Law and Economics
By: Bhakti Ghimire
Law and Economics
The law
and economics movement applies economic theory and method to the practice
of law. It asserts that the tools of economic reasoning offer the best
possibility for justified and consistent legal practice. It is arguably one of
the dominant theories of jurisprudence. The law and economics movement offers a
general theory of law as well as conceptual tools for the clarification and
improvement of its practices. The general theory is that law is best viewed as
a social tool that promotes economic efficiency, that economic analysis
and efficiency as an ideal can guide legal practice. It also considers
how legislation should be used to improve market conditions in return.
Law and economics offers a framework with which to model legal outcomes, and
common objectives with which to unify disparate areas of legal activity. The
bringing together legal theory and economic reasoning has also created new
research agendas in the fields of behavioral economics: how rationality affects
people's behavior within legal scenarios; public choice theory and how
collective behavior should have an effect on legislation; and game theory:
understanding strategic action in a legal context.
Table of Contents
Most
traditional theories of jurisprudence look to uncover the essential or
definitive aspects of the institution of law. Two of the most influential are
Legal Positivism and Dworkin’s Law as Integrity. While these two differ as to
their definition of law and legal reasoning, they agree upon some basic central
assumptions, determining the conclusions that two philosophical investigations
with largely the same aims, can reach. Because of this it is important to
acknowledge some of the assumptions that are held in common by these
jurisprudential stances.
First,
both theories agree upon the conceptual nature of jurisprudence. Both agree
that it is important for aphilosophical theory of law to define the core aspects of proper legal practice in
order to fulfill the function of philosophical jurisprudence. In fact, much
philosophical discussion of law assumes that such a characterization is the
essential aim of jurisprudence. Second in order to arrive at a properly
analyzed concept of law, both legal positivism and law as integrity are best
constructed from specific techniques of analytic and linguistic philosophy.
These techniques include the investigation and clarification of the way people
commonly speak about law and careful parsing of social practice that separate the
legal from the non-legal. The third common assumption is that the best way to
understand legal practice is to understand the necessary and sufficient
qualities that make some rule or statement into a law. Once such a set of
necessary and sufficient conditions is identified (or approximated) it is
thought that the essential aspects of particularly legal practices have been
understood.
Instead of
following this path, theorists within the law and economics movement have
attacked the study of law from another angle. Rather than trying to identify
unique conceptual aspects of law, what is advocated is an investigation of
legal practices through the means of economic analysis. The conclusion offered
is that legal practice is best understood through its function as a social tool
promoting economic efficiency, in common with other social practices.
Instead of
following this path, theorists within the law and economics movement have
attacked the study of law from another angle. Rather than trying to identify
unique conceptual aspects of law, what is advocated is an investigation of
legal practices through the means of economic analysis. The conclusion offered
is that legal practice is best described by its purported function as a social
tool aiming at the promotion of economic efficiency - something it has in
common with other social practices.
So,
instead of looking for the unique and defining features of law, the
practitioner of law and economics looks at law as a social tool and tries to
evaluate it functionally. What is emphasized is not its uniqueness as an
institution, but its place within the general and common economic structure of
society. The descriptive claim most often associated with law and economics is that
legal practices are best characterized as tools for encouraging economically
efficient social relations. To understand this claim it is important to examine
some of the basic concepts used in models of economic reasoning.
Essential
to an understanding of the law and economics movement is a set of fundamental
concepts. The most central assumption in economics is that human beings are
rational maximizers of their individual satisfactions, and, in turn, respond to
incentives. A rational maximizer of personal satisfaction adjusts means to ends
in the most efficient way possible. It is important to realize that economics,
as understood here, is not restricted to analysis of monetary issues; there are
nonmonetary as well as monetary satisfactions. Every potential satisfaction is
implicated in the calculus of economic satisfactions and therefore can be
investigated according to economic or means-end rationality and the trade-off
of costs and benefits. Normally what is aimed at through economic reasoning is
the improvement of efficiency.
A
more efficient allocation is one that increases the net value of resources.
