Circumvention of Law and the Hidden Logic Behind It

In “Circumvention of Law and the Hidden Logic Behind It,” published in the Journal of Legal Studies, Leo Katz, Frank Carano Professor of Law at the University of Pennsylvania Carey Law School, and Alvaro Sandroni of Northwestern University’s Kellogg School of Management show that any reasonable legal system is extremely manipulable and that efforts to stamp out such manipulation would be doomed to fail.

Katz’s work focuses on criminal law and legal theory more generally. By connecting criminal law, moral philosophy, and the theory of social choice, he tries to shed light on some of the most basic building block notions of the law—coercion, deception, consent, and the use and abuse of legal stratagems, among others. A prolific scholar, Katz is the author of several books including Why the Law is So Perverse (Chicago, 2011), which he researched with the support of a Guggenheim Fellowship.

Legal Circumvention

Katz and Sandroni begin their article with a basic question: “Why has the law remained so openly manipulable and by schemes that are so well-known?” They respond with their argument that “there is simply no reasonable alternative.”

In support of their position, the authors offer several “ordinary examples of open legal circumvention,” which, they write, “should, by their very ordinariness, draw attention to how fluid the boundary is between legal circumvention and ordinary legal planning.” The transfer of income-producing assets to reduce tax liability and the protection of assets from the reach of creditors, they write, both illustrate how fluid the boundary is between legal circumvention and ordinary legal planning.

Legal Manipulation

Katz and Sandroni offer two simple manipulative maneuvers that can circumvent any reasonable legal system: manipulation by contraction and manipulation by expansion.

Manipulation by contraction, they write, “is the possibility of making a previously illegal option legal through the removal of other options from the choice set.” As an example, they give a decision-maker under deadly attack who, if they cannot escape, are left with only the options to kill or be killed, rendering the previously illegal option of killing now legal.

Manipulation by expansion, they explain, is the addition of options that changes the status of an existing option from illegal to legal. They offer the example of circular priorities, such as when determining which land buyer has priority over another, which depends on who has recorded the transaction (and when) and whether there was bad faith involved.

Katz and Sandroni show that only legal systems that maximize a utility function can avoid these simple manipulation schemes. No reasonable legal system maximizes a utility function, however, according to the authors, because of the need for the law to accommodate conflicting interests and to combine different legal doctrines.

More specifically, the authors argue that anti-evasion laws, such as the fraudulent conveyance rule directed at actions taken on the eve of bankruptcy and the piercing rule regarding the limited liability doctrine for corporations, are incapable of eradicating legal manipulability, even if perfectly enforced. While manipulation can be limited by anti-evasion rules, they write, the price for such limitation is that “they move the law in the direction of being unresponsive from the moment onwards that these rules apply.”

Katz and Sandroni write that their work suggests new avenues of research in both law and economics, and they look forward to their future collaborative work investigating “how to evaluate the desirability of laws and policies in the absence of a utility function the law can be said to maximize.”

Read Katz and Sandroni’s full article.

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