TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, September 25, 2013

Levmore Presents Regulatory Intensity, Information Revelation, and Internalities Today at Columbia

LevmoreSaul Levmore (Chicago) presents From Helmets to Savings and Inheritance Taxes: Regulatory Intensity, Information Revelation, and Internalities at Columbia today as part of its Tax Policy Colloquium Series hosted by Alex Raskolnikov, David Schizer, and Wojciech Kopczuk:

It seems obvious that regulation requires the revelation of private information, because legal interventions can do harm when they are designed with insufficient information about individuals’ preferences and other variables. Nevertheless, academic observers and lawmakers often identify a market failure or constituent need, and then proceed to favor a specific legal intervention as if its intensity were of little significance. The right intensity, or even a level that does more good than harm, can be difficult to determine. It is apparent that regulation is more likely to improve social welfare when its intensity reflects accurate information about the costs and benefits it generates. At the same time, if revelation imposes emotional or other costs, then welfare can be improved if law camouflages true preferences.

One aim of this paper is to add self-revelation to the calculus surrounding government intervention. Consequently, the focus is on internalities–that is, the class of problems where intervention might be sought to deal with problems of self-control, broadly defined. Internality-driven interventions expose the need for one kind of information revelation because the essence of the interventionist claim is that the present self seeks to constrain the future self. But how do we evaluate the costs imposed on the future self and how do we assess the benefits to either self? Aspiring nonsmokers, for example, might seek help in the form of taxes or bans on cigarettes, but how do we know how high or extensive those restrictions should be?

Part II begins by comparing the revelation problems inherent in government spending on public goods with those attached to interventions in the presence of negative externalities, and collective action problems more generally.1 The idea is to establish a framework for evaluating the likelihood that internality-driven interventions will be superior. Part III focuses on internality problems and suggests that, with information revelation in the picture, the case for helmet laws is stronger than that for more intensive smoking regulation or more forced savings. Part IV detours to make a novel argument for inheritance taxes. In all these examples the strategy is to begin with a plausible case for legal intervention and then focus on mechanisms for extracting enough information about preferences to support some particular regulatory intensity. I suggest that while the literature on mechanism design has succeeded in adding incentive compatibility questions to assessments of efficient resource allocation,2 there is a third leg on which interventions must stand. It is often important to think also about interest compatibility, which is to say feasibility in a world of transaction costs and competing interest groups. As Part V concludes, regulatory aspirations must be incentive compatible, but they must also take into account the political coalitions necessary for the enactment of intensity-determining rules. This political, or interest compatibility, factor is what makes the foundational elements of mechanism design difficult to cut and paste on to concrete legal problems.

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