Efficiency in the allocation of resources is distinguished from equity, which
is concerned with justice in the distribution of wealth. Because some people
value specific goods higher or lower than others, economic efficiency can often
be raised through voluntary transfers of goods. The most common example of a
transfer promoting efficiency is that of a freely entered into contractual
relationship. Because one party to the transaction values money more than the
item owned, and the other values the item owned more than the asking price, the
exchange produces a net gain in economic goods. Each person ends up better off
than before. Some economists have gone so far as to argue that such a
contractual exchange is morally optimal because it works within both Kantian
and utilitarian theories of morality.
They argue that it works with Kantian theories because a contract is thought to
represent a good example of interaction between free and rational agents. It
works with utilitarianism because the idea of wealth maximization intuitively
translates into more utility.
Economists
have a variety of terms to describe possible outcomes of economic exchanges.
For instance Pareto optimality is defined as a point where resources are
allocated such that no one is willing to trade further. Pareto optimality is
the eventual endpoint of a series of Pareto superior moves. A Pareto superior
change makes at least one person better of without making anyone worse off.
Because no one is worse off after the trade there are no losers in Pareto
improvements, although there may be many different Pareto optimal endpoints.
Furthermore, economists have developed the concept of Kaldor-Hicks efficiency
to compensate for obstacles to freely contracted exchanges. Kaldor-Hicks
efficiency, or potential Pareto superiority, results when the overall economic
gains outweigh the losses. In other words, the gains in economic efficiency are
large enough that the winners could, if they had to, compensate the losers in
the new allocation of goods and still remain better off.
The law
and economics movement claims that law is best understood as a tool to promote
economic efficiency. But how can the institution of law help encourage
efficient transactions? One way is to help avoid situations that lead to market
failure. One example of market failure is the existence of monopolies: a
situation where one party is able to extract more profit from a good than a
healthy market would allow. Law can be used as a tool to ensure that monopoly
situations are hard to bring about and maintain. Another way legal systems can
be used to ensure economically efficient transactions is through the
enforcement of valid contracts. By ensuring compliance with contractual terms
courts can give parties to a contract confidence that the other party will fulfill
the agreed-to obligations. This becomes especially important in situations
where the parties must complete their obligations at different times.
But some
types of market failure are less obvious, and the legal means toward remedying
them subtler. One problem in market transactions is that of externalities. An
externality is a cost not reflected in the market price of a good. For
instance, a factory may not have to internalize the costs it imposes upon the
environment into the selling price of its goods. In this case the market price
of the good will not reflect its real cost – and therefore some of the costs
are imposed upon parties in an involuntary manner. Pigou argues in regard to
this that legal means should be used to impose a marginal tax upon the
offending party, to internalize any externalities. The economist Coase argued
that this conclusion, while warranted in specific cases, was too global. Coase
argued that in a market where transactions are costless and people do not act
strategically, rights assignments are irrelevant because from any starting
point the results will be economically efficient. In other words, the Coase
Theorem states that if there are no transaction costs the assignment of
entitlements will be irrelevant to the goal of allocative efficiency. In such a
situation there will be no need for law to internalize costs because people
will bargain to the most efficient possible allocation of goods. But outside of
conceptually ideal markets there are always transaction costs such as information
costs, opportunity costs and administrative costs. If transaction costs are
somewhat high, then it does matter how property rights are assigned. Therefore
the enforcement and allocation of legal entitlements will be an important
factor in ensuring economically efficient exchanges. So law can be used to
encourage economic efficiency. But is all law best described in economic terms?
It may be
no real surprise that law often is used to encourage efficient exchanges. But
it seems a stretch to claim that law as an institution is best completely
described in economic terms. It seems counterintuitive to view all law as based
upon market principles. What the economic analysis of law manages, though , is
to see such disparate areas as contract, tort and criminal law as all based
upon economic aims, therefore giving law a more coherent basis than other
theories can offer. Richard Posner argues that tort cases - those involving
private harm - can be seen as contractual by looking for the hypothetical terms
that the parties to an accident would have agreed to in advance in order to
bring about the accident voluntarily. Also that criminals are deterred by the
threat of punishment only if the likelihood of punishment multiplied by the
quantity of punishment exceeds the gain offered by the criminal act.
