This course takes a problem—risks to human life and health—and explores the potential justifications for, and contours of, legal responses to that problem.

Topic 1:

Introduction to Regulatory Policy

This section, the introduction to regulatory policy, attempts to justify regulation when parties contract.

When a risk is imposed on one person by another person in absence of any agreement between the parties, some form of legal response is at least presumptively justifiable. (Philosophers going all the way back to Hobbes have argued that the predominant reason for giving authority to the government to manage human affairs was to attain some degree of security against private violence.) (Even economists, who are generally more resistant to the notion of government intervention, have long held that in the case of “negative externalities”—such as harms imposed by one person upon another without his or her consent—government action is warranted.) The appropriateness of government intervention is less obvious when the parties’ relationship is governed by private contract, such as in relationships between employers and employees, manufacturers and consumers, and doctors and patients. Such cases raise the following questions:

1.)Should the risks associated with the relationship be regulated exclusively by the terms of the parties’ agreements?

2.)When, if at all, should legislatures or courts adopt rules that change the allocation of risks found in the parties’ agreement?

[Part I uses two classic cases to introduce legal responses to these questions, Part II will consider the economic perspective on this issue, and Part III will explore alternative perspectives that are critical of the economic point of view.]

I.Legal Responses to the Problem of Allocating Risk

A.Justifications for and Responses to Regulation

People in the United States are exposed to risk every day. (Barstow article – Patrick Walters worked without a trench box and died because of it. Walters’ relationship with his employer, Moeves Plumbing, was governed by their employment contract. Patrick knew how unsafe the workplace was, but continued to work for Moeves anyway because of how they paid him and his limited alternatives.  Tushnet says that this article was meant to highlight the acceptance of risk in a world of constrained choices.)

Justifications for Regulations

Three common justifications for legal responses to regulation deal with efficiency, distribution, and paternalism.

1.)Efficiency --- Efficiency justifications for regulation focus on the inadequacy of information that parties to a contract have about the contract terms. If parties have incomplete information about the risks that they face, they may not be able to appropriately allocate risk in their agreements. (Walters may not have complete information about the risks of working without a trench box, and even if he does, he may be unable to make accurate calculations concerning that risk because of cognitive biases like the discounting associated with long-latency problems.)

2.)Distribution --- Distributive justifications for regulation focus on the restricted choices that are available to parties to a contract. Because parties to contracts have a limited number of opportunities available to them, the parties may be forced to choose a certain allocation of risks. (The other jobs that Walters could choose may be undesirable.)

3.)Paternalism --- Paternalistic justifications for regulation focus on the way that society views the risks involved in an agreement between the contracting parties. If society deems certain risks unacceptable, the society may decide that contracting parties should not be able to contract such that anyone accepts those risks. (Society may not want to allow Walters to work without a trench-box, regardless of who accepts the risks associated with that, because society thinks that it is unacceptable for anyone to work in conditions in which they might be buried alive.)

Regulatory Responses Generated by the Justification

1.)Information Provision --- The regulatory response to efficiency problems is information provision.(In Walters’ case, a regulation could require that Moeves provide Walter with information about the risks of working without a trench-box. It is possible, though, that the risks Walters faces are from long-latency diseases, in that case, no amount of information provision would remedy the efficiency problem and the problem would need to be solved by a regulatory ban. NB: The latter solution is tinged with paternalism because it assumes that society is better at assessing this risk than Walters himself. That being said, it is not purely paternalistic because it seeks to make the choice that Walters would make for himself if it weren’t for the difficulties presented by information processing.)

2.)Improving/Providing Alternatives --- The regulatory response to distributive problems would change the availability and/or desirability of alternatives. (In Walters’ case, setting a minimum wage that reflects the “living wage” would ensure that Walters was not “forced” to work in unsafe conditions. If Walters works in unsafe conditions because can either risk dying in a trench or risk dying of starvation, that is a distributional problem. But if Walters works in unsafe conditions because he values money more than safety, the distributional problem has been remedied and that may be acceptable.)

3.)Bans --- The regulatory response to paternalistic problems restrain contracting parties from taking socially unacceptable risks or requiring parties to purchase insurance to cover those risks. (In Walters’ case, society could ban trench digging without a trench-box. This type of regulatory-ban imposes a compulsory term on contracts between parties.)

B.Regulatory Mechanisms and Institutions

This section presents two classic cases on workplace safety to consider the regulation of risk at common law, legislative regulation, and the constitutional restrictions on the power of legislatures to alter the allocation of risks in contracts between private parties.

