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Nuno Garoupa – Universidade Nova de Lisboa. KAFEE Lunch Seminars.

Event details of Decoupling as a Tax on Primary Activities
Date 13 March 2006
Time 11:15 -12:15
Location Roeterseilandcampus - building E

Nuno Garoupa – Universidade Nova de Lisboa

Decoupling as a Tax on Primary Activities

Abstract of the presentation:
In this paper we take the view that a decoupling maneuver taxes the primary activity. When the maneuver proposed by Polinsky and Che (1991) is run (raising payment for the plaintiff and lowering award for the defendant in such a way as to keep the incentive for performing constant), the social Surplus from contracting increases, but the private surplus decreases. This means that while the social value of each contract signed is higher, fewer contracts are signed. When adding-up both countervailing effects, we get two important results. In a perfect information model with no externalities, there is an optimal degree of decoupling, hence there is a limit to the maneuver proposed by Polinsky and Che (1991). When asymmetric information in contractual bargaining is introduced, we get the result that the decoupling maneuver is always welfare diminishing.

Once externalities are considered (either because the parties do not bear the full cost of litigation or because there are positive externalities coming out from contractual litigation), we show that decoupling should be reassessed to the extent that these externalities affect the social value of contracting. In particular, we get closer to Polinsky and Che (1991) when we have a negative externality and get away when we have a positive externality.

Decoupling favors settlement which partially reduces the Problem that fewer contracts are formed since parties opt For out-of-court settlements and hence are somehow Immune to this maneuver. But on the other hand precisely because parties settle, decoupling implies that more Contracts will be breached.

KAFEE Lunch Seminars.

Information: Adam Booij:

Roeterseilandcampus - building E

Roetersstraat 11
1018 WB Amsterdam