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Programme

Behavioural Approaches to Contract and Tort:

Relevance for Policymaking

Summary

The objective of this research programme (2008-2011) is to analyse specific areas of law affecting contracts and torts, making use of insights from behavioural sciences. The starting point for the analysis is that in regulating the contracting process and by imposing liability in tort, the design of private law is based on a number of presumptions concerning the behaviour of individuals and organisations.  The insights from behavioural sciences raise a number of interesting issues for the analysis of law in action and policymaking with regard to contracts and torts. They can be summarised in the two broad research questions: What is the contribution of behavioural approaches to the analysis of legal rules disciplining contract and tort? How do legal rules incorporate insights from behavioural sciences? As regards the object of research, the programme focuses on three particular domains: 1) individual behaviour in exchanging resources and engaging in harmful activities; 2) enforcement; and 3) behaviour of aggregations of individuals.  Within these domains, the projects within the programme will focus on specific research questions. Starting from a traditional legal background, the programme contrasts the content of private law rules (and its underlying presumptions) with hypotheses based on assumptions used in behavioural sciences.  In doing so, it aims at synthesising socio-legal studies, the psychology of law, and Law and Economics.

Keywords

private law; liability; contracting; organizations; corporations; regulation; behavioural sciences; economics; socio-legal studies; psychology; efficiency; distributive justice; fairness; equity.

Introduction

The objective of this research programme (2008-2011) is to analyse specific areas of law affecting contracts and torts, making use of insights from behavioural sciences. The private law concepts of ‘tort’ and ‘contract’ are understood in a broad sense. Hence, ‘contract’ refers to interaction between parties in the exchange of resources, and ‘tort’ refers to activity causing harm to society. Behavioural sciences include the economic analysis of law (Law and Economics), socio-legal studies, and psychology. The starting point for the analysis is that in regulating the contracting process and by imposing liability in tort, the design of private law is based on a number of presumptions concerning the behaviour of individuals and organisations. There is a natural connection between how courts and legislators base their decisions on presumptions and how different social sciences describe phenomena based on assumptions regarding human behaviour (both in the absence and presence of legal rules). At the outset, it must be noted that within this research programme the concepts of ‘presumptions’ and ‘assumptions’ are given a different meaning. Social sciences generally make use of assumptions when building models of human behaviour, in order to predict how parties will behave in contract and tort settings. For example, the Law and Economics literature examines the incentives provided by tort law under certain assumptions regarding the behaviour of injurers, victims, and courts. Legal policymakers (i.e. courts and legislators) are more interested in identifying presumptions that they can use for specific policy choices they make. For example, the legislator may impose an information remedy, thinking that consumers will make better choices after having received information on the benefits and dangers of particular transactions. The assumptions on behaviour made by social sciences may or may not be in line with private law policy presumptions. In some instances, the rational choice theory used in Law and Economics, for example, may be reconcilable with the world view of policymakers. In other cases, the presumptions of the policy makers may deviate from assumptions formulated in social science theories. The research programme aims at identifying and assessing both the assumptions used in behavioural approaches to law and the presumptions that underlie policy making.

Research questions

Insights from behavioural sciences raise a number of interesting issues for the analysis of law in action and for policy making relating to contracts and torts. They can be summarised in the two broad research questions below.

  • What is the contribution of behavioural approaches to the analysis of legal rules disciplining contract and tort?

Economics, sociology, and psychology try to explain the behaviour of individuals and institutions in a given set of circumstances, which may also be relevant for the law. Social sciences formulate assumptions on how individuals and their aggregations behave. Economics, for instance, assumes that people behave rationally; cognitive psychology assumes that people’s behaviour may have systematic biases. On this basis, theories are built on how people react to and respond in certain situations. When law is factored into the analysis, these theories generate explanations and predictions as to how legal rules and their enforcement patterns affect individual and institutional behaviour in those situations. This research programme will investigate the explanatory power of behavioural theories for contract and tort settings. For instance, economic analysis of law predicts how tort liability affects individuals’ incentives to take due care. In Law and Economics and socio-legal studies, this is referred to as a positive analysis of law. These predictions are testable and falsifiable both theoretically (based on consistency with the underlying assumptions) and empirically (based on consistency with the outcomes that are actually observed). As regards empiricism, the emphasis in this programme is on the reappraisal of existing empirical studies undertaken in social sciences rather than on an independent collection and investigation of new data.

