Legal Design and the Evolution of Remorse

Abstract

Comparative institutional analysis is a building block of law and economics. To compare different legal rules one analyses how incentives are affected by these rules and how subsequent individual behavior is affected by the induced incentives. Building on the rational actor paradigm, analyses of this kind typically require stable, i.e. exogeneously given preferences. This may cause a fallacy since all behavior can be rationalized by assuming appropriate preferences. However, for a long time economists refused to deal with endogenous preferences arguing that the question where preferences come from should be answered by scholars from other disciplines. Early exceptions are papers by Becker (1976) and Hirshleifer (1977) who argue that preferences are shaped in an evolutionary process. More than a decade later Giith and Yaari (1992) developed a tool to study systematically the evolution of preferences, the indirect evolutionary approach which meanwhile has been successfully applied to quite a number of questions2. The indirect evolutionary approach is based on two analytical stages: At the first stage individual behavior is determined for given preferences. At the second stage preferences are subjected to an evolutionary process — the material payoff (or, as biologists put it, the fitness) being derived via the solution of stage one. The line of reasoning can be illustrated in the following (biological) way: Individuals are endowed with preferences. Given any situation (say a market or a game) preferences determine behavior and thereby an allocation of goods.