Behavioral Equity

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Ask jill.sopper@mohr.de by e-mail or the Permissions Manager at the publisher’s address by mail. – In the USA, permissions may be cleared and payments made through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, Phone (978) 750 8400, Fax (978) 750 47744, www.copyright.com. Other countries may have a local reprographic rights agency for payments. ISSN 0932-4569 e-offprint of the author with publisher’s permission 137 Behavioral Equity by Yuval Feldman and Henry E. Smith∗ The paper uses the findings of psychology, behavioral economics, and behavioral ethics to revisit three main related assumptions of the rational-choice approach to equity, by developing three main points: first, not only bad people try to circumvent the law; second, behavior depends on the relationship between specificity, trust, and the type of motivation triggered; and, third, moral priming has different effects on good and on bad people. Based on these three modifications of rationalchoice assumptions about the law-versus-equity distinction, we offer a dynamic acoustic separation model that attempts to examine the effect of law versus equity on both good and bad people. (JEL: D80, D23, K00, K11, K42) 1 Introduction In many situations legal systems use ambiguous standards and moral language in instructing people how to behave. In the realm of the common law, much of this ambiguous, morally inflected legal component is associated with “equity.” In civil law systems, something similar goes under the banner of “abuse of right” or “abuse of law.” According to this approach, part of the presumed advantage of equity is related to its ability to prevent opportunism by limiting the ability of people to exploit loopholes in specific rules to their advantage. Most of the current research on ambiguity and vagueness in the law follows a rational-choice approach, where ambiguity is expected to increase the cost of deciding how to behave. This increase in the cost of learning is intended to nudge people toward greater compliance, assuming a certain risk aversion on their part. Another assumption of this perspective is that ambiguity is more likely to harm bad-faith people than good-faith ones because the former have greater difficulty circumventing an ambiguous law. ∗ Yuval Feldman (corresponding author): Associate Professor of Law, Bar-Ilan University and Fellow, Edmond J. Safra Center for Ethics, Harvard University, Cambridge (MA); Henry E. Smith: Fessenden Professor of Law, Harvard Law School, Cambridge (MA). Financial support for this study was provided by the Israel Science Foundation (grant 1283/11) and The Edmond J. Safra Center for the study of Ethics. The authors would like to thank Ryan Galisewski and Einav Tamir for excellent research assistance. Journal of Institutional and Theoretical Economics 170, 137–159 – ISSN 0932-4569 DOI: 10.1628/093245614X13871984730889 –  2014 Mohr Siebeck e-offprint of the author with publisher’s permission 138 Yuval Feldman and Henry E. Smith JITE 170 The present paper challenges these behavioral assumptions and the legal paradigms that are based on them. We use the findings of psychology, behavioral economics, and behavioral ethics to revisit three main related assumptions of the rational-choice approach to equity, by developing three main points: first, not only inveterate opportunists try to circumvent the law; second, behavior depends on the relationship between specificity, trust, and the type of motivation triggered; and, third, moral priming has a different effect on good-faith and bad-faith people. A word on terminology is in order. Because the literature on behavioral ethics has recently focused on good people who mindlessly end up doing much of the bad behavior that legal policymakers try to prevent, we think the terms “good faith” and “bad faith” capture the needed distinction between types of behavior and the persons who typically engage in them. Bad-faith actors are those who mindfully choose to engage in bad behavior so long as it enhances their self-interest. A bad-faith person takes moral and legal norms as merely external constraints. A good-faith person is one who has internalized moral norms and is inclined to act on them. As in the legal literature, we can distinguish between acting in good faith and bad faith, although we do not wish to imply that the law always perfectly captures the relevant distinction. We do not endorse the idea that law should be evaluated only as an external constraint. Nor do we take a position on what the content of moral norms should be, and we need not assume that people’s character is fixed once and for all. On the contrary, we will draw on the psychological literature in distinguishing contexts in which people can be expected to behave in a good or bad way. So, for example, announcing a modest fine that crowds out intrinsic motivation tends to shift people from good to bad mode. This does not imply a deep ethical theory about the ultimate merits of responding to a modest fine in this way, but it does say something useful about human behavior, particularly when it comes to legal design. Based on these three modifications of rational-choice assumptions about the law-versus-equity distinction, we suggest two normative prescriptions: first, we offer a dynamic acoustic-separation model that attempts to examine the effect of law versus equity on both good-faith and bad-faith people; and second, we sketch an initial taxonomy of the optimal mixture of law versus equity. It should be acknowledged that while we speak about equity, which is usually dealt with in the context of courts’ discretion, our focus is broader and deals also with informing the optimal discretion given to various bodies in the executive branch. For us, equity is a mode of decision-making that is not confined to courts. 2 Law versus Equity As mentioned, one of the main attributes of equity is that it tends to use ambiguous standards when instructing people how to behave in legally relevant situations. According to this approach, part of the presumed advantage of equity is related to its ability to prevent opportunism by limiting the ability of people to exploit loopholes in specific rules to their advantage. e-offprint of the author with publisher’s permission (2014) Behavioral Equity 139 The first assumption that we will challenge is that only bad-faith people try to circumvent the law. We show that, according to a rich literature, many of the opportunistic deeds that we care about can be attributed to behaviors lacking both full intention and an awareness that the law is being violated. We argue further that to some extent, in contrast to the classic risk-aversion argument, legal ambiguity can lead to lower levels of compliance. The second, somewhat contradictory point focuses on the relationships between specificity, trust, and the type of motivation triggered. We suggest that in some contexts the type of motivation is important for the likelihood that one will engage in performance that is better than mere compliance. We argue further that ambiguity can at times cause good-faith people to behave better rather than worse, for example, when specificity would crowd out intrinsic motivation. The third behavioral point focuses on the difference in the effect of moral language on good-faith versus bad-faith people. We argue that the effect of equity in increasing performance, protecting compliance, and reducing attempts at evasion accounts not only for its equity’s ambiguity but also for its moral language. We argue further that because behavioral research suggests that not all people are expected to respond to moral language in similar ways, such language may be used to trigger different motivations for compliance. Based on these modifications of the assumptions of rational choice regarding the role of equity, we proceed in two directions. First, we show that for