Many social sciences within this research programme do not aim only at explaining how and why the world is as it is; they also try to suggest how it should be. When applied to the analysis of law, this approach also raises the question of which legal rules are best suited to regulate a given phenomenon. This research programme will assess the quality of legal rules pertaining to tortious and contractual activities based on their rationale according to other social sciences. As well as considering legal rules only for their effects on behaviour, social sciences also rank these effects – and the rules that produce them – based on desirability for the interest of society. For instance, an economic analysis of law claims that providing the victim as well with legal incentives to take due care is socially desirable in a number of circumstances. This is commonly referred to as a normative analysis of law, and it can be based on different criteria of assessment (economic efficiency, corrective/distributive justice, and so on). The final judgment on the merits of legal rules for society depends on these criteria, which might be in conflict with each other. This research programme will also highlight these conflicts in assessing the quality of law based on the input of other social sciences.

  • How do legal rules incorporate insights from behavioural sciences?

Legal rules and their enforcement do not come out of nowhere. They are influenced by the legal policymaker’s (legislature, judges, regulatory agency) vision of the situations that are regulated, which in turn determines why they are regulated. This vision is the policy presumption underlying any specific set of rules. The presumption is both about individual/institutional behaviour in the considered circumstances and about how the law should improve this behaviour. This research programme will investigate the presumptions underlying the legal discipline of contract and tort settings, and compare them with behavioural theories and practices. Insights from other social sciences can put these presumptions into question, when they predict that individual and institutional behaviour will be different from the policymaker’s presumptions, and even more so, when the factual components of these presumptions are not borne out by empirical evidence. On the side of positive analysis, this approach examines the consistency of the policy presumptions underlying the regulation of tortious and contracting behaviour together with the theoretical frameworks developed in other social sciences and with the empirical evidence. For instance, can patients really be expected to make rational choices as to their medical treatment when provided with all relevant information? Is their observed behaviour consistent with the policy presumption that information disclosure improves the quality of contractual choice?

The next question within this approach to behavioural analysis concerns the efficacy of legal rules and their enforcement. Embedded in the legal policymaker’s presumptions is a vision both of how people behave and of how law could and should influence their behaviour. This research programme will determine whether legal rules and their enforcement are effectively capable of reaching the goal for which they were designed. For instance, is the provision of mandatory information efficacious in leading patients to choose what is best for them? Alternatively, are other regulatory strategies (e.g. public law, self-regulation) more efficacious in achieving the selection of the ‘best’ treatment for the patients? This is a judgment relating to the internal consistency of law with its intended goals. As such, it does not aim at questioning the goals set by policymakers. It only ranks legal solutions based on their relative efficacy in achieving them.

Three specific research domains

As regards the object of research, the programme focuses on three particular domains:

  1. individual behaviour in exchanging resources and engaging in harmful activities;
  2. enforcement;
  3. behaviour of aggregations of individuals.

Within these three domains, the projects within the programme will focus on specific research questions. Thus, at the closing of the programme period, examples and case studies relating to all three pillars will be available, allowing conclusions to be drawn at a more general, abstract level as well.

Individual behaviour in exchanging resources and engaging in harmful activities

In theory, rational individuals who have all the necessary information can make good choices when concluding contracts (purchasing, borrowing, investing) or performing activities that may result in harm to society (production, consumption, work, leisure). Economists hold that efficient outcomes (maximisation of the welfare of society) may be reached if rational individuals possess all relevant information and take this as the basis for decision-making. By contrast, if individuals are not rational or do not possess all necessary information, welfare losses may occur. Neo-classical Law and Economics discusses the ability of legal rules to correct information asymmetries. Behavioural Law and Economics focuses on the welfare losses that are caused by irrational behaviour, and suggests how they can be remedied by legal rules. In this perspective, the general research questions to be answered in specific areas of individual behaviour are the following:

  • Which legal rules may correct information asymmetries in exchanging resources?
  • Which legal rules may be needed to overcome welfare losses caused by irrational behaviour?
  • How may optimal legal rules be produced: who should produce these rules – i.e. private vs. public law; at what level should the rules be enacted – centralised vs. decentralised production of rules?

In addition to the theoretical approach, the first step in the programme also has  an empirical focus.  It consists of two components: (a) surveying and summarising the relevant empirical studies undertaken by social science research and (b) exploring the content of private law rules to test the behavioural presumptions on which they may be based.

