Publications

Abstract:  Excuse doctrine presents the greatest enigma of contract law. Excuse allows courts to release parties from their contractual obligations. It thus stands in sharp contrast to the basic principles of contract law and adds significant uncertainty to contract adjudication. This Article offers a crucial missing perspective on the doctrine of excuse: the view from a macroeconomic lens. Macroeconomics offers a new justification for the law of excuse, and new ways for understanding the doctrine’s mysteries, creating Excuse 2.0.

We offer a simple macroeconomic model of excuse doctrine, highlighting the role the doctrine plays under conditions of economic crisis and potential recession. Our analysis illustrates a counterintuitive advantage of excuse doctrine, suggesting that the legal uncertainty surrounding the doctrine can operate to induce loss-sharing between classes of contractual parties, thus minimizing the costs of long-term economic instability. In the Covid crisis, for example, excuse doctrine enabled an extraordinary wave of contractual renegotiation and loss sharing—without triggering excessive litigation. We discuss the interpretive and normative implications of our analysis and highlight its significance for contemporary policy debates in the wake of the Covid-19 pandemic. 

Abstract: Contract law offers three closely related excuse doctrines: impossibility, commercial impracticability, and frustration of purpose. These doctrines, which allow courts to release parties from their contractual obligations under extreme and unforeseeable circumstances, were central to contract disputes in the aftermath of the Covid-19 pandemic. Yet despite their importance, and despite decades of scholarly attention, these doctrines remain a puzzle, widely considered difficult to explain and justify. Existing economic theory sees contractual excuse doctrines as a risk-allocation mechanism; although highly influential, this standard theory leaves many questions unanswered. We offer a simple economic model explaining contractual excuse doctrines by focusing on avoidance investments, that is, investments by contractual parties designed to escape their obligations and wiggle their way out of the contract. We show that the proposed model offers a straightforward explanation to contractual excuse doctrines, illustrating their underlying logic, and accounting for the key patterns observed in court decisions. 

Abstract: Why do judges grant rehearing requests? We focus on rehearing requests in the Supreme Court of Israel, where the decision to hold a rehearing is made by a single judge and is documented. Using original data on all rehearing decisions since 2006, we find that judges who grant requests for a rehearing, are much more likely than other judges on the same rehearing panel, to reverse the original ruling in the rehearing. This difference is especially large for politically salient cases. This finding is consistent with the idea that judges grant rehearing requests when they disagree with the original ruling, from a policy perspective.

Abstract: What is the purpose of tax deductions? A common view among tax law scholars is that tax deductions are required to properly measure income. I present an alternative theory of tax deductions, relying on standard economic efficiency grounds. I develop a model which highlights the fact that economic activities have costs and benefits, but an income tax system taxes only some of those benefits. The efficient deduction rule allows the deduction of a share of the cost equal to the share of the benefit that is taxed. I also show that the deadweight loss due to a departure from the efficient deduction rule increases quadratically with the departure, making larger departures from the rule much more costly than smaller ones. I then review various tax deduction rules in the Internal Revenue Code, analyzing each rule under the two theories of tax deductions, and demonstrating that the efficiency theory is useful both for teaching tax deductions and as a guide to optimal tax policy.

Abstract: A large literature in law and economics analyzes the phenomenon of crime displacement and its implications for criminal law. Yet a similar phenomenon of harm displacement in the tort context has been ignored by scholars. We develop a simple model of bilateral accidents that allows for harm to be displaced by the victim. We compare the regimes of strict liability, absolute liability, and negligence and show that the possibility of harm displacement points to an advantage of strict liability and absolute liability. We use this finding to explain certain doctrinal patterns in tort law, such as strict liability for nuisance and absolute liability for intentional trespass.

Abstract: How would judges compose judicial panels, if they could? We focus on a procedure in the Supreme Court of Israel that allows each justice to compose three-justice panels, collecting an original database of decisions in this procedure. The data reveal strong bias in justices’ panel composition. A Gini coefficient measuring the extent of inequality in each justice’s panel composition, which runs between 0 (total equality) and 1 (total inequality), is 0.82 on average, which contradicts the random composition theory. The high variance in the choice of panel members contradicts the professional composition theory. The data support the idea that justices compose panels strategically, and accordingly the data uncover  justices’ revealed preference for panel members. We use the data to depict the relationships within the Supreme Court of Israel, and identify three groups of justices. Lastly, we show that justices who were selected by the current Chief Justice under the above procedure, before she became Chief Justice, are more likely to sit on panel with her in ordinary hearings after she became Chief Justice. Since the Chief Justice has the legal authority to compose ordinary panels, this is also consistent with strategic panel composition.

