11. Zywicki and Stringham - Common Law and Economic Efficiency

Common Law and Economic Efficiency

  • Authors:

    • Todd J. Zywicki

    • Edward Peter Stringham

I. Introduction

  • Foundational claim of law and economics: Common law promotes economic efficiency.

  • Traditional law and economics focused on positive analysis of rules across common law areas.

  • Shift in perspective: Some scholars argue common law now favors wealth redistribution over efficiency.

  • Ongoing research into economic applications to identify efficiency-promoting legal rules.

  • Key question: If common law promotes efficiency, what mechanisms produce this result?

II. Judges and Efficiency

  • Early theory by Posner suggested judges prefer efficient rules due to either:

    • A normative preference for efficiency over other values (e.g., wealth redistribution).

    • Practical alignment with wealth maximization due to constraints in the judicial process.

  • Utilitarianism as a philosophical underpinning: Judges seek to maximize economic efficiency, defined as wealth maximization (Kaldor-Hicks efficiency).

  • Historical view: 19th century English judges implicitly favored utilitarianism, seeking wealth maximization.

  • Claims of deviation from efficiency caused by judges’ shifting philosophies (e.g., focus on social justice).

III. Judicial Ideology and Efficiency

  • Challenges to the claim that judicial ideology explains efficiency:

    • Assumes earlier judges were moral utilitarians vs. rights-based or justice-focused (O’Driscoll, Claeys, Cordato).

    • Literature suggests correlation between judges’ ideologies and case outcomes but remains contestable.

  • Weaker arguments suggest judges default to efficiency due to practical limitations in achieving other social goals.

IV. Demand-Side Analysis of Efficiency

  • Shift in analysis: Focus on the ‘demand for judicial rulings’, not just judicial tastes.

  • Litigation dynamics: Parties seek judicial outcomes similar to public choice lobbying for favorable legislation.

  • Investment in litigation correlates with expected economic benefits:

    • Demand function: D = (V * L)

      • D: Demand for legal change

      • V: Annual value of wealth to be transferred

      • L: Expected durability of favorable legal rule

  • Parties with repeat interests invest more in litigation for beneficial rule outcomes.

V. Common Law Evolution

  • Rubin’s model (1977) suggests higher stakes in litigation (especially for repeat players) drive efficient legal rule production.

  • Categories of litigant types:

    • Both repeat players: Tend toward efficiency-enhancing rules.

    • Neither repeat players: No bias; potential random drift toward efficiency.

    • One repeat player: Law may favor repeat player at expense of non-repeat player.

  • Historical perspective: Late 19th century shift to large manufacturing created repeat players.

  • Rise of trial lawyers in the latter half of the 20th century influenced liability rules.

VI. Inefficiency in Rules and Litigation

  • Priest's model (1977) posits inefficient rules generate more litigation, leading to more frequent overruling compared to efficient rules.

  • Inefficient rules lead to more societal conflict, prompting more litigation.

  • Simultaneous tendencies toward efficiency through other mechanisms amplify this correction process.

Conclusion

  • Overall analysis highlights complex interaction between judicial process, litigant interests, and economic efficiency in common law evolution.