Legal Discretion Creates Incentives

Legal discretion creates economic incentives which distort the economy. Let’s talk about what that means.

Legal discretion can occur in courts, in the executive branch, by police officers, and by government prosecutors.In each case there is a resource constraint on law enforcement. For example, a police officer can only address so much crime at a time, and only so many officers can be employed.Similarly, punishment for a crime may deviate from the expected value of the punishment if a person were only aware of the statute. While a statute may proscribe a sentence of 1 – 10 years, the punishment may be more often near 1 or 10 then near the expected 5.5.

The actual rate of enforcement for crime combined with the actual punishment of crimes and any similar factors I may have missed can be called the real legal system, in contrast with the espoused legal system which is the combination of public law, case precedent, publicly announced discretion, and other forms of law of which contribute to the expectation of the ordinary individual.

The difference in economics between expectations and real values are analogous to the difference in sociology between Schein’s espoused values and basic assumptions in studies of culture.

Problems occur because of this legal discretion:

  1. Unexpected legal discretion can cause individuals to behave in ways which are less efficient than they otherwise would behave.
  2. Expected legal discretion may cause inefficiency is the discretion is improperly exercised.
  3. Legal discretion should be expected to be improperly exercised in any political system other than a market system or a holy system.

The first two points seem elementary, but perhaps the third point is less obvious. Why should legal discretion be expected to be improper in most systems? The answer is there is an economic calculation problem.

There are two calculation problems and a third problem which can be seen as a calculation problem as well, although it is a bit different and should probably be considered a coordination problem.

  1. Assume that there is some ideal criminal justice outcome. Given finite resources, how should those resources be allocated in order to allow the real criminal justice outcome to best match the ideal criminal justice outcome?
  2. How does the criminal justice system decide on the ideal criminal justice outcome, and does the criminal justice system’s perceived ideal outcome reflect any kind of objective best outcome?
  3. When law enforcement decides on the ideal outcome, is it in agreement with the courts, the rest of the executive branch, the legislators, and the market expectation?

Related to the calculation problems, the criminal justice system is extremely hierarchical and frequently engages in minimized flow of information. We may be confident from an economic point of view that the modern U.S. criminal justice system inefficiently allocates resources to achieve its goal, and that it also has a sub-ideal goal in mind.

Here’s a formula:

L = P – U

Where: P = f(E, S), U = f(R, S), S = f(I, A)

This means the real legal structure (L) is the perceived ideal legal structure (P) minus the intentional under-performance (U). The perceived legal structure, as perceived by some particular organization, is a function of the espoused legal structure (E) and the structure of the organization (S). The espoused legal structure is the collection of public law, case precedent, publicly expressed discretionary policy, and so on.

Notably, U is free to be negative. So my model acknowledges the theoretical possibility of the CJ system outperforming expectations. Also notably, the efficient legal structure is included nowhere in this model. According to my model, both the real and expected legal systems are explained without respect to an efficient legal system.

The perceived legal structure can be taken as with respect to some particular organization, or an aggregate function may be applied to find the general perception of concerned organizations.

Intentional under-performance is a function of available resources (R) and the structure of the organization (S). Lastly, the structure of the organization, as I am using it in these equations, is defined as the thoughts, actions, and so on of the individual actors (I), or individuals, and their arrangement (A) within the organization for the purposes of organization decision production. S may be robust to redefinition, but the purpose is that the collective decisions of the organization come from individuals arranged in certain ways.

In plain English, the criminal justice system interprets the law and then seeks to enforce it as best as possible given resource constraints. The outcome is the actual or real legal system. Consider the effect on rational action. Consider that a rational actor engages in any activity where the net benefits is positive, assuming that costs include opportunity costs. When the legal system changes from the espoused legal system to the real legal system, both benefits and costs are affected. The result may be a change to the most beneficial activity.

The end result is that legal discretion can impact market behavior. This creates a moral hazard because the ability to impact market behavior itself can be utilized either for personal utility or as a valuable service. Even when utilized morally, the calculation problem ensures that all systems except market systems and holy systems will arrive at sub-optimal outcomes.

A holy system is where all individuals in the system are omnipotent, omnibenevolent, and omniscient. For example, a God-King system.


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