Scholars have been quite effective in extending the tools of economic analysis
into areas that seem to be anything but economic in nature. Even rules of evidence
and legal ethics have proved amenable to economic analysis. However, it may be
argued that an economic explanation of law fails on two counts. Firstly as a
descriptive analysis it doesn’t do justice to everyday legal conceptions.
Secondly as an analytical analysis of the necessary conditions for the
practice of law it may not be able to account for the internal point of
view which Hart thought so central to a proper understanding of law. More
analytical approaches to economic explanation of law have considered this a
fatal flaw in the project (see Coleman 2001). This may be mistakenly importing
traditional philosophical aims into a drastically different project, but the
truth is that it is often hard to tell what types of theoretical claims are
being made within law and economics. If the claims are of exhaustive
descriptive accuracy or of the necessary and sufficient conceptual foundations
of law then it is more than likely a failure. But whether or not law and
economics is an accurate or even conceptually necessary description of law as a
social institution, and whether or not it suffices as a complete analysis of
law, it could be argued that law should in any case adopt economic efficiency
as the central aim guiding judicial decision-making.
Though
analytically incomplete, economic analysis models the actual results of legal
institutions better than any other theory. This does not entail, however, that
law ought to be consciously used for such an aim. Might not law be better used
to consider issues related to justice, duty and the like? Advocates of
law and economics have argued against such a conclusion. The arguments usually
are of two types. First, it is claimed that meanings of words such as justice
or duty are so vague and in dispute that the use of such concepts for a basis
of judicial decisions offers no guidance whatsoever. It is argued that while
such concepts are unhelpfully complex, the tools of economic analysis and the
concept of economic efficiency are sufficiently clear to provide the judge a
solid and predictable basis of decision. Law is better able to decide according
to efficiency rather than justice or duty due to limitations of institutional
competence. This might be so if issues of justice are so complex as to involve
information that courts are structurally unable to process. Second, it has been
argued that because the paradigm case of justice is the freely entered in to
contract, law is best seen as a tool to optimize contractual arrangements. If this
is so, then where law can help is in situations where transaction costs are so
high as to prohibit efficient contractual relationships. Here Posner argues
that law can encourage economic efficiency by assigning property rights to
those parties who would have secured them through market exchange if
transaction costs were lower. In other words law should bring about allocations
that mimic the results of a properly functioning market. In addition, advocates
of economic analysis of law make a claim that other jurisprudential traditions
seem to be unable to: that the analytic tools offered by law and economics has
encouraged the further creation of other productive areas for analyzing law
(see Posner 1998).
Another
argument for the fertility of the economic analysis of law is that it has
spawned a number of further tools that seem helpful in understanding legal
institutions. Three of the most important of these are the results of
behavioral economics, game theory and public choice theory.
Practitioners
of behavioral law and economics examine human limits to means-end rationality.
One of the outcomes of behavioral economics is the concept of bounded
rationality. Bounded rationality means that information is not processed
according to a model of perfect means-end rationality but, to the contrary, is
distorted due to limits of our cognitive abilities. For instance the endowment
effect is thought to be a behavioral limit that distorts the proper valuation
of property, an important aspect of bargaining to efficient outcomes. According
to the effect, the ownership of objects creates an irrational cognitive
overvaluation of them. Another claim is that our cognitive abilities are
distorted by the availability heuristic. According to this the availability of
strong imagery may induce us to over or underestimate the actual probability of
events associated with the image. For instance, graphic representations of
highly improbable harms might be more influential on behavior and demand
unjustified use of resources than statistical analysis showing another equally
undesirable harm to be more common and easier to avoid. Jurisprudential
practices could be significantly influenced by such results. For instance,
judges might be as irrationally influenced by the availability heuristic as
other human beings. Therefore victim impact statements might be important
correctives to proceedings if a well-presented defendant’s presence in the
court skews judge or jury's decisions. An awareness of such a cognitive failure
could help adjust legal reasoning and its conclusions accordingly. Finally, an
awareness and exploitation of universal cognitive limits might help legislators
to design more effective laws (see Sunstein 2000).