good-faith people ambiguity should focus on granting discretion ex ante (no crowding out); specific rules are then expected to constrain unintentional motivated reasoning. By contrast, for bad-faith people ambiguity provides specific rules ex ante, while letting them know about the discretion of the courts to review behavior ex post, which is intended to prevent them from exploiting the law. We offer a dynamic acoustic-separation model to examine the effect of law versus equity on both good-faith and bad-faith people, and explore the possibility that by using equity in a behaviorally informed way we can provide different messages to the two types of people at the same time. We suggest a richer model than the current rational-choice one, because in our model a combination of ambiguous standards, specific rules, and moral language can help manage the behavior of people with multiple motivations rather than merely that of bad-faith people who are intentionally looking for ways to evade the law. Second, we replace the common dichotomy between compliance and noncompliance with a trichotomy among three aspects of behavior: performance, compliance, and evasion. Performance is the most desired level of behavior; to achieve it, ambiguity must reduce crowding out of intrinsic motivation. Compliance is the second desired dimension, referring mostly to people following specific rules in a concrete way. Evasion is the least desired behavior, which happens intentionally or unintentionally. We show that the models accounting for the interplay between law and equity can be improved by distinguishing performance, compliance, and evasion. For example, only when recognizing the difference between compliance and performance is it possible to recognize the risk of crowding out the motivation of people through overly specific rules. The balance among evasion, compliance, and e-offprint of the author with publisher’s permission 140 Yuval Feldman and Henry E. Smith JITE 170 performance should be different for good-faith and bad-faith people, but the basic mixture of law versus equity can handle this three-way trade-off by sending the same message at times to good-faith and bad-faith people alike, who will receive it as different messages. 3 Current Views of Law versus Equity Traditionally, the issue of specificity in the law was framed in part as law versus equity. At one time, separate courts in the Anglo-American world meted out a special, individualized, morality-based justice, following a tradition of equity going back to Aristotle, who developed the idea of a special equitable kind of justice. In the Nicomachean Ethics, Aristotle declared that equity corrects “law where law is defective because of its generality” (Aristotle, transl. 1982, book 5, chapter 10, p. 317). Commentators adopted this idea when explaining equity as a branch of the law (broadly conceived), and many courts have also cited this tradition. Aristotle drew an analogy between equity and the leaden rather than iron measuring rulers of the builders of Lesbos, which bend according to the shape of the stone and allow the selection of a stone that fits. Courts also invoke this image when they are inclined to dispense individualized, ex post justice. Equity is specific and ex post, but it is couched in vague ex ante terms based on principles such as good faith, clean hands, and not profiting from one’s own wrongdoing. This view of equity, as being necessarily more ex post-specific than the law because the law is defective owing to its generality, leaves open many questions. Exactly how and when does the law fail on account of its generality? A broad version of equity would hold that legislators cannot anticipate the future, and therefore every time a law does not accord with the intent of the legislator, equity should intervene to make things right. A much narrower version of equity would regard it as a device to use against opportunists, “gamers,” and loophole seekers using their knowledge, which is superior to that of the legislator or of a contractual partner, to take unintended and difficult-to-foresee advantage of the law. To forestall these activities, equity must be specific, but only in an ex post way. Ex ante, the language of equity is general, and the proxies it uses, such as disproportionate hardship, are not completely tailored to the problem they are intended to target: opportunism (Smith, 2010). Interestingly, Aristotle’s equity can be interpreted as directed against opportunists who take advantage of the gap between the law and its purpose (Klimchuk, 2011). Various intermediate positions are also possible, according to which equity is aimed at preventing misuse of the law, where misuse is based on moral concepts. All these versions of equity, save perhaps the most general ones, share a notion that equity is aimed at particular people acting inequitably out of illegitimate motives. In other words, if equity courts are “courts of conscience,” the motivation of the actors matters. In our opinion equity is much broader than ambiguity because it focuses also on the discretion of the courts, the types of argument they can consider, and moral e-offprint of the author with publisher’s permission (2014) Behavioral Equity 141 language, but ambiguity is clearly the main concept through which we can communicate with the current literature. 3.1 Rules versus Standards There are few paradigms that address the notion of optimal specificity. The most familiar parallel to the law-versus-equity distinction is that of rules versus standards. In law and economics, the distinction between rules and standards is manifest on one dimension: the timing of decision-making (Kaplow, 1992), which captures the differential cost of creating and enforcing directives and the role of ex post discretion. The technique espoused by those interested in institutional design focuses on how best to design rule systems to take advantage of the various capacities of legal decision-makers (Sunstein, 1995). For example, Sunstein argues that because legislatures cannot anticipate all of the circumstances in which they will affect people, judges use a process of analogical casuistry to ensure that the proper result is achieved in each case. By contrast, a highly influential movement in legal academia has vigorously argued against conferring discretion on judges because it prevents the law from being predictable (Alexander and Sherwin, 2001; Scalia, 1989). Rather than focus on certain aspects of rules or standards and on how much trust to place in different actors in the system, another group of scholars has emphasized the overall costs and benefits of applying rules or standards, usually through economic models (Kaplow, 1992, 1995; Ferguson and Peters, 2000). Kaplow’s paradigm and various follow-up studies have focused mainly on the rational-choice view of human nature, translating the notion of optimal specificity mainly into optimization of information costs. Many legal scholars have written about the relative benefits of rules and standards,1 although little of the literature has focused on the effect of the choice of standards or rules on how legal actors make decisions. The rational-choice view of the effect of vagueness or ambiguity on legal compliance is for the most part one of chilling, leading individuals to engage in overcompliance (e.g., Logue, 2007, notes theoretically that risk aversion is possible in the tax world, where there is legal uncertainty and a high penalty; see also Garoupa, 2003). These models of the chilling effect of vagueness are of two sorts. In one model, vagueness is chilling and undesirable but carries with it tightly correlated benefits, like raising litigation costs. Thus, parties may even choose to include vague terms in their contracts if these make litigation non-cost-effective (e.g., Choi and Triantis, 2008, 2010; Triantis, 2002). In this case, better targeting of the vague terms is pointless because the benefits of vagueness are in the imposition of costs. The question is the balance between the costs and the benefits. 