Abstract: What shapes individuals’ preferences for criminal justice error types, that is, the preferences for convicting the innocent versus letting the guilty go free? The strong correlation between preferences for criminal justice error types and incarceration rates across countries highlights the importance of these preferences. I develop an instrumental theory and an intrinsic theory of the preferences for criminal justice error types. Using individual-level data from the United States, I find support for both theories. Consistent with the instrumental theory of preferences, gender, race, and concern about crime shape preferences. Consistent with the intrinsic theory of preferences, education and ideology also shape preferences. I confirm these findings using individual-level data from 22 countries and provide some suggestive evidence that culture shapes preferences too.

Abstract: Can language be centrally planned and controlled? Friedrich Hayek considered language the archetypal example of spontaneous order, yet many countries adopt a planned-order approach to language, attempting to centrally plan and control it through language academies. I collect original data on the regulation of language across countries and show that countries that adopt a planned-order approach to language also do so in their law and similarly rely on a planned-order approach in their economy. Countries that adopt a spontaneous-order approach to language also do so in their law and similarly rely on a spontaneous-order approach in their economy. This is consistent with the idea that these approaches are driven by an underlying cultural attitude toward the two types of order.

Abstract: The past decade has seen a dramatic shift in the enforcement of tax and securities laws, from an almost exclusive reliance on designated agents for the  detection of violations of these laws, to a great reliance on whistleblowers, driven by the desire to obtain a reward. This shift has led to the payment of hundreds of millions of dollars in whistleblower rewards by the IRS and the SEC in recent years. Although legal scholars have devoted much attention to this shift in law enforcement, this literature has failed to explore one central question relating to the use of whistleblower rewards: How much should the IRS and the SEC pay whistleblowers? This Article fills this gap in the literature by developing a new economic model to capture the deterrent effect of whistleblower rewards. Using this model, this Article highlights three major determinants of the minimal deterring whistleblower reward: the gain to the violator from violating the law, the personal cost to the whistleblower, and the likelihood of a successful report. Three counter-intuitive findings emerge from this analysis: first, reports of less severe violations of the law may deserve a greater whistleblower reward; second, different whistleblowers may receive different rewards for providing the same type of information; and third, a greater likelihood of a successful false report may require a greater whistleblower reward. Recently adopted regulations that are intended to guide the IRS and the SEC in determining the size of whistleblower rewards do not consider the three abovementioned determinants of whistleblower rewards. Therefore, an improved whistleblowing policy would consider these factors as central factors when determining the level of whistleblower rewards.

Abstract: A well-known result in economic analysis of contract law is that expectation damages lead to over-reliance by the non-breaching party. Recently, the contractual disgorgement remedy has attracted much attention from scholars, yet no attempt has been made to analyze reliance investment under this remedy. In this article, we develop a model showing that under disgorgement a problem arises that is the mirror image of the problem that arises under expectation damages. While expectation damages lead to over-reliance by the non-breaching party, the disgorgement remedy leads to over-reliance by the breaching party. Therefore, the choice between these two contractual remedies should depend on which over-reliance problem is more costly. We also highlight other factors that can guide the choice between these two remedies.

Abstract: We examine the broad consequences of the right to counsel by exploiting a legal reform in Israel that extended the right to publicly provided legal counsel to suspects in arrest proceedings. Using the staggered regional rollout of the reform, we find that the reform reduced arrest duration and the likelihood of arrestees being charged. We also find that the reform reduced the number of arrests made by the police. Lastly, we find that the reform increased crime. These findings indicate that the right to counsel improves suspects’ situation, but discourages the police from making arrests, which results in higher crime.

