Economic Analysis of Legal Disputes and Their Resolution
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Description
Economic thought about law old, but the economic analysis of law, which relies on formal models, is new. A little over 30 years ago, economics was relegated by lawyers to the technical role of providing expert advice on a relatively narrow set of laws in such fields as antitrust and labor. There were no journals devoted to the economic analysis of law, it had no place in the first-year curriculum at American law schools, and few American law schools allocated a full-time faculty position to a pure economist. From its modest beginnings in the 1960s, the economic analysis of law became an intellectual fad in the 1970s. The fad is over, but the continuing progress of the subject remains impressive. There are now four journals devoted to the economic analysis of law, articles using this approach appear frequently in the major law reviews, economic arguments and perspectives are often developed in the first-year law courses, and each of the major law schools has at least one economics PhD on its faculty. Like the rabbit in Australia, the economic analysis of law found a vacant niche in the intellectual ecology, and filled it rapidly. The vacancy was created in part by the inability of legal theory to provide sufficient guidance for American courts that were increasingly involved with policy questions. Policy-making courts need a behavioral theory to predict responses to changes in law and to evaluate these responses systematically according to a normative standard. Economics was able to provide both the behavioral theory and a normative standard that legal theory lacked. The behavioral theory treats laws, like prices, as incentives for behavior. It has been well received, although controversy continues concerning the responsiveness (or lack of it) of poorly informed and possibly irrational actors. The normative theory of efficiency is relatively uncontroversial (Who favors wasting money?) as a broad guide to policy. But, controversy is abundant when efficiency is seen as dominating other norms of fairness and justice. The economic analysis of law, having secured a place in mainstream North American institutions of legal education, is influential but controversial, which is the most a body of ideas can attain in a profession of advocates. It seems that the acceptance of economic theory into law has been eased by structural similarities between economics and law. For example, the “reasonable man” of the law is not very different from the “rational man” of economics. The law's search for a fair division of the burdens of accidents is not very different from the economist's concern for the efficient allocation of risk. All substantive areas of law have a common concern with the processes by which legal disputes get resolved, which is the subject of this article. The existing corpus of economic literature on courts is modest, but understanding the litigation process has become important, even urgent, as courts intrude more forcefully upon resource allocation. The number of trials, their cost, and the size of awards are unprecedented. To illustrate, civil cases tried in federal courts tripled between 1975 and 1985, and an $11 billion judgment against Texaco forced one of America's largest corporations to file for reorganization through bankruptcy. The related costs of litigation are known to be large, although difficult to quantify. This review consists of four parts. Part I focuses on the application of economic tools to the study of courts and outlines the chronology of a legal dispute. In our framework, legal disputes are resolved at various stages of a sequential decision-making process in which parties have limited information and act in their own self-interest. Part II reviews the predictions obtained from modeling these decisions, and Part III discusses their normative significance. Part IV contains a conclusion that assesses the progress and promises of the subject.
Source Publication
Game Theory and the Law
Source Editors/Authors
Eric B. Rasmusen
Publication Date
2008
Recommended Citation
Cooter, Robert D. and Rubinfeld, Daniel L., "Economic Analysis of Legal Disputes and Their Resolution" (2008). Faculty Chapters. 1830.
https://gretchen.law.nyu.edu/fac-chapt/1830