1 Some classical works that propose various frameworks for thinking about the difference between rules and standards are Kennedy (1976), arguing in particular that rules are connected to the ideology of individualism, whereas standards are connected to that of altruism; Sullivan (1992), showing how the rule–standard dichotomy is used rhetorically in American constitutional adjudication; and Schlag (1985). e-offprint of the author with publisher’s permission 142 Yuval Feldman and Henry E. Smith JITE 170 Another class of models based on rational actors regards vagueness as causing chilling behavior and raising information costs, but considers the benefits it brings in regulating behavior to be at least separable to some extent. That is, these models do not see the benefits of vagueness as flowing directly from the costs it imposes, but rather as arising despite its costs. Models that see a benefit in using vague standards against seekers of loopholes consider the main trade-off to be between punishment and the chilling effect on legitimate behavior (Ferguson and Peters, 2000).2 This trade-off is made worse by the fact that vagueness cannot be targeted against opportunists. To the extent that it can – and that it is perceived that it can – the chilling effect can be reduced (Bar-Gill and Ben-Shahar, 2009). In particular, if ordinary, garden-variety actors have higher information costs for figuring out whether contractual performance is not merely valuable but also technically compliant, they are vulnerable to cross-subsidies for opportunists who can sue for satisfactory but not technically compliant performance. Equity, if it is targeted at the latter but not so broad as to invite its own form of opportunism, can deter opportunism sufficiently so that the garden-variety actors will be willing to contract, thereby achieving a substantive compliance equilibrium, in which less costly and equally valuable but technically nonconforming performance can be achieved (Ayotte, Friedman, and Smith, 2013). Both types of models, those in which vagueness is inextricably bound up with chilling and those in which multiple audiences can be affected in various ways, are consistent with the rational-actor paradigm. Even the models that distinguish between types of actors do so based on their costs of information. Actors can assess a set of possible outcomes and assign at least a default probability to them. Ambiguity – a case in which an actor cannot quantify probabilities or identify the state space – does not figure in these models.3 We argue that there is a way out of the dilemma between tractability and psychological realism. The law has long differed along various dimensions, with apparently different audiences of actors and different situations in focus at various points. One such dimension is specificity: should the law announce its directives in general or in specific terms? The view that we take here, according to which ambiguity leads to less compliance, has long been recognized in the literature. For example, some applied research identified the dilemma associated with optimal specificity of law even before the research on behavioral ethics. Nelson (2003) focuses on two dimensions associated with the specificity of rules: their ability to communicate clear information and their ability to constrain behavior. Nelson suggests that opportunistic behavior is more likely to be constrained by broader standards because 2 Ferguson and Peters assume that the same rule will govern both ordinary actors and loophole seekers and that it will be received by each group in a similar, chilling way. The authors show that nevertheless an Orwellian equilibrium can be more efficient than one with clear rules. 3 For an argument that uncertainty rather than risk is at the heart of the problem of opportunism, see Smith (2010). Oliver Williamson (1985) identifies uncertainty as an opening for opportunism. e-offprint of the author with publisher’s permission (2014) Behavioral Equity 143 highly specific rules call for finding various types of safe harbors. Bratton (2003) also argues that systems of principles are more costly because they lack certainty.4 A sophisticated approach appears in the seminal work of Braithwaite (2002) on rules and principles. Braithwaite suggests that too many specific rules create subjectively an overall lack of certainty that harms the law in the long term. 3.2 The Rational-Choice Approach: Equity as an Enforcement Tool against BadFaith Individuals According to the rational-choice assumption about compliance, an individual will violate the law “if and only if his expected utility from doing so, taking into account his gain and the chance of his being caught and sanctioned, exceeds his utility if he does not commit the act” (Polinsky and Shavell, 2000, p. 47). The decision is based on the individual’s preference for risk, the probability of punishment, and the utility expected with and without punishment (Garoupa, 1997, p. 268). Under the rational-choice theory, optimal enforcement overdeters; policymakers must take into account the costless deterrence of risk aversion.5 Consistent with the rational-actor paradigm, equity can be seen as a mode of decision-making aimed at discouraging opportunism (Ayotte, Friedman, and Smith, 2013; Smith, 2010). The various features of equity work in tandem to act as a safety valve on the relatively simple structures of law. Opportunism is near-fraud in two senses. It covers situations in which some proxy for fraud is present, and we intervene to deter actual fraud. In addition, it covers situations in which actual fraud may be absent but someone uses deception by taking unforeseen and unfair advantage of the letter of the law or of another rule to gain a larger share of a smaller surplus. Equity as a safety valve is multidimensional. In addition to the timing of decisionmaking, at least three other dimensions are crucial to antiopportunism: moralism, domain of foreseeability, and local application. Equity is based on moral notions. Opportunism is considered immoral. Basing equity on moral consensus makes it more predictable. The use of moral standards is consistent with using on–off remedies (injunctions, disgorgement), or sanctions as opposed to prices (see Cooter, 1984). Appeals to morality may seem vague, but morality itself may need to be a little vague to prevent evasion, although it is not so vague to those with background knowledge. The domain of equity has to do with foreseeability. Opportunism is a problem because an actor has found an unforeseen and ex ante unforeseeable way to take advantage.6 As related to foreseeability, equity requires widening the contextual frame. If an opportunist steps outside the domain of the foreseeable to take advantage, equity must widen the frame to include this context. For example, if someone 4 5 6 His argument is more complex and depends on various other factors. See Garoupa (1997, p. 279), quoting a result by Polinsky and Shavell. The problem of opportunism may be an example of ambiguity (uncertainty) rather than a quantifiable risk (Smith, 2010). e-offprint of the author with publisher’s permission 144 Yuval Feldman and Henry E. Smith JITE 170 brings up a technicality such as not being an adult in order to void a contract, equity will not enjoin the jilted contractual partner from interfering with the opportunist’s new contract.7 Equity applies locally. It is a safety valve. Traditionally it applied in personam. For example, an injunction is directed at specific persons before the court and at those acting in concert with them. Equity was not intended to disrupt general rules, and it often enforces customs that apply only locally in a certain industry or community. These four dimensions – timing of decision-making, moralism, domain of foreseeability, and