Abstract: To enforce the law, the government must learn about violations of the law. One way of obtaining such information is by employing police officers and investigators. An alternative way is by rewarding whistleblowers. In this paper I consider two basic questions relating to whistleblower rewards. First, what is the optimal size of whistleblower rewards? Second, how should we choose between employing police officers and rewarding whistleblowers? I develop a model that highlights two features of thewhistleblowing context: whistleblowers bear a personal cost, and a reward may encourage false reports. I find that there is a nonmonotonic relationship between the personal cost to whistleblowers and the optimal reward, and between the risk of a false report and the optimal reward. Furthermore, offering a whistleblower reward dominates the employment of police officers and investigators when the risk of a false report is small.

Abstract: Across areas of law, administrative agencies employ four basic policymaking strategies: rulemaking, adjudication, advance ruling, and licensing. How should administrative agencies choose among these policymaking strategies? I develop a model which captures the idea that rules are inherently incomplete, and focuses on the strategic interaction between agencies and firms. Unlike rulemaking, adjudication allows for a policy that is narrowly tailored to firms’ circumstances. However, since adjudication takes place after firms have already acted, two time-inconsistency problems arise: the hold-up and the leniency problems. Advance ruling eliminates the hold-up problem, but not the leniency one. Licensing eliminates both problems, but only by requiring socially costly licenses even in cases where neither problem arises. Agencies’ choice of policymaking strategy depends on firm heterogeneity and the social cost of preapproval procedures.

Abstract: How should fringe benefits be taxed? Though fringe benefits are covered in every basic law school course on federal income taxation, no widely accepted economic framework has developed for thinking about their taxation. As a result, policymakers lack a clear picture of the benefits and costs of alternative tax regimes, when faced with situations such as the free luxurious meals provided by Google and Facebook to their employees. This Article fills this gap in the literature, by developing an economic theory of the provision of fringe benefits. Employing this economic framework, this Article considers different tax regimes for fringe benefits, using standard measures of a desirable tax policy, namely equity, efficiency, and revenue raising. This analysis provides three valuable implications. First, when labor markets are competitive, the choice of tax regime for fringe benefits has no effect on either horizontal or vertical equity. Second, the efficiency of the provision of fringe benefits depends on the marginal taxable income from these benefits. Third, non-taxation of fringe benefits generates a "double penalty” phenomenon, which results in a greater effect on tax revenue than scholars have realized. In light of these implications, this Article shows that policymakers choosing among possible tax regimes for fringe benefits face a tradeoff between efficiency and revenue raising. The two extreme tax regimes for fringe benefit often used, namely non-taxation and taxation at fair market value, lead to non-optimal outcomes both in terms of efficiency and in terms of revenue raising. Therefore, adopting intermediate tax regimes, such as the taxation of fringe benefits at half their fair market value, may be desirable.

Abstract: In many contexts, tax law grants favorable tax treatment to transactions of one type and adverse treatment to transactions of another type. The task of tax authorities is to draw lines in legally gray areas to distinguish between economically similar transactions that should receive different treatment. Despite tax law’s propensity for line drawing, the manner in which tax authorities draw legal lines has received little attention. This article aims to fill this gap by providing guidance to tax authorities on how to select the best line-drawing instrument in a given situation. First, the article demonstrates that tax authorities employ four different line-drawing instruments: rulemaking, adjudication, private letter rulings, and licensing. Second, the article develops a theory of line drawing in tax law, which identifies three criteria by which tax authorities should choose line-drawing instruments: the ideal policy, the effect on taxpayers, and the effect on tax authorities. Finally, the article applies this theory of line drawing to explain line-drawing instruments currently in use.

Abstract: How does the organizational structure of law enforcement agencies affect police activity and crime? We examine the consequences of an organizational reform in Israel that transferred the responsibility for housing arrestees from the police to the prison authority. Using the staggered rollout of the reform in different regions of the country, we document strong evidence that this organizational change led to an increase of 11% in the number of arrests and to a decrease of 4% in the number of reported crimes, with these effects concentrated in more minor crimes. The reform also led to a decrease in the quality of arrests, measured by the likelihood of being charged following an arrest. These findings are consistent with the idea that the reform externalized the cost of housing arrestees from the police's perspective, and therefore led the police to increase its activity against crime.

