Law and economics or economic analysis of law is the application of economic theory (specifically microeconomic theory) to the analysis of law that began mostly with scholars from the Chicago school of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated.
As used by lawyers and legal scholars, the phrase "law and economics" refers to the application of microeconomic analysis to legal problems. Because of the overlap between legal systems and political systems, some of the issues in law and economics are also raised in political economy, constitutional economics and political science.
Approaches to the same issues from Marxist and critical theory/Frankfurt School perspectives usually do not identify themselves as "law and economics". For example, research by members of the critical legal studies movement and the sociology of law considers many of the same fundamental issues as does work labeled "law and economics," though from a vastly different perspective.
The one wing that represents a non-neoclassical approach to "law and economics" is the Continental (mainly German) tradition that sees the concept starting out of the governance and public policy (Staatswissenschaften) approach and the German Historical school of economics; this view is represented in the Elgar Companion to Law and Economics (2nd ed. 2005) and—though not exclusively—in the European Journal of Law and Economics. Here, consciously non-neoclassical approaches to economics are used for the analysis of legal (and administrative/governance) problems.
As early as in the 18th century, Adam Smith discussed the economic effects of mercantilist legislation. However, to apply economics to analyze the law regulating nonmarket activities is relatively new. A European law & economics movement around 1900 did not have any lasting influence. In 1961, Ronald Coase and Guido Calabresi independently from each other published two groundbreaking articles: "The Problem of Social Cost" and "Some Thoughts on Risk Distribution and the Law of Torts". This can be seen as the starting point for the modern school of law and economics.
Harold Luhnow, the head of the Volker Fund, not only financed F. A. Hayek in the U.S. starting in 1946, but he shortly thereafter financed Aaron Director's coming to the University of Chicago in order to set up there a new center for scholars in law and economics. The University was headed by Robert Maynard Hutchins, a close collaborator of Luhnow's in setting up this "Chicago School". The University already had Frank Knight, George Stigler, Henry Simons, and Ronald Coase—a strong base of libertarian scholars. Soon, it would also have not just Hayek himself, but Director’s brother-in-law and Stigler's friend Milton Friedman, and also Robert Fogel, Robert Lucas, Eugene Fama, Richard Posner, and Gary Becker.
The historians Robert van Horn and Philip Mirowski described these developments, in their "The Rise of the Chicago School of Economics" chapter in The Road from Mont Pelerin (2009); and historian Bruce Caldwell (a great admirer of von Hayek) filled in more details of the account in his chapter, "The Chicago School, Hayek, and Neoliberalism", in Building Chicago Economics (2011). Van Horn (a Hayek critic) filled in yet more details of this history in a Seattle University Law Review article ("Chicago's Shifting Attitude Toward Concentrations of Business Power [1934–1962]") explaining how the influence of Luhnow and other corporate funders wrenched the Chicago School away from its predecessors' common support for anti-trust. Van Horn argues that the opposition to antitrust, and the acceptance of corporate monopoly power and control by oligopolies (such as Germany's and Italy's fascists had always supported), which came to be championed by Robert Bork and others at Chicago, had their actual origins in America's corporate boardrooms.
In 1958, Director founded the Journal of Law & Economics, which he co-edited with Nobel laureate Ronald Coase, and which helped to unite the fields of law and economics with far-reaching influence. In 1962, he helped to found the Committee on a Free Society. Director's appointment to the faculty of the University of Chicago Law School in 1946 began a half-century of intellectual productivity, although his reluctance about publishing left few writings behind. He taught antitrust courses at the law school with Edward Levi, who eventually would serve as Dean of Chicago's Law School, President of the University of Chicago, and as U.S. Attorney General in the Ford administration. After retiring from the University of Chicago School of Law in 1965, Director relocated to California and took a position at Stanford University's Hoover Institution. He died September 11, 2004, at his home in Los Altos Hills, California, ten days before his 103rd birthday.
In the early 1970s, Henry Manne (a former student of Coase) set out to build a center for law and economics at a major law school. He began at Rochester, worked at Miami, but was soon made unwelcome, moved to Emory, and ended up at George Mason. The last soon became a center for the education of judges—many long out of law school and never exposed to numbers and economics. Manne also attracted the support of the John M. Olin Foundation, whose support accelerated the movement. Today, Olin centers (or programs) for Law and Economics exist at many universities.
Economic analysis of law is usually divided into two subfields: positive and normative.