Game
theory adds to economic modeling the phenomenon of strategic action. Strategic
actions are those adopted because of the competitive nature of many social
transactions. They are adopted due to how one individual expects another to act
in response. For example, a person who wishes to buy an item cheap would act
disinterested so as not to signal his or her actual desires to the seller.
Addition of analytic tools dealing with strategic action greatly strengthens
the economic analysis of law. For instance, the Coase theorem, to function
properly, necessarily excludes strategic action; cooperation is just assumed.
But it seems apparent that legal actions often are deeply implicated in and
animated by strategic motives. Common sense tells us that full open cooperation
is not always the best path to bringing about one’s desired results. In fact
much of the bargaining invested in designing an effective contract seems to be
done in the shadow of potential strategic action on the part of the contracting
parties. Designing legal rules with an eye to the possibility of strategic
action helps ensure that the rules will not create perverse outcomes. For
instance, if a defendant’s privilege against self-incrimination could also
encourage an inference of guilt from the silence the privilege would be all but
useless. Therefore, courts have not only barred comment on the refusal to
testify but also have required that juries, on defendant’s request, make no
inference from such a choice (see Baird et al 1994). Further, the understanding
that legislators might have adopted specific wording for a law based upon
strategic motives may help direct the proper aims of judicial interpretation.
This type of claim, though, is often better analyzed by the tools offered in
public choice theory.
Public
choice theory is centered upon how the nature of the legislative process and
collective decision making influence the nature of law. It is the application
of economic models of decision-making and their results to the issues that
traditionally occupy political science, for example Arrow's Theorem. One claim
made within public choice theory is that a proper understanding of collective
decision processes will help judges understand their position within the
system. If all collective decisions are unavoidably influenced by those who get
to frame the questions debated and the order of voting - the agenda-setters -
public legislation will need to be interpreted differently than if it were a
more neutral recording of collective wishes. Such a theoretical result makes
problematic a court’s reference to the intent of the legislature.
·
Ackerman, Bruce, The
Economic Foundations of Property Law (Boston: Little, Brown & Co.,
1975)
·
Baird, Douglas, Robert Gertner and
Randal Picker, Game Theory and the Law (Cambridge: Harvard
University Press, 1994)
·
Becker, Gary S., "Nobel
Lecture: The Economic Way of Looking at Behavior," 101 Journal of
Political Economy 385 (1993)
·
Calabresi, Guido, The Costs
of Accidents (1970)
·
Calabresi, Guido, and Douglas
Melamed, "Property Rules, Liability Rules and Inalienability: One View of
the Cathedral," 85Harvard Law Review 1089 (1972)
·
Calabresi, Guido, "Some
Thoughts on Risk Distribution and the Law of Torts," 70 Yale Law
Journal 499 (1961)
·
Coase, Ronald, "The Problem of
Social Cost," 3 Journal of Law and Economics 1 (1960)
·
Coleman, Jules, "Efficiency,
Auction and Exchange: Philosophic Aspects of the Economic Approach to
Law," 68 CaliforniaLaw Review 221 (1980)
·
Coleman, Jules, Market,
Morals and the Law (Cambridge: Cambridge University Press, 1988)
·
Coleman, Jules, The Practice
of Principle: In Defense of a Pragmatist Approach to Legal Theory (Oxford:
Oxford University Press, 2001)
·
Cotter, Thomas F., "Legal
Pragmatism and the Law and Economics Movement," 84 Georgetown Law
Journal 2071 (1996)
·
Farber, Daniel, and Philip
Frickey, Law and Public Choice (Chicago: University of Chicago
Press, 1991)
·
Harrison, Jeffrey L., Law
and Economics (St. Paul: West Group, 1995)
·
Horwitz, Morton, "Law and
Economics: Science or Politics?," 8 Hofstra Law Review 905
(1981)
·
Katz, Avery Weiner, Foundations
of the Economic Approach to Law (Oxford: Oxford University Press,
1998)
·
Landes, William and Richard
Posner, The Economic Structure of Tort Law (Cambridge: Harvard
University Press, 1987)
·
Leff, Arthur, "Economic
Analysis of Law: Some Realism About Nominalism," 60 Virginia Law
Review 451 (1974)
·
Miceli, Thomas J., Economics
of the Law: Torts, Contracts, Property, Litigation (1997)
·
Murphy, Jeffrie G. and Jules L.
