develops a network governance-based account of the way that private ordering might have supported exchange among the Maghribi traders with little or no reliance on the public legal system. The analysis reveals that a particular type of bridge-and-cluster configuration of ties among traders and trading centers--known as a “small-world network”— can have strong reputation-based contract enforcement properties that make it possible support trade over long distances, even in environments of noisy information. This structure economizes on information costs by aggregating information in local nodes and then connecting these nodes with ties that are robust enough to transmit the relevant information but sparse enough to do so at a cost far below the cost of keeping all transactors in the market aware of all reputation-relevant information all of the time. Identifying the governance power of small-world networks reveals that the small, geographically concentrated, close-knit groups (known as cliques) that the legal literature has long associated with successful private ordering are not in fact a precondition for well-functioning private order—small-world networks can effectively support trade among large numbers of traders operating at considerable distances from one another. In addition, because the small world network form can be found in many industries today, recognizing its potential contract governance properties should make it possible to better understand the ways trade both is and can be supported in a variety of modern markets. AUTHOR—Wilson-Dickinson Professor of Law, The University of Chicago Law School and International Research Fellow, University of Oxford, Said School of Business, Center for Corporate Reputation. I would like to thank the Aaron Director Research Fund for financial support. I would also like to thank Philip Ackerman-Lieberman, Yehonatan Arbel, Adi Ayal, Douglas N O R T H W E S T E R N U N I V E R S I T Y L A W R E V I E W 1010 Baird, Sadie Blanchard, Patrick Barry, Sam Bray, Brian Bix, David Boxenhorn, Greg Buchak, Ron Burt, Jeremy Calvert, Johan Chu, Avinash Dixit, Greg Dolin, Shai Dothan, Kendra Doty, Robin Effron, Roger Ford, Jessica Goldberg, Avner Greif, Ron Harris, Richard Hemholtz, Daniel Hemmel, Matt Jennejohn, Emily Kadens, Louis Kaplow, Dan Kelly, Dan Klerman, Avery Katz, Juliet Kostritsky, Christian Kolb, Fillipo Lancieri, Janet Landa, Jamie Macleod, Meredith McBride, David Miller, Ameet Morjaria, Greg Nimmo, Sheilagh Ogilvie, Oren Perez, Ariel Porat, Haggai Porat, Mark Ramseyer, Alan Schwartz, Ziv Schwartz, Bill Schwesig, Keith Sharfman, Steve Shavell, Erin Sheley, Hannah Simpson, Henry Smith, Rafe Stolzenberg, Avishalom Weistreich, David Waddilove, Lael Weinberger, Barry Weingast, Josh Whitford, Chris Yenkey, and participants at the American Law and Economics Association Annual Meeting, The Third Annual Relational Contracts Conference (2017), Bar Ilan Law School: Conference on Relational Private Law and Network Theory, the Society for Institutional and Organizational Economics Annual Meeting, the Research Group on Political Institutions and Economic Policy Annual Conference, the Case Western Law School Faculty Workshop, the Hebrew University Law and Economics Workshop, the Tel Aviv University Private Law Reading Group, the Harvard Private Law Workshop, and the Harvard Law and Economics Workshop for useful conversations and comments. I would also like to thank Daniel Sullivan for his truly extraordinary research assistance. INTRODUCTION .......................................................................................................... 1011 I. THE MAGHRIBI TRADERS AS A SMALL-WORLD NETWORK ................................. 1015 A. Trading and Postal Routes ....................................................................... 1018 B. Interpersonal Ties ..................................................................................... 1020 C. Quasi-Institutional Ties ............................................................................ 1030 D. The Importance of a Trader and His Agent’s Position in the Network ..... 1033 E. Methodological Caution ........................................................................... 1038 II. SMALL-WORLD NETWORK GOVERNANCE .......................................................... 1042 A. Two-Tiered Market-Wide Governance ..................................................... 1044 B. Micro-Network Governance ..................................................................... 1045 III. REVISITING THE DEBATE OVER PRIVATE VERSUS PUBLIC ORDER ....................... 1050 A. Formalities ............................................................................................... 1051 B. Insufficient Reputation-Relevant Information Circulating in the Market ............................................................................................. 1056 C. Exchange with Muslim Traders ................................................................ 1062 CONCLUSION ............................................................................................................. 1065 APPENDIX .................................................................................................................. 1069 113:1009 (2019) Contract Governance in Small-World Networks