As far as contract and tort law are more specifically concerned, a number of rules and doctrines aimed at the making of informed choices will be analysed in order to answer the following research questions:

  • What presumptions about human behaviour underpin rules of contract law aimed at informed choice making?
  • Is there any empirical evidence supporting these presumptions?
  • Which legal rules enhancing informed choice making contribute to efficiency?
  • How does compulsory information sharing correct for information asymmetry?
  • What kind of information duties are needed to correct for irrational behaviour of individuals?

How can we judge which information is ‘relevant’: there may be too little as well as too much information. In this respect, the question arises especially as to how the insights from cognitive psychology can be used to learn what information (or regulatory) strategies can be deemed successful to make private legal solutions work.

Enforcement

The central research question for this part is whether – and if so, to what extent – one should rely on private parties and/or on public bodies for enforcement, given the behavioural assumptions regarding private individuals and public representatives of society in the specific circumstances considered for investigation. With reference to the individual or organisational behaviour that form the subject matter of the investigation, the following should be evaluated: public vs. private enforcement, optimal combinations of the two, and alternative techniques (e.g. gate-keeping, self-regulation). Moreover, the more fundamental question of what private law remedies are actually available and imaginable may need an answer as well.

Standards for evaluation in view of the goals of enforcement can be manifold, and they depend on the level of analysis. Generally speaking, the following standards present themselves:

1.      efficacy with respect to the assigned policy goal;

2.      economic efficiency;

3.      non-economic policy goals or other theoretical paradigms.

More specific research questions in this perspective are the following.

  • Is individual/corporate behaviour best regulated by the incidental private initiative of a tort or contract claim, by frequent supervision by regulatory agencies, or by some ‘third way’ alternative (e.g. self-regulation)?
  • Currently, organisations are subject to more regulation than ever before. In some jurisdictions, duties of disclosure, duties to obtain information, to warn against inherent dangers, or to abstain from misleading statements are no longer the prerogative of private enforcement by individuals but rather the domain of enforcement agencies. As a consequence, there is an ongoing transition from private law to public law (and vice versa) in the field of financial services, competition law, consumer contracts, food safety and product safety agencies, and occupational health and safety agencies. What are the consequences of this transition for the domain of private law?
  • What triggers private parties to enforce private law rules and public officials to enforce (public) law? By comparing the motivations of private individuals to enforce the law (compensation? revenge? self vindication?), and comparing these with the motivations of public officials, we may be able to show the implications for the optimal balance between private and public enforcement.
  • Indeed, the aforementioned raises more general questions as to the (optimal mix of) enforcement instruments, and merits the question of why a particular instrument (e.g. criminal law) may be more (cost-) effective in a particular context. The relationship and cooperation between the various enforcement instruments and actors also deserves specific attention.

Behaviour of aggregations of individuals

In this section, the study of contract and tort is extended from individuals to the conduct of organisations. We understand organisations to be a broad concept, encapsulating commercial business enterprises (varying from large multinationals to small and medium-sized enterprises), corporations, legal persons, and aggregations of individuals ranging from non-profit organisations, consumer/investor associations, and self-regulatory organisations, through to government agencies, and so on. Naturally, we do not focus exclusively on how organisations think and decide in the shadow of the law, but also on whether private law rules have any bearing on organisational behaviour. Specifically, aspects of both internal organisation (disciplined, e.g. by corporate law) and external interaction with other members of society (e.g. in the field of consumer/investor protection, but also environmental law) will be included in the study of the impact of law on private and public organisations. In short, organisations are created by contract, conclude contracts in their turn, and engage in tortious activities. As a consequence, the general research questions in this section depend on the level of analysis; hence, these questions are:

  1. Do organisations respond differently from individuals to rules in contract and tort?
  2. Under what conditions should policymakers stimulate setting up organisational structures?
  3. In which direction, in which form, and to what extent should private law intervene to correct the behaviour of organisations?

In many areas of law, these questions are of current interest. As far as internal organisation is concerned, possible topics are:

  • corporate contract and its discipline by company law;
  • vicarious liability and regulation of internal monitoring;
  • organisation and accountability of self-regulatory organisations vs. regulatory authorities.

Regarding the interaction of organisations with society, subjects of investigation in this perspective include:

  • mass torts;
  • consumer credit;
  • commercial (B2B) contracts and their implications for IP and antitrust; consumer protection in B2C contracts;
  • corporate fraud, with a special view to the placement/trading of securities;
  • corporate social responsibility vs. environmental/safety regulation.