Coleman, Philosophy of Law (Boulder: Westview Press, 1990)
·
Polinsky, A. Mitchell, An
Introduction to Law and Economics (Boston: Little, Brown &
Company, 1989)
·
Posner, Richard A., Economic
Analysis of Law (New York: Aspen, 5th ed., 1998)
·
Posner, Richard A., The
Economics of Justice (Cambridge: Harvard University Press, 1983)
·
Posner, Richard A., Frontiers
of Legal Theory (Cambridge: Harvard University Press, 2001)
·
Posner, Richard A., "Gary
Becker's Contributions to Law and Economics," 22 Journal of Legal
Studies 211 (1993)
·
"Symposium on Post-Chicago Law
and Economics," 65 Chicago-Kent Law Review 1 (1989)
·
Sunstein, Cass R., Behavioral
Law and Economics (Cambridge: Cambridge University Press, 2000)
Law and Economics
By: Bhakti Ghimire
“Law and
economics,” also known as the economic analysis of law, differs from other
forms of legal analysis in two main ways. First, the theoretical analysis
focuses on efficiency. In simple terms, a legal situation
is said to be efficient if a right is given to the party who would be willing
to pay the most for it. There are two distinct theories of legal efficiency,
and law and economics scholars support arguments
based on both. The positive theory of legal efficiency states that the common
law (judge-made law, the main body of law in England and its former colonies,
including the United States) is efficient, while the normative theory is that
the law should be efficient. It is important that the
two theories remain separate. Most economists accept both.
Law and economics stresses that markets are more
efficient than courts. When possible, the legal system, according to the
positive theory, will force a transaction into the market. When this is impossible,
the legal system attempts to “mimic a market” and guess at what the parties
would have desired if markets had been feasible.
The second characteristic of law and economics is its
emphasis on incentives and people’s responses to these incentives. For example,
the purpose of damage payments in accident (tort) law is not to compensate
injured parties, but rather to provide an incentive for potential injurers to
take efficient (cost-justified) precautions to avoid causing the accident. Law
and economics shares with other branches of economics the assumption that
individuals are rational and respond to incentives. When penalties for an
action increase, people will undertake less of that action. Law and economics
is more likely than other branches of legal analysis to use empirical or
statistical methods to measure these responses to incentives.
The private legal system must perform three functions,
all related to property and property rights. First, the system must define
property rights; this is the task of property law itself. Second, the system
must allow for transfer of property; this is the role of contract law. Finally,
the system must protect property rights; this is the function of tort law and
criminal law. These are the major issues studied in law and economics. Law and
economics scholars also apply the tools of economics, such as game theory, to purely legal questions, such as
various parties’ litigation strategies. While these are aspects of law and
economics, they are of more interest to legal scholars than to students of the
economy.
History and Significance
Modern law and economics dates from about 1960, when Ronald (who later received a Nobel Prize)
published “The Problem of Social Cost.” Gordon Tulloch and Friedrich Hayek also wrote in the area, but the
expansion of the field began with Gary Becker’s 1968 paper on crime (Becker also
received a Nobel Prize). In 1972, Richard Posner, a law and economics scholar
and the major advocate of the positive theory of efficiency, published the
first edition of Economic
Analysis of Law and founded
the Journal of Legal Studies,
both important events in the creation of the field as a thriving scholarly
discipline. Posner went on to become a federal judge while remaining a prolific
scholar. An important factor leading to the spread of law and economics in the
1970s was a series of seminars and law courses for economists and economics
courses for lawyers, organized by Henry Manne and funded, in part, by the
Liberty Fund.
