William and Mary Law Review
Scott A. Moss and Peter H. Huang, How the New Economics Can Improve Employment Discrimination Law, and How Economics Can Survive the Demise of the Rational Actor, 51 Wm. & Mary L. Rev. 183 (2009), available at http://scholar.law.colorado.edu/articles/244.
Much employment discrimination law is premised on a purely money-focused "reasonable" employee, the sort who can be made whole with damages equal to lost wages, and who does not hesitate to challenge workplace discrimination. This type of "rational" actor populated older economic models but has been since modified by behavioral economics and research on happiness. Behavioral and traditional economists alike have analyzed broad employment policies, such as the wisdom of discrimination statutes, but the devil is in the details of employment law. On the critical damages-and-liability issues the Supreme Court and litigators face regularly, the law essentially ignores the lessons of behavioral economics and the affective sciences.
(1) Damages: With emotional distress and punitive damages limited, the basic discrimination damages are the employee's lost income. Courts draw no distinction between a failure to hire a job applicant and a termination of a long-term employee, yet endowment effect and happiness research indicate that terminated long-term employees typically suffer greater psychological loss, justifying greater damages.
(2) Employer Duties: Effective antidiscrimination programs can shield employers from liability, but the cases and scholarship say little about what programs are effective. Research showing that people think and problem solve best in positive emotional states indicates that programs focused on negativity (for example, "discrimination gets us sued") yield fear and backlash but not the productive employee effort, understanding, and empathy that lessen bias.
(3) Employee Duties: Harassment victims often cannot sue unless they first complained to their employer. Courts should recognize the reasonableness of not complaining due to learned helplessness and because the endowment effect and loss aversion explain reluctance to upset even a bad status quo (a job with harassment). The risk of loss (retaliation) outweighs the possible gain (ending harassment).
This Article also analyzes broad implications of behavioral and happiness research for law and economics:
(1) Do behavioral and happiness adjustments to a rational actor model make economics indeterminate? Economics still can yield useful legal analyses, but likely narrower ones (for example, improving individual, micro-level determinations of damages and reasonable behavior) than past economic analyses of macro-level issues, like whether all discrimination law is "efficient."
(2) Psychologically informed economics often prescribes regulation of markets. It asks, 'When is such regulation worth the transaction costs and incentive distortions?" More complex rules, like those this Article prescribes, are worth the cost in higher-stakes, less-repeated transactions like employment than in lower-stakes, often-repeated transactions like consumer purchases.
(3) Should courts rely on these new findings or instead disclaim reliance on any social science because new research often displaces prior findings? In employment cases, courts must assess make-whole damages and employee reasonableness, so they cannot avoid some conception of well-being and cognition-and even imperfect new findings beat disproven, too-narrow "rationality" assumptions.
This Article thus offers a half-full/half-empty assessment of the usefulness of economics, and of behavioral and happiness research, to law. It sounds a cautionary note against using social science to assess grand legal policies, but a hopeful note that such research can improve decision making by judges, firms, and individuals.
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