What (if anything) Does Normative Economics Contribute to the Philosophy of Justice?

Fairness versus Welfare

Louis Kaplow and Steven Shavell

Abstract

The thesis of this Article is that the assessment of legal policies should depend exclusively on their effects on individuals' welfare. In particular, in the evaluation of legal policies, no independent weight should be accorded to conceptions of fairness, such as corrective justice and desert in punishment. (However, the logic leading to this conclusion does not apply to concern about equity in the distribution of income, which is often discussed using the language of fairness.)

Our analysis begins with the argument that, when the choice of legal rules is based even in part on notions of fairness, individuals tend to be made worse off. Indeed, if any notion of fairness is ascribed any evaluative weight, everyone will necessarily be made worse off in some situations. Moreover, when we examine various principles of fairness and the literature that advances them, we find it difficult to identify reasons that, on reflection, justify giving importance to these principles at the expense of individuals' well-being.

Nevertheless, policy analysts and the population at large obviously find notions of fairness appealing. We conjecture that their attractiveness is rooted in several factors. Namely, individuals who believe in ideas of fairness tend to behave better toward others; notions of fairness may serve as proxy goals for instrumental objectives; and individuals may have a taste for satisfaction of the notions. Furthermore, each of these factors is a reason that principles of fairness are relevant under a welfare-oriented normative approach. As we explain, however, none of these factors warrants treating notions of fairness as independent evaluative principles.

We develop our thesis through consideration of specific conceptions of fairness that are employed in major areas of the law: tort, contract, legal procedure, and law enforcement. We also discuss the implications of our analysis for our primary audience, legal academics and other legal policy analysts, as well as for government officials, notably, legislators, regulators, and judges.

©2000 Louis Kaplow and Steven Shavell. All Rights Reserved.

