Law Design: Methodology

Abstract

At the core of every civil law suit lays a plaintiff's claim of some harm caused by a defendant. Under the current judicial system, the law is structured such that the plaintiff’s entitlement to relief is determined through a verification process in court. This process contains numerous problems, with the main one being that the frequent necessity for the transfer of legal rights (the demand for court services) far outweighs the ability of the court system to supply verdicts in these disputes (the supply of court services). In this paper we develop a methodology that can be used to design legal mechanisms that will induce the parties to reallocate legal rights while fully compensating the right holder without utilizing the court system. To accomplish this, we use “reverse game theory” to structure mechanisms such that the desired outcome is the unique equilibrium of the game. For each mechanism, the designer determines the taking price and sets two payoffs for each player, one if he chooses to comply with the mechanism and one if he chooses not to comply and the dispute ends up in court. The payment in court is lowered so that compliance by both players is the unique equilibrium of the game. We call this methodology “law design.” We show that there are six sufficient conditions that, in tandem, guarantee that law design will succeed in keeping cases out of court, and demonstrate that the same methodology can be used for designing reallocation mechanisms and allocation mechanisms (when there is uncertainty regarding the allocation of a legal right).