The discipline is now well established, with eight
associations, including the American, Canadian, and European law and economics
associations, and several journals.1 Law
and economics articles also appear regularly in the major economics journals,
and the approach is common in law review articles. Most law schools have
faculty trained in economics, and most offer law and economics courses. Many
economics departments also teach courses in the field. A course in law and
economics is very useful for undergraduates contemplating law school. Several
consulting firms specialize in providing economic expertise in litigation.
Substance
Property
A legal system should provide clear definitions of
property rights. That is, for any asset, it is important that parties be able
to determine unambiguously who owns the asset and exactly what set of rights
this ownership entails. Ideally, efficiency implies that, in a dispute regarding
the ownership of a right, the right should go to the party who values it the
most. But if exchanges of rights are allowed, the efficiency of the initial
allocation is of secondary importance. The Coase theorem—the most fundamental
result in the economic study of law—states that if rights are transferable and
if transactions costs are not too large, then the exact definition of property
rights is not important because parties can trade rights, and rights will move
to their highest-valued uses (see
externalities).
In many circumstances, however, who owns the right will
matter. Transactions costs are never zero, and so if rights are incorrectly
allocated, a costly transaction will be needed to correct this misallocation.
If transactions costs are greater than the increase in value from moving the
resource to the efficient owner, there may be no corrective mechanism. This can happen in any sort
of economy. An extreme example is Russia, where the courts have not been able
to provide clear definitions of property rights, and those persons with control
of firms are not necessarily the owners. That is, those with control over a
firm cannot sell it and keep the proceeds. This creates incentives for
inefficient use of the assets, such as sale of valuable raw materials for
below-market prices, with the proceeds deposited outside the country. In such
circumstances, the Coase theorem will not operate, and correctly defining
property rights becomes important. More generally, experience in Russia and its
former satellites has emphasized the importance of the legal system for
development of a market economy and, thus, has shown the importance of law and
economics in influencing policy.
One important finding of law and economics is that, in
market economies, property rights are defined efficiently in many
circumstances. The characteristics of efficient property rights are
universality (everything is owned), exclusivity (everything is owned by one
agent), and transferability. Law and economics can also explain the results of
inefficient property definitions. For example, because no one owns wild fish,
the only way to own a fish is to catch it. The result is overfishing (see tragedy of the commons). property
is an important area of current research because new copying and
duplicating technologies are having profound effects on the definition of this
form of property rights and on incentives for creating such property.
Contract Law
The law governing exchange is crucial for a market
economy. Most of the doctrines of contract law seem consistent with economic
efficiency. Law and economics study of contract law has shown that, in general,
it is efficient for parties to be allowed to write their own contracts, and
under normal circumstances, for courts to enforce the agreed-on terms,
including the agreed-on price. The courts will generally not enforce contracts
if performance would be inefficient, but, rather, will allow payment of
damages. If, for example, I agree to build something for you in return for
$50,000, but meanwhile costs increase so that the thing would cost me $150,000
to build, it is inefficient for me to build it. Courts, recognizing this, allow
me to compensate you with a monetary payment instead. This is efficient.
Contracts and contract law are also designed to
minimize problems of opportunism. The danger of opportunism arises when two
parties agree to something, and one makes irreversible investments to carry out
his side of the bargain. So, for example, a company invests in a railroad spur
to a coal mine, making a contract in advance to ship the coal at a specific
price. Once the railroad is built, the mine owner can refuse to honor his
contract and can hold out for a lower shipping rate. As long as this rate
exceeds the railroad’s incremental costs, the railroad owner will be tempted to
accept. If he does so, he will not receive the full return on the spur line
that he needed to make the investment worthwhile. Doctrines such as
a duty to mitigate (to reduce the harmful effects of breach of contract) are
easily explained as being efficient.