Regulation of Risk at Common Law

At common law, the regulation of risks can take one of two forms. If the risks at issue are risks that must be assumed by one of the contracting parties, then contract law governs the issue. On the other hand, if the risks at issue are externalities of that contract relationship, then tort law doctrines like nuisance can regulate risk by internalizing those externalities.

The Contract Response

The contract response to the problem of allocating risk builds risk into the contract’s terms. That is, when the relationship between two private parties is governed by a contract, the risks associated with the relationship are accounted for by the explicit and implied terms of the contract. (Shaw’s opinion in Farwell v The Boston and Worcester RR Corp [Mass, 1842] – Farwell was injured because of the negligence of a fellow employee, but the Court held that Farwell’s employer was not responsible for the injury. Though this was a tort case, Shaw’s opinion focuses on contract-related rationales. Shaw observes that engineers are paid more than other employees and draws the conclusion that part of Farwell’s wage is attributable to the risk that he will be injured by another employee. Thus an implied term of the contract allocates risk to Farwell in exchange for a higher wage. Shaw argues that Farwell should not recover because the employment contract provides a better mechanism for compensating for the risk of injury.Shaw’s choice to interpret the implied terms of the contract as an allocation of risk to Farwell is a regulatory choice.)

Taking the example of risk allocation between parties to an employment contract: The implied in fact term could be either that the risk is allocated to the employee or the employer. If the risk is allocated to the employee, then the employer will increase the employee’s wages, adding a risk premium reflecting the probability that he will be injured to the employee’s base wage. (If the risk is greater than the compensation, then the employee could either re-negotiate or quit.) If the risk is allocated to the employer, however, then the employer would buy insurance to cover the cost of a possible injury to the employee using the money that would otherwise have been given to the employee as the risk premium.

Allocating risk to the employer does not involve a transfer of wealth to the employer because the employer just gives the money that would have gone to the employee to the insurance company. But, allocating the risk to the employee is a transfer of wealth to the employee because it allows the employee to purchase less or no insurance. Thus, if the employee values something else more than he values his safety, then the employee could purchase something other than insurance with the risk premium.

Problems with the Contract Response

However, this argument is predicated on several assumptions about the availability of alternative contracts/options, the availability of information, a lack of negative externalities to the agreement, and the view that the parties should be able to make choices independent of society’s judgments. If you can generate the argument that any of these assumptions are untrue, then you have an argument for regulation even in the context of contract. Thus, the conditions under which government regulation might be justified to displace contractual terms include:

1.)Restricted Choices In order to argue that risk is accounted for by the contract terms, you have to assume that the contracting parties had other choices available to them. If the contracting parties are faced with restricted choices, government regulation might be justified to displace contractual terms. (Adistributional argument)

(For example, in an employment relationship, if the worker is forced to choose between a reasonable wage and a reasonable amount of safety, then the government might be justified in displacing the contractual terms in order to create more choices for the employee.)

2.)Lack of Information In order to argue that risk is accounted for by the contract terms, you have to assume that the contracting parties had accurate information when they were negotiating the contract. If one of the contracting parties has incomplete information, the government may also be justified in using regulation to change the contract terms. In these situations, it is also possible that information provision might not be enough to correct for the problem. That is, if one of the parties cannot process the information in such a way that produces rational choices, the government may be justified in regulating the contract terms such that the government limits options or forces actions rather than simply providing information. (For example, in an employment contract, there might be a risk of contracting a long-latency disease that makes it such that the worker can’t appropriately account for the risk. In that situation, information provision isn’t enough and the government might be justified in imposing a regulatory ban.) (An efficiency argument)

3.)Negative Externalities In order to argue that risk is accounted for by the contract terms, you have to assume that there are no negative externalities that cannot be resolved by the affected parties. If the behavior of the contracting parties causes negative externalities and generates a collective action problem that can’t be overcome by tools or procedural mechanisms like class actions, then the government may be justified in using regulation to limit or remedy the negative externalities. (An efficiency argument)

4.)Paternalism In order to argue that risk is accounted for by the contract terms, you have to assume that society is not paternalistic.If society takes the paternalistic view that people should not be allowed to accept certain types of risks, then the government may be justified in using regulation to eliminate the choice of accepting those risks. (Apaternalistic argument)

Regulation of Risk through Legislation

Legislative regulation can supplement common-law regulation. (Section 113 of the NY statute at issue in Lochner)The regulation of risk through legislation involves policy choices. In order to regulate risks, legislators must make judgments about risk allocation and the justifications for regulating it. (The question of whether or not legislators are good at making these types of judgments and coming up with the best solutions to these problems will be addressed later.)

