🤖 AI Summary
This study addresses the breakdown of traditional quality signals when generative AI outputs become indistinguishable from those of human experts, forcing service providers to rely solely on outcome-based warranties—a strategy whose efficacy varies across professions and jurisdictions. The paper introduces the concept of an “institutional window,” framing legal liability regimes as mechanisms that sustain human fallback capacity by delineating a viable signaling space through legal parameters such as liability caps and enforceability of penalties. Integrating legal analysis, game-theoretic modeling, and multi-agent market simulations—calibrated with empirical data from five professions across seven jurisdictions—the research demonstrates that when task verifiability falls below the threshold 1/m, contractual concerns collapse into operational ones; moreover, an empty institutional window drives human participation to zero, precipitating skill atrophy.
📝 Abstract
Problem definition. When generative AI produces expert artifacts clients cannot distinguish from a competent provider's, the classical cost-based quality signal collapses and only outcome-contingent commitments can separate types. Such a commitment certifies an endogenous, perishable asset: the human fallback capability a firm builds by keeping staff engaged with cases the AI handles, eroding otherwise. Prior work is silent on where that mechanism holds. We ask where, across occupations and liability institutions, it remains informative.
Methodology/results. We introduce an institutional wedge between the liability cap a firm posts and the retained exposure that carries information, generated by four legal primitives: the cost rule, the enforceability of penalty clauses, the displacement of private liability by state liability or pooled indemnity, and mandatory limits on contractual liability. The wedge compresses the separating type space into a signaling window, bounded above by solvency and the penalty doctrine and below where standard-terms control voids caps beneath a threshold. We calibrate five occupations and seven jurisdictions on published evidence. In common-law agreed-damages channels the provability gross-up is unavailable whenever verifiability falls below 1/m, turning a contracting problem into an operational one. Verifiability investment widens the window where the ceiling binds but narrows it where the cap floor binds. In an agent-based market, within the tested policy class, every empty-window cell converges to zero engagement and skill collapse.
Managerial implications. Liability institutions are a workforce-capability instrument, not merely a risk-allocation device. Firms should target the binding margin in each jurisdiction; cap floors and pooled indemnity each suppress the signal sustaining fallback capacity.