Optimal Line-Drawing for Legal Rules

Line drawing is a pervasive feature of legal systems. Across many domains, the applicable legal treatment turns on whether an activity falls above or below some threshold. We characterize the economic forces that determine the optimal placement of such thresholds, both generally and in specific legal settings involving monetary and non-monetary sanctions, prohibitions, and mandates. We apply our results to two important line-drawing questions in private law: the optimal due-care threshold for negligence liability and the optimal threshold for whether a shortfall in contract performance constitutes breach. In both applications, the optimal line takes the form of a population-level marginal cost-benefit rule, with the relevant costs and benefits weighted over the actors whose behavior the line induces to change.