Regulation of Risk in Constitutional Law

Even when legislative regulation supplements common-law regulation, courts continue to have some degree of control over the content of legislatively enacted rules because all such rules have to be consistent with the restrictions imposed by the state and federal constitutions.

The Constitutional Response

One Constitutional restriction on the regulation of risk is the Due Process Clause of the 14th Amendment, which provides that no state shall “deprive any person of life, liberty, or property without due process of law.” During the Lochner Era, the Supreme Court invalidated a number of regulations because the court believed that those regulations interfered with the rights guaranteed to people by the Due Process Clause. (Lochner v New York [US, 1905] – held that the Due Process Clause limited legislative authority to restrict the liberty of contract by setting limits on the terms to which workers and employers could agree. Peckham, for the majority, says that the legislature has no power to regulate the hour terms of a contract for the purpose of altering the distribution of market-based power between workers and employers.)  Tushnet says that Lochner transfers the kind of analysis that Shaw does in Farwell for private law to a public/constitutional law framework. The Court balances the bakers’ constitutionally protected interest in making contracts against the state’s police power as applied to providing for the public health of the state’s citizens.

The Problem with the Constitutional Response

The problem with the argument that the Constitution restrains the legislature’s ability to regulate interactions between contracting parties is that such an argument assumes that the legislature’s actions must be consistent with a certain view of the market/economy. (Lochner v New York [US, 1905] – held that the Due Process Clause limited legislative authority to restrict the liberty of contract by setting limits on the terms to which workers and employers could agree. Holmes, in dissent, responds that there is no pre-political market. Holmes says that when the majority claims that the Constitution requires respect for the pre-legislative power balance, it adopts a particular economic theory.) The Lochner line of cases is no longer good law because we now think that (1) wealth redistribution is a permissible goal of regulation; (2) regulations don’t need to benefit the public as a whole; and (3) paternalistic regulation is justifiable.

II.An EconomicPerspective on Allocating Risk

The economic approach to allocating risks to human health and life considers the appropriateness of some ways in which the government—including both courts and legislatures—can displace or alter private agreements. One question about regulation is whether the government’s role in addressing health risks should be limited to the enforcement of private contracts allocating the burden of these risks.

There is theoretical and empirical support for the proposition that people allocate the burdens of risks to human health through contract; some scholars state that there are “wage premiums” or “compensating wage differentials” for risky work (the provision of an increased wage to an employee in exchange for the employee’s agreement to accept health or safety risks in the workplace). (Viscusi, 42, measures the existence of risk premiums with respect to worker perception of job risks and finds that workers who believe that they are working in particularly risky jobs make $900 more per year. Thus, Viscusi’s analysis indicates that compensatory wage premiums do exist and that they are much more significant in economy-wide impact than OSHA fines.) If private individuals do indeed strike bargains regarding risk, then perhaps the government’s role in addressing risks should be limited.

However, some critics argue that observable wage-premiums mis-price risk. (Kelman, 46, argues that Viscusi’s risk premiums don’t show marginal increases in wages for shifts in danger within a dangerous occupation and so Viscusi’s research doesn’t imply that, in the absence of regulation, workers are already compensated for their desired safety levels) (Graham and Shakow, 47, argue that compensating wage differentials may exist for high-paying primary segment jobs, but do not exist in low-paying, unstable secondary segment jobs.) (Mendeloff, 51, argues that status-governed career paths reverse the logic of wage premiums, making the pay-scale increase for promotions that typically involves less, not more, risks/hazards.)

III.Other Perspectives on Allocating Risk

Two important challenges to the economic perspective are the idea of market inalienability and the reality of unequal bargaining power. Paternalism is also a possible justification for government interference with private agreements.

A.Market-Inalienability

The theory of market-inalienability holds that some aspects of personhood should not be commodified. Thus, advocates for market inalienability argue that there are instances in which risk and health should not be priced. (Radin, 54, argues that, in an ideal world, market-inalienability would protect all things important to personhood and that universal commodification undermines personal identity by conceiving of personal attributes, relationships, and philosophical and moral commitments as monetizable and alienable from the self.) The corollary of that argument is the economic approach to allocating risk is unsatisfying. If there are certain contract terms that cannot be commodified, then government interference with private agreements might be justified.