114 Harvard Law Review (February 2001) and Harvard University Press (forthcoming).

TABLE OF CONTENTS

1. INTRODUCTION
2. WELFARE ECONOMICS AND NOTIONS OF FAIRNESS
   1. Welfare Economics
      1. 1. Individuals' Well-Being
      2. Social Welfare and Individuals' Well-Being
      3. Remarks on Social Welfare and the Distribution of Income
      4. Concluding Remark
   2. Notions of Fairness
      1. The Basic Nature of Notions of Fairness
      2. Further Remarks on Notions of Fairness
         1. Meaning
         2. Nonconsequentialist character
         3. Ex post character
         4. Concluding remark
   3. Overview of Our Argument
      1. The Argument for Welfare Economics and Against Notions of Fairness
      2. On the Rationale for Notions of Fairness
   4. Notions of Fairness and Social Norms
      1. The Nature of Social Norms
      2. Implications for the Role of Notions of Fairness in Legal Policy Analysis
3. TORTS
   1. Welfare Economics and Tort Law
   2. Notions of Fairness and Tort Law
      1. Notions of Fairness in Tort Law
      2. Comments on the Literature
   3. Welfare Economics versus Fairness in Paradigmatic Accident Situations
      1. Reciprocal Accidents
         1. Description
         2. Effects of the legal rules
         3. Choice of legal rules using welfare economics
         4. Choice of legal rules using notions of fairness
         5. Why the choice of legal rules should be based only on individuals' well-being
            1. The argument for welfare economics and against notions of fairness
            2. Comments on the literature
            3. The significance of the possibility that all individuals may be made worse off under any notion of fairness
         6. The apparent mootness of concerns for fairness
      2. Nonreciprocal Accidents
         1. Description
         2. Effects of the legal rules
         3. Choice of legal rules using welfare economics
         4. Choice of legal rules using notions of fairness
         5. Why the choice of legal rules should be based only on individuals' well-being
   4. Welfare Economics versus Fairness in Paradigmatic Accident Situations: The Case in Which Harm Is Uncertain
      1. Reciprocal Accidents
         1. Description
         2. Effects of the legal rules
         3. Choice of legal rules using welfare economics
         4. Choice of legal rules using notions of fairness
         5. Why the choice of legal rules should be based only on individuals' well-being
         6. The foregoing reconsidered when insurance is not purchased
            1. Victims uninsured
            2. Injurers uninsured
      2. Nonreciprocal accidents
   5. The Appeal of Notions of Fairness and Its Implications
      1. Social Norms and Notions of Fairness
      2. Implications for the Role of Notions of Fairness in Legal Policy Analysis
      3. Remark on the Concepts of Injurer and Victim
      4. Remark on the Ex Post Character of Notions of Fairness
   6. The Extent to Which the Use of Notions of Fairness Has Led Us Astray
4. CONTRACTS
   1. Welfare Economics and the Enforcement of Contracts
   2. Notions of Fairness and the Enforcement of Contracts
      1. Promise-Keeping
      2. View that Breach is Akin to a Tort
      3. Further Comments on the Literature
   3. Welfare Economics versus Fairness and the Enforcement of Contracts
      1. Complete Contracts
         1. Description
         2. Examination of different contracts
         3. Effects of the legal rules
         4. Choice of legal rules using welfare economics
         5. Choice of legal rules using notions of fairness
         6. Why the choice of legal rules should be based only on individuals' well-being
            1. In relation to promise-keeping
            2. In relation to view that breach is akin to a tort
            3. Summary
      2. Incomplete Contracts
         1. Description
         2. Effects of the legal rules
         3. Choice of legal rules using welfare economics
         4. Choice of legal rules using notions of fairness
         5. Why the choice of legal rules should be based only on individuals' well-being
            1. In relation to promise-keeping
            2. In relation to view that breach is akin to a tort
         6. The apparent mootness and arbitrariness of concerns for fairness
         7. The appeal of notions of fairness and its implications
   4. Additional Considerations
      1. Distribution of Income
      2. Advantage-Taking
      3. The Extent to Which the Use of Notions of Fairness Has Led Us Astray
5. LEGAL PROCEDURE
   1. Ability to Bring Suit
      1. Welfare Economics and the Ability to Bring Suit
      2. Notions of Fairness and the Ability to Bring Suit
      3. Description of Basic Case
      4. Effects of the Legal Rules
      5. Normative Assessment
         1. Choice of legal rules using welfare economics
         2. Choice of legal rules using notions of fairness
         3. Why the choice of legal rules should be based only on individuals' well-being
      6. The Appeal of Notions of Fairness and Its Implications
      7. Remarks on the Generality of Our Results
      8. The Extent to Which the Use of Notions of Fairness Has Led Us Astray
   2. Accuracy in Adjudication
      1. Welfare Economics and Accuracy in Adjudication
      2. Notions of Fairness and Accuracy in Adjudication
      3. Basic Case: Accuracy in Assessing Damages and the Benefit of Inducing Behavior in Accordance with Legal Rules
         1. Description
         2. Effects of the legal rules
         3. Choice of legal rules using welfare economics
         4. Choice of legal rules using notions of fairness
         5. Why the choice of legal rules should be based only on individuals' well-being
         6. The appeal of notions of fairness and its implications
      4. Variations: Accuracy in Determining Damages
         1. Case in which injurers do not know in advance how much harm victims will suffer
         2. Case in which victims are risk averse, and injurers do not know in advance how much harm victims will suffer
      5. Variations: Accuracy in Determining Liability
      6. Remarks
         1. The generality of our results
         2. Parties' excessive incentives to invoke procedures in litigation
      7. The Extent to Which the Use of Notions of Fairness Has Led Us Astray
   3. Additional Reasons Why Legal Procedures Might Be Valued
      1. Possible Tastes for Procedural Fairness
      2. Other Ways that Procedures May Enhance Individuals' Well-Being
6. LAW ENFORCEMENT
   1. Welfare Economics and Law Enforcement
   2. Notions of Fairness and Law Enforcement
      1. Notions of Fairness in Law Enforcement
      2. Comments on the Literature
   3. Welfare Economics versus Fairness and Law Enforcement
      1. Fair Punishment and Deterrence in a Paradigm Case
         1. Description
         2. Behavior of individuals under different sanctions
         3. Choice of sanction using welfare economics
         4. Choice of sanction using notions of fairness
         5. Why the choice of sanction should be based only on individuals' well- being
            1. Effects on the well-being of different groups
            2. Actual imposition of unfair punishment under the two approaches
            3. Comments on the literature
      2. Variation of the Paradigm Case: Different Crimes
      3. Variation of the Paradigm Case: Imperfect Deterrence
      4. Variation of the Paradigm Case: Punishment of the Innocent
         1. Analysis of a basic situation
         2. Comments on the literature
   4. The Appeal of Notions of Fairness and Its Implications
      1. The Origins and Functions of Notions of Fairness
      2. Implications for the Role of Notions of Fairness in Legal Policy Analysis
      3. Remark on the Ex Post Character of Notions of Fairness
   5. The Extent to Which the Use of Notions of Fairness Has Led Us Astray
7. ON THE USE OF NOTIONS OF FAIRNESS AND WELFARE ECONOMICS BY DIFFERENT TYPES OF ACTORS
   1. Ordinary Individuals
   2. Legal Academics
      1. The Appeal of Notions of Fairness to Legal Academics
      2. Why Legal Academics Should Be Guided by Welfare Economics
      3. Reminder of the Ways in Which Notions of Fairness Are Relevant for Legal Policy Analysis under Welfare Economics
   3. Government Decisionmakers
8. COMMENTS ON THE BREADTH AND SOUNDNESS OF WELFARE ECONOMICS
   1. Design of Legal Institutions
      1. Accuracy
      2. Controlling Government Officials' Behavior
      3. Legitimacy of Legal Institutions
      4. Administrative Costs
   2. Preferences and Individuals' Well-Being
      1. Imperfect Information and Other Limitations on Individuals' Decisionmaking
      2. The Effect of the Law on Preferences
      3. Trumping Objectionable Preferences
      4. Tastes for Notions of Fairness
   3. Bad Luck and Inequality
      1. Bad Luck: Ex Ante versus Ex Post Evaluation
      2. Equality and Equal Treatment
   4. Additional Concerns about the Application of Welfare Economics
      1. Difficulty in Valuing Life, Pain and Suffering, and Other Nonpecuniary Factors
      2. Omission of "Soft" Variables
      3. Possible Costs of Permitting Market Trade
      4. Indeterminacy
         1. Indeterminacy due to empirical uncertainty
         2. Alleged conceptual indeterminacy
      5. The Difficulty of Predicting the Behavior of Individuals, Who Are Not Always Rational Maximizers of Their Own Well-Being
9. CONCLUSION

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