local application – are all related and reinforce each other, although this systemic aspect is more difficult to show. The vagueness and judicial discretion are necessary in order to “keep up” with the opportunist, and equity can do this better by being the second-mover. The safety-valve perspective assumes that a hybrid system of generally applicable rules provides firm entitlements on which good-faith actors can rely, and allows judges to employ equitable standards in particular disputes to sanction opportunists taking advantage of the over- or underinclusiveness of the rules (Smith, 2010). (The concept of acoustic separation seems to fit here too, because the public is given a general rule on which to rely, but judges hear individual cases in order to apply the rule equitably.8 ) 4 Behavioral Modifications: Extending the Effect of the Law-versus-Equity Debate to Good-Faith People The law is often seen as treating human beings as interchangeable recipients of legal commands. This is especially true of traditional law and economics. The problem is not only the narrowness of some versions of the rational-actor paradigm. Some critics fault the rational-actor paradigm for taking preferences as given: surely, external factors, including the law itself, can shape preferences. Others point to motivations other than material gain and loss, or to motivations other than external constraints such as fear of punishment, as important in shaping human behavior. The most sophisticated of these critiques recognize that different people may be motivated differently, or that the same person may be motivated differently in different situations. But if we allow preferences to change, people to vary, and individuals’ motivations to reflect contextual cues, the factors influencing people turn out to be many and to point in many, often opposing directions. Human behavior seems to be chaotic. Below we briefly present the relevant findings of behavioral scholarship on the topic and try to resolve the puzzle about the conflicting effect of ambiguity that arises 7 8 Carmen v. Fox Film Corp., 269 F. 928 (2d Cir. 1920). See Sunstein (1995, pp. 1006f.), describing as acoustic separation Bentham’s proposal for clear rules announced to the public and judicial adaptation of the rules in individual cases. e-offprint of the author with publisher’s permission (2014) Behavioral Equity 145 in the literature by paying closer attention to predictions that may be generated from the theories. The limitations of the rational-choice theory were recognized by law-and-economics scholars themselves. For example, Shavell, one of the founding fathers of law and economics, showed in his paper on law versus morality as regulators of conduct (2002) that morality has many advantages over external sanctions, mostly because it is likely to provide more accurate sanctions for every misconduct. Nevertheless, for the most part Shavell’s focus is on individual morality rather than on designing laws in a way that appeals to morality. Cooter, another leading scholar in law and economics, has focused in much of his writing on the expressive function of law and on the importance of intrinsic motivation in legal compliance. Cooter recognized that when compliance is based on intrinsic motivation, it is more likely to lead to a stable equilibrium (Cooter, 2000). Moving from rational-choice accounts of motivation and compliance to the behavioral literature, we can make better use of some recent developments in the behavioral literature on human rationality, which provide useful paradigms for revisiting this question. In the behavioral literature, as in the rational-choice literature, we find conflicting predictions about the effect of ambiguity. On the one hand, theories such as crowding out, trust, monitoring, and control all support less specificity, and on the other hand, theories such as elastic justification, dishonesty, and motivated reasoning all support more specificity. We attempt to solve this tension by suggesting a possible variation in the effect of ambiguity on two aspects of behavior that the law seems to care about: performance and compliance. Most current research suggests that ambiguity is expected to increase performance but decrease compliance. Based on these theoretical accounts and on empirical findings, we present a broader perspective of the effects of legal ambiguity on individuals, allowing us to improve the integration of equity-related concepts in law. Because the psychological perspectives on equity are too numerous to be included in a model, we focus on three components: (1) Ambiguity as blurring the difference between good-faith and bad-faith people. (2) Specificity as crowding out intrinsic motivation and therefore leading people from evasion to compliance, but undermining performance. According to this perspective, the combination of good-faith people, moral language, and ambiguity can increase the likelihood that the good-faith people will engage in performance. (3) Morality as more likely to improve the behavior of good-faith than of bad-faith people. We will show that three trends of the recent literature on motivation and cognition can inform the treatment of good-faith people rather than just focusing on the bad-faith individuals. Differential specificity according to motivation serves as our starting point. In the face of the potential welter of situations, motivations, and types of legal commands, we ask whether certain combinations of generality and specificity in well-known e-offprint of the author with publisher’s permission 146 Yuval Feldman and Henry E. Smith JITE 170 types of situations are called for in light of recent results in the study of motivation. As the common law tends to do, we work from the bottom up. 4.1 Ambiguity, Good-Faith People, and Evasion In recent years, many behavioral ethics scholars have documented that good-faith people are the ones responsible for most opportunistic deeds (Hollis, 2008; Kidder, 2009; Bersoff, 1999; Mazar, Amir, and Ariely, 2008; Pillutla, 2011; and Banaji and Greenwald, 2013).9 Although some accounts of human nature by writers such as Lynn Stout (2011) and Yochai Benkler (2011) try to argue for a greater focus on good-faith people, the majority of the literature seems to focus on the reverse side, where opportunistic deeds are done by good-faith people who fail to recognize that their deeds are opportunistic (e.g., Bazerman and Tenbrunsel, 2011; Banaji and Greenwald, 2013). Importantly in this vein, Bandura applies a moral disengagement paradigm to the area of employee misbehavior. Bandura (1999) suggests this paradigm, not in the context of ethics in the organization, but with reference to the active role that the self plays in allowing people to engage in inhumane behavior. Bandura offers eight mechanisms by which individuals are able to convince themselves that their actions are not immoral, thereby preventing the self-sanctions that individuals would normally apply to keep their actions consistent with their personal ethical standards. The mechanism relevant to ambiguity is the use of euphemistic labeling to reclassify an action like stealing into a more innocuous one like “shifting resources.” Moore et al. (2012) make more concrete application of the self-deception mechanisms that people employ to justify their opportunistic behaviors. Their work arguably relates to legal ambiguity, in that exploiting ambiguity in rules is central to people’s ability to justify immoral behavior. A similar view appears in the works of Ayal and Gino (2011) and of Ashforth and Anand (2003), who focus on creative ways people use to justify doing wrong. One of the main techniques people use to justify unethical behaviors to themselves is to engage in constructing self-serving interpretations of the legal and organizational requirements they must follow. Psychological processes such as selfdeception, elastic justification, moral wiggle