'Positive law and economics' uses economic analysis to predict the effects of various legal rules. So, for example, a positive economic analysis of tort law would predict the effects of a strict liability rule as opposed to the effects of a negligence rule. Positive law and economics has also at times purported to explain the development of legal rules, for example the common law of torts, in terms of their economic efficiency.
Normative law and economics goes one step further and makes policy recommendations based on the economic consequences of various policies. The key concept for normative economic analysis is efficiency, in particular, allocative efficiency.
A common concept of efficiency used by law and economics scholars is Pareto efficiency. A legal rule is Pareto efficient if it could not be changed so as to make one person better off without making another person worse off. A weaker conception of efficiency is Kaldor-Hicks efficiency. A legal rule is Kaldor-Hicks efficient if it could be made Pareto efficient by some parties compensating others as to offset their loss.
Important figures include the Nobel Prize–winning economists Ronald Coase and Gary Becker, U.S. Court of Appeals for the Seventh Circuit judges Frank Easterbrook and Richard Posner, Andrei Shleifer and other distinguished scholars such as Robert Cooter, Hans-Bernd Schäfer, Henry Manne, William Landes, and A. Mitchell Polinsky. Guido Calabresi, judge for the U.S. Court of Appeals for the Second Circuit, wrote in depth on this subject; his book The Costs of Accidents: A Legal and Economic Analysis (1970) has been cited as influential in its extensive treatment of the proper incentives and compensation required in accident situations. Calabresi took a different approach in Ideals, Beliefs, Attitudes, and the Law (1985), where he argued, "who is the cheapest avoider of a cost, depends on the valuations put on acts, activities and beliefs by the whole of our law and not on some objective or scientific notion" (69).
The economic analysis of law has been influential in the United States as well as elsewhere. Judicial opinions use economic analysis and the theories of law and economics with some regularity, in the US but also, increasingly, in Commonwealth countries and in Europe. The influence of law and economics has also been felt in legal education, with graduate programs in the subject being offered in a number of countries. The influence of law and economics in civil law countries may be gauged from the availability of textbooks of law and economics, in English as well as in other European languages (Schäfer and Ott 2004; Mackaay 2013).
Many law schools in North America, Europe, and Asia have faculty members with a graduate degree in economics. In addition, many professional economists now study and write on the relationship between economics and legal doctrines. Anthony Kronman, former dean of Yale Law School, has written that "the intellectual movement that has had the greatest influence on American academic law in the past quarter-century [of the 20th Century]" is law and economics.
Despite its influence, the law and economics movement has been criticized from a number of directions. This is especially true of normative law and economics. Because most law and economics scholarship operates within a neoclassical framework, fundamental criticisms of neoclassical economics have been drawn from other, competing frameworks, though there are numerous internal critiques as well. Yet other schools of economic thought have emerged and have been applied to the work of law and economics in, for example, the work of Edgardo Buscaglia and Robert Cooter on "Law and Economics of Development".
Critics of the law and economics movements have argued that normative economic analysis does not capture the importance of human rights and concerns for distributive justice. Some of the heaviest criticisms of the "classical" law and economics come from the critical legal studies movement, in particular Duncan Kennedy and Mark Kelman.
Relatedly, additional critique has been directed toward the assumed benefits of law and policy designed to increase allocative efficiency when such assumptions are modeled on "first-best" (Pareto optimal) general-equilibrium conditions. Under the theory of the second best, for example, if the fulfillment of a subset of optimal conditions cannot be met under any circumstances, it is incorrect to conclude that the fulfillment of any subset of optimal conditions will necessarily result in an increase in allocative efficiency.
Consequently, any expression of public policy whose purported purpose is an unambiguous increase in allocative efficiency (for example, consolidation of research and development costs through increased mergers and acquisitions resulting from a systematic relaxation of anti-trust laws) is, according to critics, fundamentally incorrect, as there is no general reason to conclude that an increase in allocative efficiency is more likely than a decrease.
Essentially, the "first-best" neoclassical analysis fails to properly account for various kinds of general-equilibrium feedback relationships that result from intrinsic Pareto imperfections.
Another critique comes from the fact that there is no unique optimal result. Warren Samuels in his 2007 book, The Legal-Economic Nexus, argues, "efficiency in the Pareto sense cannot dispositively be applied to the definition and assignment of rights themselves, because efficiency requires an antecedent determination of the rights (23–4)".