However, not all doctrines are efficient. Contracting
parties will sometimes specify damages (called “liquidated damages”) to be paid
if there is a breach. If the courts decide that these liquidated damages are
too high—that they are a penalty rather than true damages—they will not enforce
the amount of contractual liquidated damages. This failure to enforce agreed-on
terms is a major puzzle to law and economics scholars; it appears that the
courts would do better to enforce the parties’ agreement, just as they do with
respect to price and other terms of a contract. Here, the positive theory of
the efficiency of law seems to be violated, but scholars argue that the courts
should enforce these agreements.
Tort Law
Tort law and criminal law protect property rights from
intentional or unintentional harm. The primary purpose of these laws is to
induce potential tortfeasors (those who cause torts or accidents) or criminals
to internalize—that is, take account of—the external costs of their actions,
although criminal law has other functions as well.
Tort law is part of the system of private law and is
enforced through private actions. The economic analysis of tort law has
stressed issues such as the distinction between negligence (a party must pay
for harms only when the party failed to take adequate or efficient precautions)
and strict liability (a party must pay for any injury
caused by its actions). Because most accidents are caused by a joint action of
injurer and victim (a driver goes too fast, and the pedestrian he hits does not
look carefully), efficient rules create incentives for both parties to take
care; most negligence rules (negligence, negligence with a defense of contributory negligence,
comparative negligence) create exactly these incentives. Strict liability is
important when the issue is not only the care used in undertaking the activity,
but also whether the activity is done at all and the extent to which it is done
(the level of the activity); highly dangerous activities (e.g., blasting with
explosives or keeping wild animals as pets) are generally governed by strict
liability.
Tort law used to be uninteresting and unimportant,
dealing largely with automobile accidents. But it has become quite important in
the United States in the last fifty years, because many events traditionally
treated under contract law are now subject to tort law. For example, in
products liability and medical malpractice cases, the parties have a precedent
relationship and so could have specified and traditionally did specify in their
contracts what damages would be paid in the event of a mishap. But since about
1950, the courts have refused to honor these contracts, treating these instead
as tort cases. Many observers believe that this was a fundamental error of the
courts and look on it as the primary example of an inefficient doctrine in
modern American law. Scholars have found that this error was caused by actions
on the part of the plaintiff’s bar, who were seeking to benefit themselves at
the expense of the public in general. Problems are exacerbated when claims are
aggregated through the mechanism of class actions.
Two factors have caused the major expansion of product
liability law. One was finding relatively strict liability for “design defects”
in addition to “manufacturing defects.” The other was expansion of liability
for “failure to warn.” One result of treating these events as part of tort law
is that injured parties can collect classes of damage payments (such as damages
for pain and suffering and sometimes excessive punitive damages) that would be
excluded by contract if contracts could be enforced. As a result, prices of
many goods and services (including medical services) are driven above the value
that consumers would place on them. That is why, for example, private airplanes
are so expensive, and obstetricians and gynecologists are unavailable in some
markets.
Criminal Law
Criminal law is enforced by the state rather than by
victims. This is because efficient enforcement requires that only a fraction of
criminals be caught (in order to conserve on enforcement resources) and the
punishment of this fraction be multiplied to reflect the low probability of
detection and conviction. If, for example, only one out of four criminals is
caught and punished, then the punishment must be four times the cost of the
crime in order to provide adequate deterrence.
However, most criminals do not have sufficient wealth
to pay such multiplied fines, and so incarceration or other forms of no
pecuniary punishment must be used. One implication of law and economics is that
a fine should be used as punishment whenever the miscreant can pay. The reason
is that fines are transfers and do not create deadweight losses (i.e., losses
to some that are not gains to others); imprisonment, on the other hand,
transfers virtually no wealth from the criminal but causes two forms of
deadweight loss: the loss of the criminal’s earning power in a legitimate job
in the outside world and the cost to taxpayers of providing a prison and
guards. But because so few criminals have enough wealth to pay multiplied
fines, private enforcement would not be profitable for private enforcers, and
so the state provides enforcement. In some circumstances, incarceration serves
the additional function of incapacitation of potential wrongdoers.