room, moral disengagement, and motivated reasoning support the view that people may be able to exploit legal ambiguity to behave unethically without feeling that they are in violation of the law. Two relevant concepts that support this notion come from Haisley and Weber (2010), who find that people prefer to take ambiguous risks when this allows them to justify unfair behavior, and from Dana, Cain, and Dawes (2006), who find that people are less generous in situations in which they can appeal to moral ambiguity in explaining their actions. Similarly, Hsee (1995) has found evidence that people make choices that satisfy their preferences, at the cost of best achieving an assigned goal, if they can exploit existing ambiguity about which decision may complete the as9 Many others do not use the term “good people” in their titles but make the same argument in the text (for example, Desmet, De Cremer, and Van Dijk, 2011). For a review of the focus on good people in recent literature, see Feldman (2013). e-offprint of the author with publisher’s permission (2014) Behavioral Equity 147 signment. Elsewhere (Feldman and Teichman, 2009; Feldman, 2011, 2013) one of us has shown that people use legal ambiguity strategically to formulate a minimal interpretation of what is required from them by laws or contracts. 4.2 Ambiguity, Good-Faith People, and Performance Some scholars have shifted the focus from analyzing the costs and benefits of applying rules or standards, and from making certain baseline assumptions about how actors will behave (usually in their rational best interest), to making substantive inquiry into the process through which actors grapple with legal rules and standards before making a decision. For example, Alexander and Sherwin (1994, p. 1212) have argued that when rules are not serious – that is, they do not in all situations accurately dictate what an actor should do – people are less likely to follow the letter of the law.10 In this tradition of moral education, Shiffrin (2010, pp. 1222–1225) has argued that vague standards that incorporate moral concepts encourage “moral deliberation,” a more careful decision-making mode in which actors grapple with moral concepts, promoting stronger community morals and democratic engagement with the substance of the law.11 However, to the extent that the moral component of law can be subsumed into typical rationality analysis,12 these considerations do not directly answer the question of how the specificity of a rule (or the vagueness of a standard) affects an actor’s behavior. Other legal scholars have advocated a similar favorable view of legal ambiguity, but based more on the psychological process of decision-making. For example, Feldman and Lifshitz (2011) focus on the advantages to people’s authenticity of masking the certainty of legal benefits, that is, focusing theoretically and empirically on the injunction effect triggered by legal uncertainty. Similarly, Dagan and Fisher13 suggest that legal ambiguity is one way of avoiding the commodification effects of the law. These views are also supported behaviorally by recent research by Chou, Halevy, and Murnighan (2010) on the negative behavioral effects of the specificity of contracts on people’s cooperation and trust. Following a series of studies that examine how people perceive specific contracts, the authors argue that a crowding-out effect is associated with specificity. A preference for incomplete contracts is also demonstrated in the work of Fehr and Gächter (2000) and supported by an earlier study by Tenbrunsel and Messick (1999), whose broader point is that strict enforcement, sanctions, and specificity can harm cooperation. A similar view 10 “If citizens learn that rules are not statements of right action in all cases, but only statistical calculations of right action over a range of cases, they will be more likely to exercise their own judgment in particular cases, and errors will increase.” 11 See also Sunstein (1995, pp. 995f.), arguing that participation in a hearing, in addition to giving a claimant individual treatment, furthers the goal of democratic participation of those affected by rules; and Smith (2010), arguing that an essential part of the system of equity is the moral component of equitable adjudication. 12 See Shavell (2002), making such an attempt; see also Kaplow and Shavell (2007). 13 “The State and the Market,” on file with authors. e-offprint of the author with publisher’s permission 148 Yuval Feldman and Henry E. Smith JITE 170 is supported by Falk and Kosfeld (2006), who demonstrated this broader point using a principal–agent experiment in which participants could either let the agent decide the production amount or set a lower boundary. In settings in which a lower boundary was set, agents produced less than in those in which the principal left the decision about the production amount entirely in the hands of the agents. In post hoc questioning, agents said that they regarded the lower boundary as a sign of distrust and were therefore less cooperative. Many of the studies on the crowdingout effect of incentives and on enforcement are summarized by Bowles (2008; see also Feldman, 2011). 4.3 Moral Language and Good-Faith versus Bad-Faith People If specificity can crowd out both motivation and cognition, in mirror fashion moral language can “crowd in” intrinsic motivation, especially among good-faith people. Tom Tyler (2006), in his research on why people obey the law and in various followup studies (Tyler and Fagan, 2008; Wenzel, 2002; and Gibson, 2007),14 has shown the importance of noninstrumental motivation, such as fairness in accounting, for compliance and performance. Some of the studies conducted in this tradition seem to build the behavioral foundation for the possibility of using the differences between types of people, in particular the differential likelihood that morality in the law has an effect on their behavior. The leading paper in this line of reasoning is by Aquino et al. (2009), who demonstrates that people who are high on moral identity (in our terminology, good-faith people) are likely to be affected by moral priming, whereas moral priming was found to have no effect on people who are low on moral identity (in our terminology, bad-faith people). 5 A Model of Behavioral Equity In this part we develop a model of law and equity that makes crucial use of the insights of behavioral psychology. We go beyond the rational-actor paradigm by allowing ambiguity to have different effects on good-faith and on bad-faith people and to vary in the extent of its effect within each group, depending on factors such as whether the law is aligned with the purposes of the group members. To obtain this resolution requires unpacking motivation in a way that the classic rational-actor paradigm avoids. At first, such an approach may appear unpromising because the psychological literature seems to imply that the ambiguity of legal directives has to do with very fine-grained cues that point in different directions, making them useless for designers of legal directives. We argue that law and equity, both traditionally and even more so as a functional theme in the law, permit one to thread the needle between the fine grain of motivation to benefit from the mechanisms identified in 14 For an empirical demonstration of the limits of traditional economic models in the context of legal compliance, see Feldman and Teichman (2009). e-offprint of the author with publisher’s permission (2014) Behavioral Equity 149 the psychology literature on one hand, and sufficient simplicity to implement its insights so as to be realistic on the other. Both behavioral economics and behavioral ethics point to the need to analyze situations with a finer grain keyed to the actors’ motivations, and indicate that the nature of the legal directive, including its specificity and moral content, induces different behavior in different actors. This seems like