The Shaping of Information Flow in Law and Life

*Teaching Fellow, Kennedy School, Harvard University; Frank P. Ramsey Professor of Political Economy, Kennedy School, Harvard University. We are grateful to the editors of the Virginia Law Review for their careful editing and insightful suggestions. We thank the Mossavar-Rahmani Center for Business and Government for research support.Show More

Introduction

Fred Schauer showed how the law takes a messy, probabilistic world and uses rules to draw bright lines through it: liable or not, knowing or ignorant, guilty or innocent.¹ 1.Of course, the law sometimes uses standards or probabilistic thresholds (reasonableness tests, burdens of proof), but the ultimate result is a categorical determination.Show More Such neat categorical boxes are a feature, not a bug, for the law. They serve two critical purposes: (1) they determine an outcome, and (2) they fulfill the law’s need for predictability and administrability.² 2.See Frederick Schauer, Playing by the Rules: A Philosophical Examination of Rule-Based Decision-Making in Law and in Life 95, 137 (1991); Frederick Schauer, Thinking Like a Lawyer: A New Introduction to Legal Reasoning 35–37 (2009); Frederick Schauer, Formalism, 97 Yale L.J. 509, 539 (1988); see also Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 Duke L.J. 557, 611 (1992) (underscoring the need for legal predictability).Show More

From an economic perspective, though, information comes in shades of gray, not black and white. Indeed, sometimes those grays include dots and waves and not merely tones, such as when potential states of the world are poorly defined. Beliefs update by degree, and uncertainties in the law are rarely resolved to one or zero before a decision must be made. Finally, information may be written in invisible ink, as when ignorance hits and individuals do not even recognize the existence of some states of the world.

When law imposes categorical boundaries on this amorphous, ill-defined reality, it does more than merely regulate information asymmetries. It creates new strategic landscapes, where the boundaries themselves create games among strategic players. Hold people liable for what they know, and they might choose not to learn. Punish lies but not misleading truths, and quasi-truths will flourish. When some reputations get protected but others sullied, collective identities become both a valuable resource and a significant vulnerability.

This Essay explores three conceptual domains, which lie well outside of traditional legal scholarship. Nonetheless, each of the three has strong implications for the law. Those domains are information asceticism, the strategic choice not to learn; paltering, misleading without lying; and reputational externalities, spillovers—positive or negative—from associations. In each case, we show how and where the law draws lines. We then use simple economic models to illustrate the incentives that follow. Schauer’s insights about legal categorization embrace the economic logic of uncertainty, generating predictable strategic responses that often reshape but rarely eliminate the asymmetries that underlie them.

1.  Of course, the law sometimes uses standards or probabilistic thresholds (reasonableness tests, burdens of proof), but the ultimate result is a categorical determination. ↑

2.  See Frederick Schauer, Playing by the Rules: A Philosophical Examination of Rule-Based Decision-Making in Law and in Life 95, 137 (1991); Frederick Schauer, Thinking Like a Lawyer: A New Introduction to Legal Reasoning 35–37 (2009); Frederick Schauer, Formalism, 97 Yale L.J. 509, 539 (1988); see also Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 Duke L.J. 557, 611 (1992) (underscoring the need for legal predictability). ↑