The theory of insurance is considered here when an insured individual may be able to sue another party for the losses that the insured suffered—and thus when an insured has a potential source of compensation in addition to insurance coverage. Insurance policies reflect this possibility through so-called subrogation provisions that give insurers the right to step into the shoes of insureds and to bring suits against injurers. In a basic case, the optimal subrogation provisions involve full retention by the insurer of the proceeds from a successful suit and the pursuit of all positive expected value suits. This eliminates litigation risks for insureds and results in lower premiums—financed by the litigation income of insurers, including from suits that insureds would not otherwise have brought. Moreover, optimal subrogation provisions are characterized in the presence of moral hazard, administrative costs, and non-monetary losses, and it is demonstrated that optimal provisions entail sharing litigation proceeds with insureds in the first two cases but not when losses are non-monetary. (JEL G22, K13, K41)

Courts generally insist that two criteria be met before imposing strict liability. The first––that the injurer’s activity must be dangerous––is sensible because strict liability possesses general advantages in controlling risk. But the second––that the activity must be uncommon––is ill-advised because it exempts all common activities from strict liability, no matter how dangerous. Thus, the harm generated by the large swath of common dangerous activities––from hunting, to construction, to the operation of railroads––tends to be socially excessive. After developing this theme, the Article addresses the question of how the uncommon activity requirement could have arisen and finds that its legal pedigree is problematic: it was invented by the authors of the first Restatement of Torts. The conclusion is that the uncommon activity requirement for the imposition of strict liability should be eliminated.

Courts generally insist that two criteria be met before imposing strict liability rather than basing liability on the negligence rule. The first—that the injurer’s activity must be dangerous—is sensible because strict liability possesses general advantages over the negligence rule in controlling risk. But the second—that the activity must be uncommon—is ill-advised because it exempts all common activities from strict liability no matter how dangerous they are. Thus, the harm generated by the large swath of common dangerous activities—from hunting, to construction, to the transmission of natural gas—is inadequately regulated by tort law. After developing this theme and criticizing ostensible justifications for the uncommon activity requirement, the article addresses the question of how it arose. The answer is that its legal pedigree is problematic: it appears to have been invented by the authors of the first Restatement of Torts. The conclusion is that the uncommon activity requirement for the imposition of strict liability should be eliminated.

This chapter compares strict liability and negligence rules on the basis of the incentives they provide to "appropriately" reduce accident losses. Under strict liability, the outcome is efficient, and again the reasoning is a little different from that in the last subcase. Under the negligence rule, restaurants will decide to avoid liability by taking appropriate precautions to prepare meals under sanitary conditions. The unilateral case is studied for two reasons. First, it is descriptive of situations in which whatever changes in the behavior of victims that could reasonably be expected to result from changes in liability rules would have only a small influence on accident losses. The second reason is pedagogical; it is easier to understand the general bilateral case after having studied the unilateral case. In the bilateral case, two additional liability rules are considered, strict liability with a defense of contributory negligence and the negligence rule with that defense.

The conduct of adjudication is often influenced by motions—requests made by litigants to modify the course of adjudication. The question studied in this article is why adjudication should be designed so as to permit the use of motions. The answer developed is that litigants will naturally know a great deal about their specific matter, whereas a court will ordinarily know little except to the degree that the court has already invested effort to appreciate it. By giving litigants the right to bring motions, the judicial system leads litigants to efficiently provide information to courts that is relevant to the adjudicative process.

Economic analysis of law is concerned with (a) determination of the effects of legal rules and (b) evaluation of the desirability of the effects of legal rules, with respect to well-specified definitions of social welfare. This article surveys the approach as it applies to basic areas of law – accident, property, contract, and criminal law – as well as to the litigation process. The economic approach is also contrasted with traditional analysis of law, under which the effects of legal rules are not usually systematically assessed.

A basic principle of law is that damages paid by a liable party should equal the harm caused by that party. However, this principle is not correct when account is taken of litigation costs, because they too are part of the social costs associated with an injury. In this article we examine the influence of litigation costs on the optimal level of damages, assuming that litigation costs rise with the level of damages.

This article develops two points.First, insurance against the risk of legal change is largely unavailable, primarily because of the correlated nature of the losses that legal change generates.Second, given the absence of insurance against legal change, it is generally desirable for legal change to be attenuated.Specifically, in a model of uncertainty about two different types of legal change-in regulatory standards, and in payments for harm caused-it is demonstrated that the optimal new regulatory standard is less than the conventionally efficient standard, and that the optimal new payment for harm is less than the harm.