TRUST, TREASON, AND TRIALS - AN EXAMPLE OF HOW THE EVOLUTION OF PREFERENCES CAN BE DRIVEN BY LEGAL INSTITUTIONS

This study tries to enlarge the scope of law and economics by providin g an example that legal institutions do not only have short-run effect s on present behavior by changing the cost-benefit relation of differe nt actions but can also drive the evolution of preferences. Therefore legal design has long-run effects on behavior which should not by negl ected by legislators. The study presents a simple model of cooperation where only one party has the option to observe the outcome of joint e fforts. While this party can pretend a failure of cooperation, the oth er party has the option to monitor its partner. The model considers re source variables and a psychological variable reflecting remorse in ca se of betrayal. Players are assumed to behave rationally according to given preferences, but preferences may change in the course of evoluti on. The results show that a ''good'' design of legal institutions can crowd out ''bad'' preferences.