No Judge, No Job! Court errors and the contingent labor contract

Judges are prone to error and misapprehension when they are verifying the facts of a legal case. We analyze the significance and scope of accurate court decisions and judicial error for labor contracting and identify the implications of these concepts on behavioral incentives and market outcomes. We find that imperfect judicial state verification and the diverging beliefs on a court ruling reduce the efficiency of contingent labor contracts and make them less effective in stipulating sufficient incentives for compliance. If increasing court accuracy in general is not feasible, the courts (and the legislator) should primarily mitigate type I errors. The common reversal of the burden of proof to the employer in labor laws reflects these insights. The model also indicates that the ability of judges to verify facts is a prerequisite for efficient law-making and contributes significantly to the economic role of courts. Copyright Springer Science+Business Media New York 2014