Behavioral Economic Analysis of Redistributive Legal Rules

Abstract

I. INTRODUCTION and economics-the general topic of this Symposium-seeks to bring together and law and Law and (without modifier) is of course already about behavior. But it is typically about behavior of a particular sort: highly rational (in a particular sense of that term), optimizing behavior. Sometimes it is reasonable to assume that people behave in this manner; other times it is not.l The in and economics is about infusing and with insights into actual (rather than hypothesized) human behavior when such insights are needed to insure sound predictions or prescriptions about law. Behavioral and is not a critique of and economics. It shares with that approach to view that human behavior is organized by predictable patterns, which enable analyst to generate models (often formal ones) and testable hypotheses about effects of legal rules. And it shares view that such analysis is an important and valuable pursuit, one most worthy of legal scholars' attention. Where it disagrees with conventional and is about shape of predictable patterns of human behavior. Its goal is to offer better predictions and prescriptions about based on improved accounts of how people actually behave. This Essay offers a behavioral economic analysis of legal rules. Redistributive legal rules are rules chosen for their effects in shifting wealth from high-income to low-income individuals (progressive redistribution). The desirability of such rules has been subject of intense debate within legal community. Many and scholars have urged that legal rules be chosen solely with an eye towards Kaldor-Hicks (which I will call simply efficiency for remainder of this Essay); these scholars often urge that distributional considerations be addressed (if they are to be addressed at all) exclusively through tax and welfare systems.2 On this view, distributive goals do not provide a basis for choosing an inefficient legal rule-although they might, it seems, provide a basis for choosing between two efficient rules.3 Other legal scholars have argued that selection of legal rules should be informed by distributional considerations even at expense of efficiency.4 I will call a rule redistributive if it makes such a trade-off between distributive objectives and efficiency. A recurring theme in debate over legal rules has been relative cost of redistributing wealth through legal rules (defined to mean rules other than those that directly relate to tax and welfare systems) and redistributing wealth through tax and welfare systems (which I will call simply the tax or for remainder of this Essay). Under assumptions of neoclassical economics, any desired level of redistribution can be achieved at lower cost through tax system than through legal rules.5 This is not because tax system can redistribute wealth costlessly; animating feature of both lawyers' and economists' analyses of tax schemes is their potential to distort people's work incentives. Higher taxes on wealthy will tend to discourage people from earning high incomes. But from perspective of neoclassical economics, precisely same is true of legal rules: [U]sing legal rules to redistribute income distorts work incentives fully as much as income tax system-because distortion is caused by redistribution itself...'6 Thus, for example, a thirty percent marginal tax rate, together with an inefficient legal rule that redistributes an average of one percent of high earners' income to poor, creates same distortion in work incentives as a thirty-one percent marginal tax rate coupled with an efficient, non-redistributive legal rule.7 However, former regime also entails costs due to inefficient legal rule. …