Are All ‘Legal Dollars’ Created Equal?


For several decades law and economic scholars have employed the tools of price theory in order to evaluate an array of legal questions ranging from criminal sanctions to contract remedies. This vast body of literature implicitly assumed that all payments made through the legal system are fungible. In other words, just as a dollar paid for a tomato is identical to a dollar paid for a cucumber, so are a dollar paid as a pollution tax to the government and a dollar paid as compensation to the party injured by the pollution. In this study we challenge this assumption, and present empirical evidence that documents systematic and consistent differences between distinct types of legal payments.

We used a sample of 420 students who received a description of a hypothetical scenario that involved the behavior of an owner of a factory that creates a negative externality in its production process. We then manipulated the legal regime that participants were subject to along three dimensions: timing of payment (ex-ante v. ex post), identity of recipient (state vs. injured party), and the level of certainty (certain vs. probable), and compared the way participants perceived the situation using an array of psychological variables. Our findings indicate that there is a continuum of legal payments that are perceived differently by people, and as a result generate distinct incentives. At one end of this continuum lie legal payments that are similar in structure to a paradigmatic price. These are payments made to another private party in advance. At the other end of the continuum lie legal payments that are similar in structure to the paradigmatic punishment. These are payments that are made after the fact to the state, and that their assessment is probabilistic.

The analysis presented in the paper offers a significant contribution to current scholarly work in fields such as criminal law, tort law, law enforcement, and environmental regulation. For example, our findings indicate that shifting to a system of pollution taxes might transform the way in which polluters treat the price the law sets for their activity. Furthermore, the framework we introduce in this study can be extended to a wide range of empirical studies that will help broaden our understanding of the social meaning of legal dollars.


Environmental Law | Law | Law and Economics | Law and Society | Law Enforcement and Corrections | Legal Remedies | Tax Law | Torts

Date of this Version

February 2007