Criminal law has been the subject of the most extensive
empirical work in law and economics, probably because of the availability of
data (see crime). Economic theory predicts that criminals,
like others, respond to incentives, and there is unambiguous evidence that
increases in the probability and severity of punishment in a jurisdiction lead
to reduced levels of crime in that jurisdiction. The issue of the deterrent
effect of capital punishment has been more controversial, but several recent
papers using advanced econometric techniques and comprehensive data have found
a significant deterrent effect; each execution deters between eight and
twenty-eight murders, with eighteen being the best single estimate. No refereed
empirical criticism of these papers has been published. Research on procedural
rules has shown that increased rights for accused persons can lead to increases
in crime. One controversial paper by John Donohue and Steven Levitt argues
empirically that the easing of abortion restrictions led to a reduction in crime
because unwanted children would have been more likely to become criminals.
There are also major debates in the literature on the effect on crime of laws
allowing easier carrying of concealed weapons. Some, such as John Lott, find
significant decreases in crime from these laws, while others find much smaller
effects, although there is little evidence of any increase in crime.
Further Reading
Becker,
Gary S. “Crime and Punishment: An Economic Approach.”Journal of Political
Economy 76 (1968): 169–217. The seminal article on the economic
approach to crime.
Bouckaert,
Boudewijn, and Gerrit De Geest, eds. Encyclopedia
of Law and Economics. London:
Edward Elgar, 2000. Also available online:http://encyclo.findlaw.com/. Mainly for economists and
legal scholars interested in exploring particular topics more deeply.
Coase,
Ronald H. “The Problem of Social Cost.” Journal
of Law and Economics 3, no. 1
(1960): 1–44. The key article in law and economics and the origin of the famous
Coase theorem.
Cooter,
Robert D., and Thomas Ulen. Law
and Economics. 3d ed. New
York: Addison-Wesley, 1999. A textbook introduction to law and economics,
mainly for economics students.
Dezhbakhsh,
Hashem, Paul H. Rubin, and Joanna M. Shepherd. “Does Capital Punishment Have a
Deterrent Effect? New Evidence from Post-moratorium Panel Data.” American Law and Economics Review5
(2003): 344–376. Source of the estimate that each execution deters an average
of eighteen murders.
Donohue,
John, and Steven Levitt. “Legalized Abortion and Crime.”Quarterly Journal of
Economics 116, no. 2 (2001):
379–420. Finds that much of the reduction in crime in recent years is due to
the legalization of abortion.
Friedman,
David D. Law’s Order: An
Economic Account. Princeton:
Princeton University Press, 2000. The simplest introduction to law and
economics; accessible to general readers. Available online at:http://www.daviddfriedman.com/laws_order/index.shtml.
Hayek,
Friedrich. The Constitution of
Liberty. Chicago: University
of Chicago Press, 1960. More difficult reading, philosophical as well as
economic.
Lott,
John R. Jr., and David B. Mustard. “Crime, Deterrence and the Right-to-Carry
Concealed Handguns.” Journal
of Legal Studies 26 (1997):
1–68. The original study finding that right-to-carry laws reduce crime.
Although the study has been criticized, there is no evidence that these laws
cause increases in crime.
Newman,
Peter, ed. New Palgrave
Dictionary of Economics and the Law.London: Macmillan, 1998. Mainly for
economists and legal scholars interested in exploring particular topics more
deeply.
Posner,
Richard A. Economic Analysis
of Law. 1st ed. Boston:
Little, Brown, 1973; 7th ed. New York: Aspen Publishers, 2007. Both a key
treatise in the field and a textbook suitable for students of both law and
economics.
Rubin,
Paul H. “Micro and Macro Legal Efficiency: Supply and Demand.”Supreme Court
Economic Review 13 (2005):
19–34. Describes the history of the economic analysis of efficiency in the law.
Shavell,
Steven. Foundations of
Economic Analysis of Law. Cambridge:
Belknap Press of Harvard University Press, 2004. The newest comprehensive book
in the field; nonmathematical but complex.
Comments
Post a Comment