Abstract: How should administrative agencies choose among the different policymaking instruments at their disposal? Although the administrative law literature has explored this question with respect to the instruments of adjudication and rule making, it has failed to appreciate two other powerful instruments at agencies’ disposal: advance ruling and licensing. Taking these four policy-making instruments into consideration, this Article provides a general theory to guide agencies in selecting the most suitable policy-making instrument in different policy environments. To do so, the Article utilizes a new game-theoretic framework, focusing on two central dimensions of policy-making instruments in particular: timing and breadth. This framework provides two valuable implications. First, it highlights two key administrative challenges that are underappreciated by the academic literature: the holdup and leniency problems. And second, the framework shows that administrative agencies are underutilizing two powerful policy-making instruments, namely, licensing and advanced rulings. I argue that these two instruments are valuable across areas of law.

Abstract: How do social values shape legal institutions across countries? To address this question I focus on one important legal institution—the use of plea bargaining in criminal cases. I develop a model in which the optimal scope of plea bargaining depends on social values. Specifically, a lower social emphasis on ensuring that innocent individuals are not punished, and a greater social emphasis on ensuring that guilty individuals are punished, lead to a greater use of plea bargaining. Using unique cross-country data on social preferences for punishing the innocent versus letting the guilty go free, as well as an original coding of plea bargaining regimes across countries, I obtain results that are consistent with the model.

Abstract: Why do some countries mandate a long maternity leave, while others mandate only a short one?We incorporate into a standard mandated-benefit model social tolerance of gender-based discrimination, showing that the optimal length of maternity leave depends on it. The less tolerant a society is of gender-based discrimination, the longer the maternity leave it will mandate. Relying on recent research in psychology and linguistics according to which patterns in languages offer a window into their speakers’ dispositions, we collected new data on the number of gender-differentiated personal pronouns across languages to capture societies’ attitudes toward gender-based discrimination. We first confirm, using within-country language variation, that our linguistic measure is correlated with attitudes toward gender-based discrimination. Then, using cross-country data on length of maternity leave, while controlling for other parameters, we find a strong correlation between our language-based measure of attitudes and the length of maternity leave.

Abstract: Although administrative law doctrine requires courts to defer to an agency’s reasonable statutory interpretation, the doctrine is unclear as to whether an agency gets less deference when it changes its own prior interpretation. We formally analyze how judicial deference to revised agency interpretations affects the ideological content of agencies’ interpretations. We find a nonmonotonic relationship between judicial deference to inconsistent agency interpretations and interpretive extremism. This relationship arises because as courts become less deferential to revised interpretations, the initial agency finds it more attractive to promulgate a moderate interpretation that will not be revised. However, the less deferential the courts, the more extreme this moderate interpretation becomes. Normatively, our results suggest that an interest in responsiveness of interpretive policy to the preferences of the incumbent leadership favors deference to revised interpretations, whereas an interest in ideological moderation favors a somewhat less deferential posture to interpretive revisions.

Abstract: Many statutes are administered by administrative agencies. This paper shows that, when interpreting an ambiguous statute, administrative agencies choose between two strategies of statutory interpretation: the risky strategy, a relatively aggressive interpretation that provokes an appeal by the firm; and the safe strategy, a relatively nonaggressive interpretation that the firm complies with. The paper also shows that a change in the level of judicial deference may result in a shift from the risky strategy to the safe one, or vice versa. Therefore, contrary to the commonly held view, an increase in the level of judicial deference may result in agencies choosing a less aggressive statutory interpretation, and in more court decisions reversing agencies’ statutory interpretation.

Abstract: Advance tax rulings allow taxpayers to achieve certainty about the tax consequences of contemplated transactions, and are thus considered indispensable in the modern world of tax administration and compliance. After providing evidence of tax law uncertainty, which should give rise to a demand for advance tax rulings, the Article shows that advance tax rulings are in fact infrequently used. To explain this counterintuitive finding, the Article analyzes the taxpayers’ strategic considerations when deciding whether to request an advance tax ruling. The strategic disadvantages of applying for an advance tax ruling are shown usually to outweigh the strategic advantages of such a request. Since the same strategic considerations apply when taxpayers decide whether to request an advance pricing agreement – a new procedure for resolving transfer pricing disputes – this analysis also explains why, despite considerable attention from scholars and practitioners in recent years, advance pricing agreements have been infrequently used, and are therefore unlikely to resolve the transfer pricing problem – probably the most significant problem in modern international taxation.