a counsel of despair. Especially dispiriting is the idea that the legal directive may disturb initial motivation, making the consequences of specificity and moral language in a directive difficult to trace. One may think that the law, if it is to deal on this level at all and not simply ignore the problem, would have to differentiate situations very finely, based on a variety of features, including those of the actors involved in those situations, and issue directives one by one to cover a vast and varied field. This is not an appealing prospect, both because such a system would be costly to devise and update, and because it runs the risk of sending confused messages to legal actors. How could the law target narrow types of situations and particular types of actors with their varied motivations in this situation-by-situation fashion? We suggest that there is a way out of this problem, and it involves combining the notion of acoustic separation with the behavioral considerations that inform our taxonomy. Managing the complex psychological problem with the relatively simple legal technology relies on a cluster of ideas about how different legal actors receive the messages of the law. Central to our model is the idea that the same message can have a different impact on different legal actors, depending on their motivations and focus. All legal directives are intended to reach an audience. Not all members of the audience are similar in relevant respects. At the most basic level, a recipient of a message extracts more or less information from a given message depending on how much information the recipient already has.15 For example, if A knows that C lives in Illinois but B does not know it, and both A and B receive the message that C lives in Springfield (a common town name in the U.S.), then A knows where C lives but B does not. In the legal system, information directed at knowledgeable actors can be more compressed and skeletal because of the information the actor already possesses (Smith, 2003). Thus, patent law presupposes more knowledge in duty bearers than does copyright, and by extension, the duties under a contract are allowed to be much more detailed and idiosyncratic than is the content of in rem property rights. Sometimes the division of law into audiences can lead to separate messages being received by multiple audiences without excessive interference between the messages, even if there is tension between them. This has been dubbed acoustic separation by Meir Dan-Cohen (1984), who has explored the idea in criminal law. In Dan-Cohen’s model, the law can in principle send two separate messages to two separate audiences. Thus, the law consists of conduct rules directed at primary actors 15 “What one learns, or can learn, from a signal [...] and hence the information carried by that signal, depends in part on what one already knows about the alternative possibilities” (Dretske, 1981, p. 43). e-offprint of the author with publisher’s permission 150 Yuval Feldman and Henry E. Smith JITE 170 (the public) and decision rules aimed at guiding legal decision-makers (especially judges). Criminal law may be couched in a way that sounds categorical to the ordinary observer, but that signals to judges when leniency is called for. According to Dan-Cohen, the linguistic form of a rule does not determine its function, and the two functions can be served by different rules as long as there is not too much crosstalk – in other words, if there is acoustic separation between the two audiences. For the present paper, the multiple potential audiences are groups of primary actors rather than primary actors versus official decision-makers. Moreover, we argue that the same literal message is received by both groups, but what they derive from it depends on their motivation and focus. In our understanding, the problem that behavioral considerations pose is the potential for too many types of rules and audiences, with the greater attendant danger of acoustic nonseparation. Dan-Cohen explores the fact that criminal law can consist of conduct rules and decision rules that are different: for example, “let no man steal” is a conduct rule, whereas “let the judge cause whoever is convicted of stealing to be hanged” is a decision rule. DanCohen resists the idea that one can be reduced to the other. He notes that according to Austin, judges merely “apply” conduct rules, and that Kelsen tried to collapse conduct rules into decision rules, on the assumption that primary actors respond to the prospect of legal decision-makers following the decision rule. But in principle conduct rules and decision rules need not be the same; they can be independent. Below we build into our model a special kind of acoustic separation. We assume that some actors are aware of both the conduct rule and the decision rule, whereas others are aware of only the conduct rule. In the extreme, evasion is a problem where bad-faith actors are aware not only of the conduct rule but also of the consequences of behavior as far as the decision rule is concerned, and they are focused on both. They are ready to game the system as a whole, and they have the requisite knowledge for such gaming. What about the good-faith people at their best, who are not aware of the decision rule or at least are not focused on it? These garden-variety people can receive a good deal of leniency without upsetting the system, because they are not evaders. In Dan Kahan’s terms (1997), the law can afford not to achieve exact compliance from this group of people. The legal system should afford a safe harbor for these actors, who generally sense that by following their moral inclinations they are not likely to run afoul of the law. Unlike classic acoustic separation, however, we add a new twist that makes the legal system better able to juggle the two audiences: the same literal message can serve as an antievasion device for bad-faith actors while not interfering with (or even while promoting) the intrinsic motivation of the good-faith actors. As we have seen, equity is couched in moral terms (clean hands, not profiting from one’s own wrong, equity as a court of conscience). To the evaders, the system sends a message that it is reserving the second move in order to counteract evasionary behavior, even if it appears in a new guise. The same moral norms will have an appeal to the good-faith people, not as a legal message, but as reinforcement of existing moral e-offprint of the author with publisher’s permission (2014) Behavioral Equity 151 norms. Thus, equity avoids crowding out intrinsic motivation, and in some cases can even promote moral deliberation (Shiffrin, 2010). To further specify the nature of the different audiences, we draw an analogy to the notion of regulatory focus. In Higgins’s theory (1996), regulatory focus refers to the orientation of primary actors either to the promotion of a desirable state or to the prevention of an undesirable one. The promotion focus corresponds to an active and engaged stance and a tendency toward taking greater risk; the prevention focus is associated with an orientation to preservation, greater caution, and risk avoidance. While we think that there are many differences between the regulatoryfocus paradigm and the dichotomy between good faith and bad faith we wish to advocate, the work of Gino and Margolis suggests that the analogy between the two dichotomies might be illuminating. In four experiments, Francesca Gino and Joshua Margolis (2011) have found that they could induce regulatory focus in such a way that subjects who were primed for a promotion focus were more likely to cross an ethical line than were subjects primed for a prevention focus. The promotion focus encourages risk-seeking behaviors, including ethical stretches. In another study, Francesca Gino and Dan Ariely (2012) found that more creative people were more likely to engage in dishonest acts, because they were better able to