From this perspective, the programme will focus on how corporate behaviour is affected by contract and tort law. The connection between empirical evidence of behavioural influences of contract and tort law and the law itself is explored. Several questions can be raised in this respect, such as:

  • Is there firm evidence that corporate tortfeasors change their behaviour after being held liable for damages? Under what conditions is this change most likely to take place? Should private law remedies be adjusted in order to provide more efficacious incentives for compliance?
  • How do businesses respond to large-scale claiming? What innovative systems of managing these risks do they design? Does self-regulation help businesses in this respect, or should the legislature provide for more uniformity or more effective remedies?
    Additionally, the question also arises as to what role contract and tort law can and do play in inducing corporations towards compliance. Here again, the question can be asked regarding the role of self-regulation within corporations and the role of corporate governance structures in organisational behaviour.

Scientific relevance

This research programme aims at incorporating insights from behavioural sciences into legal thought. The presumptions underlying the regulation of contracts and liability for torts will be identified and then contrasted with assumptions used in behavioural sciences (such as the rationality assumption in economics). Behavioural approaches allow one to explain and better understand the real-life effects of existing rules of contract law, tort law, and the law of organisations. Not only the legal science but also the social sciences may benefit from this interdisciplinary endeavour. Identifying assumptions and contrasting them with presumptions underlying actual legal rules may enable social science researchers to refine existing theoretical models and adapt them to better explain real-world phenomena.

Social relevance

By focusing both on the assumptions made by social sciences concerning human behaviour (and their related effects) and on presumptions made by policymakers concerning the effects of certain policy choices, legal rules can be constructed in a far more effective way. The research programme aims at explaining legal rules as they are, but also (in the normative analysis) at examining how legal rules in the domains of contract law and tort law could be improved to better fulfil their societal functions. The latter ambition is one of the crucial elements in the three specific research domains that have been described.

Methodology

Based on a traditional legal background, the programme contrasts the content of private law rules (and the underlying presumptions) with hypotheses based on assumptions used in behavioural sciences.  In doing so, it aims at synthesising socio-legal studies, the psychology of law, and Law and Economics. Other disciplines are also welcome for specific projects within the framework of this programme. Additionally, the research team is committed to using interdisciplinary research data as much as is possible without compromising scientific validity. Experience has shown, however, that it is difficult to transfer research output from one discipline to other research fields. Therefore, the methodology and ‘translation’ of research output will be monitored during the execution phase of the programme.

Institutional environment

The research team will be formed on the basis of cooperation between the following departments:

The nucleus of this research consists of scholars from, on the one hand, the Civil Law Department and, on the other hand, the Law and Economics Department, both at the Law Faculty of the Erasmus University Rotterdam. Scholars from the Civil Law Department are at the Rotterdam Institute of Private Law (RIPL), whereas the Rotterdam Law and Economics scholars constitute the Rotterdam Institute of Law and Economics (RILE). The expertise from these two institutes is the basis for the execution of this research programme. The programme leaders come from the RIPL (van Boom) and the RILE (Faure), and ensure that within the programme an optimal cooperation is guaranteed between Law and Economics scholars and private law scholars.

Most participants in the programme also work at these two institutes. In addition, the programme will be further supported by the input of Prof. Rassin, who is working in the area of law and psychology. This is crucial for including the empirical behavioural insights into the programme. Both the Department of Socio-Legal Studies and the Social Law Department will – in part – join the research programme from 2009 onwards (as they will still be involved in another research programme until that time).

Quality assessment

The execution of the research within the programme is subject to ongoing internal and external quality assessment. On the one hand, the need is felt to stress quality assessment in order to guarantee excellence in scholarly output; on the other hand, academics obviously want to avoid spending too much time on quality assessment and too little on actual research. In order to facilitate this optimal mix, the following quality assurance mechanisms have been developed:

As regards the PhD students, quality assurance will be guaranteed by the PhD supervisors. Research carried out in the three specific research domains will be monitored by senior scholars responsible for the research. Their basic task is to stimulate research in these domains in line with the general goals of the research programme outlined above. These senior scholars report to the programme directors (to the extent that there is no overlap in that respect). The responsibility of the programme directors (Van Boom and Faure) is twofold: first, to verify that within the specific research domains output of sufficient quality and quantity is generated and contributes to an execution of the general goals of the research programme; second, to stimulate the generation of integrated research projects that go beyond the specific domains mentioned and that present a result of the programme as a whole.

