Socially Optimal Ex-ante Adjudication

Abstract Ex-ante adjudication prospectively ascertains the legality of some proposed conduct. This article studies ex-ante adjudication using a signaling model. An actor may take an action that benefits herself but produces an externality to others. This action attracts a risk of ex-post adjudication and sanction. The actor seeks ex-ante adjudication before deciding how to act. Conducting ex-ante adjudication, a socially minded judge decides how accurately to ascertain whether the proposed action is sanctionable. In equilibrium, ex-ante adjudication is never fully accurate. When the threat of ex-post adjudication and sanction fails to incentivize socially desirable conduct, the judge conducting ex-ante adjudication can occasionally make erroneous rulings to encourage such conduct. She cannot err too often; otherwise, her rulings will not be followed. As the quality of ex-post adjudication or sanction worsens, surprisingly, equilibrium ex-ante adjudication must more accurately mimic ex-post adjudication; otherwise, erroneous, but socially beneficial, ex-ante rulings will no longer be followed. These results partially explain and justify the discretionary nature of ex-ante adjudication in reality. These results are also consistent with how ex-ante adjudication is conducted regarding trusts, insurance, patent validity, and international law. These results further offer normative guidance for the design and conduct of ex-ante adjudication more generally.