engage in divergent thinking to devise new tricks and were more cognitively flexible about integrating the unethical behavior into their positive moral self-image (the authors tested for the latter). In an analogy to the dichotomy developed around Higgins’s theory, in our model bad-faith people can be seen as having a prevention focus when in compliance mode and having a promotion focus as evaders. Evasion is a matter of opportunistic creativity. What about good-faith people receiving the “same” equitable message? We can say that they are in promotion mode, but their focus is not on the law but on the moral norm itself.16 We therefore consider how the same literal message can have a differential effect on good-faith and bad-faith people (or people in good-faith and bad-faith mode). The law is ambiguous and morally inflected exactly where there is a crucial overlap in the literal message in our model. If designed properly, such messages reinforce intrinsic motivation in good-faith people, thereby promoting high performance. At the same time, the ambiguous morally infused message serves as a warning to opportunists that they can be sanctioned if they evade the letter of specific provisions of the law (if they engage in bad-faith evasion of the directives of the law). We call this dual-function set of nonspecific morally inflected commands behavioral equity. Our model rests on an assumption that good-faith and bad-faith people have different information about the law and a different orientation toward it. Badfaith people have information about the law, both as conduct rules and as decision rules. (This includes otherwise good-faith people who are induced by some factor to 16 This is a departure from Higgins’s theory (1996), in which promotion relates to the law only. To the extent that morality works as a norm system, we hypothesize that an analogous mechanism can work with respect to morality, and we have built this hypothesis into our model. e-offprint of the author with publisher’s permission 152 Yuval Feldman and Henry E. Smith JITE 170 Figure Acoustic-Separation Model of Behavioral Equity engage not only in motivated reasoning but in outright conscious evasion.) Bad-faith people respond to the content of specific directives, thus promoting compliance. When they have too much information about loopholes ex ante, they also have sophisticated knowledge about the role of equity as an ex post device to counter their evasive moves. Thus behavioral equity is vague ex ante, but specific ex post (as a second mover).17 By contrast, the good-faith people regard the law from a less detailed perspective and want to know merely that the law accords with their sense of what is right. They do not need or want to know much detail, and in some circumstances can be expected to fill it in with their own sense of morality. For these actors it is important for the law not to intrude with too much specificity, especially specific information that may seem to conflict with basic extralegal morality. We take from the acoustic-separation model the notion that a legal directive can do double duty: the same literal message can be received in different and even contradictory ways by different audiences, without one communication interfering with the other. The hypothesis is that both specific and (especially) ambiguous directives exhibit acoustic separation in the sense that good-faith and bad-faith people are intended to interpret a given directive differently with regard to its generality. Thus, specific commands are directed to those with a prevention focus, who do not want to be on the wrong side of the law. Here, with the actors depicted in the middle of the figure, the emphasis is on compliance rather than performance. The audience is not especially good-faith or bad-faith and approximates the picture of actors in the rational-actor models. On the left in the figure, vague moral directives elicit high performance from actors who have a promotion focus on morality. The vague moral directives do not crowd out, and if anything dovetail with and reinforce, the actor’s moral sense. These actors can be thought of as especially good-faith or motivated 17 Although the ex ante perspective is often associated with law and economics, the role of equity as intervening ex post can be captured in the rational-actor model (Ayotte, Friedman, and Smith, 2013). The opportunists are crucially aware ex ante about what might happen ex post if they engage in opportunism. The garden-variety good people have a simpler ex ante perspective that the law accords with their moral outlook, and for our present purposes one might identify their ex ante perspective with intrinsic motivation along with the promotion focus on morality. e-offprint of the author with publisher’s permission (2014) Behavioral Equity 153 in a positive, moral way. On the right-hand side of the figure are the evaders. They are those with a promotion focus on the law, willing to use their knowledge of law as a set of conduct and decision rules to further their narrow interests. These are the bad-faith actors, who are creative but in a socially destructive fashion. Vague moral directives – the “same” ones that are aimed at the good-faith people – will be interpreted by the evaders (with their promotion focus on the law) as decision rules that reserve second-mover status as legal decision-makers who will use moral standards to thwart and counter the evaders. The left and right ends of this spectrum are the joint target of behavior equity with its special kind of acoustic separation. Our model also suggests reasons why it has been difficult to observe behavioral equity at work in the law, even if implicitly. The assumption of uniform legal actors, or at least simply rational ones, has tended to obscure how legal directives can reach people with different motivations differently. In our model, law and equity do double duty in different ways. Equity sends a nonspecific moral message to two different groups, the good-faith and the bad-faith, with different effects, enhancing performance and discouraging evasion, respectively. The law (in the narrow sense, as distinguished from equity) uses specific commands that are not necessarily moral (positivistically, one may say) but have a similar effect on similar people. That is, when good-faith people are engaged in motivated reasoning, it sometimes makes sense to lump them in with the bad-faith. The law as a set of specific commands seems to be paradigmatic because it is directed at “everyone” some of the time. This seeming comprehensiveness may make it appear that specific law is all there is to real law, and that the law is really directed at the Holmesian “bad man” (1897, p. 459). The good-faith people and the evaders then end up being peripheral embarrassments. Behavioral equity can bring these actors back into the picture, in one fell swoop. Consider an illustrative example of behavioral equity, from the field of trespass and building encroachments. The basic message in this case is “keep off,” and the law tracks basic morality (Merrill and Smith, 2007). It also shades off into a more cooperative morality when it comes to nuisances and problems like overhanging trees (the law of neighbors). The traditional rule has been that equity does not enjoin a mere trespass.18 This is somewhat startling at first, because trespass has often been regarded as the basic rule delineating legal things and giving them their most stringent protection. It is not even required to show harm for there to be a trespass, and punitive damages and restitution (disgorgement) have been used as remedies for trespass. On closer look, however, trespass saves its real firepower for the bad-faith actor while sending a seemingly strict and morally inflected message to goodfaith people. Someone who engages in a repeated or continuous trespass is subject to a fairly automatic injunction, and bad-faith trespass can be