The programme directors will draft a yearly scientific report that is provided to and verified by the Faculty Board.

Quality assurance of individual research output is further guaranteed by a seminar series in which scholars participating in the programme are invited to present their research, and where a critical academic evaluation of the research output will take place.

The external evaluation takes place at two levels: first, on a yearly basis the output of the research programme will be evaluated by the Faculty Board on the basis of the scientific report drafted by the programme directors; second, once every three years (hence, for the first time over the period 2008-2010) an external Board of Evaluation will assess the research results on the basis of a Peer Review following the Standard Evaluation Protocol (SEP). The goal of this external evaluation is to judge the quality of the research executed within the group, to determine whether the research group has been able to carry out the research as announced in this programme, and to formulate recommendations for the future.

International network

Apart from this modest nucleus, a further augmentation of the team is envisaged on the basis of future external funding and ad hoc-cooperation within the framework of the specific themes. The research team aims at obtaining external funding and research cooperation.

Moreover, the institutes (RIPL and RILE) that participate in this programme both have an extensive network of researchers with whom they cooperate and on whom they can call to contribute to the execution of the research. More specifically, RIPL has excellent contacts with the European Centre of Tort and Insurance Law (ECTIL) in Vienna, a specialised research institute in the area of tort and insurance law. In the past, both programme directors have collaborated intensively with ECTIL, which has a large worldwide research network of scholars upon whom the programme can also call.

RILE has an ongoing intensive cooperation with the European Association of Law and Economics (EALE), of which Prof. Van den Bergh and Prof. Faure were president and secretary, respectively, for more than 12 years. EALE organises annual conferences and brings together European scholars interested in the economic analysis of law. The excellent contacts between RILE and EALE thus allow RILE to call on this network in order to establish research collaborations. Moreover, RILE is actively participating in the European Doctorate in Law and Economics (EDLE), which will converge as much as possible with this key research programme.

More particularly, the research collaborations will be developed with specific scholars and institutes having considerable expertise in the area of behavioural studies. In this respect, contacts will be intensified with the help of:

 

  • Prof. Anthony Ogus, emeritus from Manchester University. Prof. Ogus has published on the importance of behavioural approaches for both regulation and private law, and his contribution to the programme will thus be essential;
  • The Centre for Empirical Economic Research (Prof. Bruno Frey) and the ETH Zürich (Prof. Gérard Hertig). These centres in Zürich have extensive experience with experiments showing the cognitive limitations of individuals; they also run seminar series on behavioural approaches and their importance for economics and law;
  • Prof. Jason Scott Johnston from the Faculty of Law of the University of Pennsylvania. He has published widely, also on behavioural approaches, corporate social responsibility, and risk regulation. Thus, collaboration with Prof. Scott can constitute an equally important contribution.

Forms and presentation

The research conducted within this programme will of course take the traditional forms of publication in proceedings volumes and articles in preferably peer-reviewed journals. However, in order to create cohesion within the programme and integration between the various researchers, steps will be taken, among which:

  • the setting up of a seminar series. On a monthly basis, scholars participating in the programme will present ongoing research in a seminar where this research will be critically commented upon and evaluated by peers. The goal is to provide scholars with a possibility of critical feedback on their work and hence to stimulate the academic quality of the research output. Both senior and junior scholars will present their work in the seminar, in order to stimulate the latter as well to prepare their research for publication in (preferably international) journals;
  • an accepted series of papers will be created, entitled ‘Behavioural Approaches to Contract and Tort APS’. The research group’s published papers will also be included in this series;
  • conferences and the execution of joint research projects will be planned. Although the programme encourages outstanding individual research, in order to promote the visibility of the programme, it will be highlighted that, with respect to specific topics, projects will be developed resulting in a conference and a proceedings volume. The goal of these activities is to stimulate collaboration between the scholars and to present the research programme externally through volumes presented as the results of the research programme;
  • the separate websites and working paper series of RIPL and RILE will also be linked with the research programme, to the extent that activities carried out within the institutes contribute to an execution of the research programme;
  • an annual report will be drafted providing the research results and describing briefly the extent to which progress has been made in the execution of the programme.

Keywords
private law; liability; contracting; organizations; corporations; regulation; behavioural sciences; economics; socio-legal studies; psychology; efficiency; distributive justice; fairness; equity.