Are All 'Legal Dollars' Created Equal?

Abstract

Law and economics scholars treat legal payments as fungible. To put things in the terminology often used by legal economists, legal payments are a price set for an activity. Just as a dollar paid for a tomato is identical to a dollar paid for a cucumber, so are a dollar paid as a pollution tax to the government and a dollar paid as compensation to the party injured by the pollution. Our goal in this study is to explore how different characteristics of legal payments affect the way in which people perceive them, and as a result the way they might behave. The three characteristics we focus on are: (a) the timing of the payment - we distinguish between payments that are made prior to committing the wrongful act and those made after the act has already been committed; (b) the identity of the party to which the payment is made - we distinguish between payments that function as compensation and are therefore paid to the injured party and those that are paid to a third party; and (c) whether or not the payment was probabilistic - we distinguish between payments that are certain and those that are not. We conjecture that social norms, cognitive biases, and other forces, could cause people to behave differently under legal rules that create similar economic consequences. Using a sample of 420 students, we employed a between-subject, three-factor design. Each factor was divided along two levels: timing of payment (ex-ante v. ex-post), identity of recipient (state vs. injured party), and the level of certainty (certain vs. probable). Participants were randomly divided amongst the six experimental conditions, and received a questionnaire with a hypothetical scenario that involved the behavior of an owner of a factory that creates a negative externality in its production process. Following the scenario, participants were asked about their likely behavior, as well as their social, legal and moral perceptions. Overall, we found that participants were more likely to produce when they paid the injured party, when they paid in advance and when the payment was not probabilistic.