subject to serious sanction (Gergen, Golden, and Smith, 2012, pp. 235ff.). In Jacque v. Steenberg 18 See Justices of Pike County v. Griffin & W. Point Plank Rd. Co., 11 Ga. 246, 250 (1852) (“It is well understood that Equity will not interfere in a case of a mere trespass”). e-offprint of the author with publisher’s permission 154 Yuval Feldman and Henry E. Smith JITE 170 Homes,19 $100,000 in punitive damages was imposed on the trespasser precisely because it was gaming the system: the company’s foreman knew that delivering a mobile home across the snow field of the elderly farming couple would not cause much measurable damage, and he found overriding their objections to be amusing. Ordinary good-faith people can go about their business not committing trespasses or committing de minimis ones without worrying about liability (although technically there is liability in the latter case). The law sends a reassuring message that property rights are important, but normal good-faith behavior will not be penalized. At the same time, those who know too much about the rules and who might be tempted to take opportunistic advantage of leniency for minor trespasses will find that the strict message of the law will indeed be upheld strictly in their case. Evasionary actors and those engaging in self-serving motivated reasoning receive the same literal message as the moral or good-faith actors, but take away a different meaning. There is acoustic separation supporting behavioral equity. Equity also touches upon excuses, and that resonates with the notion of leniency in criminal law. As in Kahan’s account of mistakes and lenity in criminal law, equity offers its excuses differentially. To continue with the law of trespass, the general rule in building encroachments is that they are continuing trespasses and therefore subject to injunction. Nevertheless, a small encroachment done in good faith (by mistake) is often partially excused in the sense that the remedy is damages rather than an injunction (Gergen, Golden, and Smith, 2012, pp. 235ff.; Smith, 2010; Laycock, 2011).20 This solution is often placed under the heading of undue or disproportionate hardship (Laycock, 2011), so that if the injunction inflicted far greater harm on the enjoined party (the violator) than it would benefit the moving party (whose rights were violated), a court can exercise its discretion, and it regularly does so, to lessen the remedy to damages. But if the encroachment was carried out in bad faith, the full injunctive remedy applies, regardless of the amount of hardship. This is acoustic separation in behavioral equity. Society wants the good-faith people to try their best within reason, without being paranoid about the boundary in the form of overcompliance (see Sterk, 2008, and Denicolò et al., 2008). There is a low cost of ex post monitoring in this case (locating the boundary), and the general assumption is that most people are good-faith (nonopportunistic) and in a promotion mode, focused on morality. The doctrine announces a set of directives that accords with everyday morality and sends the general message that reasonable behavior never leads to dire consequences. For those in prevention mode and focused on the law, the message is equally clear: obtain a good survey. But as soon as there is reason to suspect someone of evasion, the law is unyielding. Thus, the same message is delivered to people along the entire spectrum between good faith and bad faith with differential behavioral effect. 19 20 563 N.W.2d 154 (Wis. 1997). See Golden Press, Inc. v. Rylands, 235 P.2d 592 (Colo. 1951); Raab v. Casper, 124 Cal. Rptr. 590 (Cal. Ct. App. 1975) (California Good Faith Improver Act); Dickinson (1985, pp. 42–49). e-offprint of the author with publisher’s permission (2014) Behavioral Equity 155 We would like to note that even the mere distinction between good-faith and badfaith people can vary according to which legal doctrine is at issue. In some cases, people’s motivation aligns with the law, making them good-faith actors, whereas at other times their motivation may not be aligned with the law, making them more likely to behave as bad-faith people. When intrinsic motivation is aligned with the purposes of the law and specific rules could crowd out motivation, the purpose of equity is to prevent this from happening. When intrinsic motivation is not aligned with the purposes of the law, even good-faith people may want to evade the law, and the combination of self-serving mechanisms and ambiguity could make it easier for them to do so. Hence, preventing an unintentional self-serving interpretation of the law is especially needed when motivation is not aligned with the law. The terms “bad faith” and “good faith” designate the extremities of a spectrum of motivation on which particular actors may find themselves at different points under different circumstances. 6 Limitations and Conclusion In the present paper we have attempted to revisit some of the rational-choice models of the interaction between law and equity, understood primarily as contrasting and complementary regulatory and decision-making modes. We suggested that adding insights from behavioral economics and behavioral ethics will allow us to offer a richer and more accurate model of the optimal specificity of law and of the employment of moral language and sanctioning. The works reviewed in this paper have enabled us to make specific predictions about the behavior of people, taking account of differences between them, their motivations regarding the law, and the likely effect of various forms of law on their behavior. In behavioral equity, the law uses vague moral directives to reach two groups simultaneously: the good-faith people with a promotion focus on morality, and the bad-faith people (opportunists, evaders) with a promotion focus on the law. Behavioral equity can simultaneously promote performance and avoid crowding out intrinsic motivation for the former, while holding a sword of ex post intervention over the latter. The evaders, with their promotion focus on the law, have knowledge of how equity will be used ex post as a rule of decision as well as of conduct, whereas actors with an ethical focus will regard the law as consisting of conduct rules that dovetail with their moral expectations. Specific rules are used for actors, whether we regard them as good-faith or bad-faith, who have a prevention focus on the law. Specific rules here aim for compliance, in areas where motivation for performance is not as important (for example, where behavior is easily measured). We naturally had to make some compromises to produce a usable model. For example, for purposes of simplicity we separated people into good-faith and badfaith. There is much to be said about the feasibility of this dichotomy from various angles. The possibility of opening the rational-choice assumption to a richer ty- e-offprint of the author with publisher’s permission 156 Yuval Feldman and Henry E. Smith JITE 170 pology of people extends also to other aspects of the law’s influence that are not entirely clear, such as the stability of preferences and motivations to comply, the likelihood that intrinsic motivation is aligned with the law without external intervention, and the ability to correlate aspects such as morality, risk perception, and reputation concerns of people designated as good-faith and bad-faith. Further theoretical and experimental work is needed to better capture the dichotomy advocated here. This would improve the ability of the law to base the optimal specificity of law and equity on a richer classification than the dichotomy between good faith and bad faith presented in this paper. Using such an approach, the use of equity could be tailored more accurately to the need to reduce evasion by some people and to increase performance and commitment by others. References Alexander, L., and E. 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