Law and economics has adapted to some of these criticisms (see "contemporary developments", below). One critic, Jon D. Hanson of Harvard Law School, argues that our legal, economic, political, and social systems are unduly influenced by an individualistic model that assumes "dispositionism"—the idea that outcomes are the result of our "dispositions" (economists would say "preferences"). Instead, Hanson argues, we should look to the "situation", both inside of us (including cognitive biases) and outside of us (family, community, social norms, and other environmental factors) that have a much larger impact on our actions than mere "choice". Hanson has written many law review articles on the subject.
Law and economics has developed in a variety of directions. One important trend has been the application of game theory to legal problems. Other developments have been the incorporation of behavioral economics into economic analysis of law, and the increasing use of statistical and econometrics techniques. Within the legal academy, the term socio-economics has been applied to economic approaches that are self-consciously broader than the neoclassical tradition.
The American Law and Economics Association (ALEA), a United States organization founded in 1991, is focused on the advancement of economic understanding of law, and related areas of public policy and regulation. It promotes research in law and economics. The association was co-founded by George Priest, A. Mitchell Polinsky, and Steven Shavell. The growing acceptance of legal and economic perspectives by judges, practitioners, and policy-makers is evident by the creation of parallel associations in Australia, Europe, Latin America, and Canada. The organization's official journal is the American Law and Economics Review, established in 1999.
Robert Cooter is one of the ALEA's founders and served as its president from 1994 to 1995. The current president is Michelle White, from the University of California, San Diego.Efficient breach
In legal theory, particularly in law and economics, efficient breach is a voluntary breach of contract and payment of damages by a party who concludes that they would incur greater economic loss by performing under the contract.Empowerment
The term empowerment refers to measures designed to increase the degree of autonomy and self-determination in people and in communities in order to enable them to represent their interests in a responsible and self-determined way, acting on their own authority. It is the process of becoming stronger and more confident, especially in controlling one's life and claiming one's rights. Empowerment as action refers both to the process of self-empowerment and to professional support of people, which enables them to overcome their sense of powerlessness and lack of influence, and to recognize and use their resources. To do work with power.
The term empowerment originates from American community psychology and is associated with the social scientist Julian Rappaport (1981). However, the roots of empowerment theory extend further into history and are linked to Marxist sociological theory. These sociological ideas have continued to be developed and refined through Neo-Marxist Theory (also known as Critical Theory).In social work, empowerment forms a practical approach of resource-oriented intervention. In the field of citizenship education and democratic education, empowerment is seen as a tool to increase the responsibility of the citizen. Empowerment is a key concept in the discourse on promoting civic engagement. Empowerment as a concept, which is characterized by a move away from a deficit-oriented towards a more strength-oriented perception, can increasingly be found in management concepts, as well as in the areas of continuing education and self-help.Frank H. Easterbrook
Frank Hoover Easterbrook (born September 3, 1948) is a United States Circuit Judge of the United States Court of Appeals for the Seventh Circuit. He was Chief Judge from November 2006 to October 2013, and has been a judge on the court since 1985.Guido Calabresi
Guido Calabresi (born October 18, 1932) is an American legal scholar and Senior United States Circuit Judge of the United States Court of Appeals for the Second Circuit. He is a former Dean of Yale Law School, where he has been a professor since 1959. Calabresi is considered, along with Ronald Coase and Richard Posner, a founder of the field of law and economics.Information asymmetry
In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This asymmetry creates an imbalance of power in transactions, which can sometimes cause the transactions to go awry, a kind of market failure in the worst case. Examples of this problem are adverse selection, moral hazard, and monopolies of knowledge.Information asymmetry extends to non-economic behavior. As private firms have better information than regulators about the actions that they would take in the absence of a regulation, the effectiveness of a regulation may be undermined. International relations theory has recognized that wars may be caused by asymmetric information and that "Most of the great wars of the modern era resulted from leaders miscalculating their prospects for victory". There is asymmetric information between national leaders, wrote Jackson and Morelli, when there are differences "in what they know [i.e. believe] about each other's armaments, quality of military personnel and tactics, determination, geography, political climate, or even just about the relative probability of different outcomes" or where they have "incomplete information about the motivations of other agents".Information asymmetries are studied in the context of principal–agent problems where they are a major cause of misinforming and is essential in every communication process. Information asymmetry is in contrast to perfect information, which is a key assumption in neo-classical economics. In 2001 the Nobel Memorial Prize in Economics was awarded to George Akerlof, Michael Spence, and Joseph E. Stiglitz for their "analyses of markets with asymmetric information".Legal plunder
Legal plunder is a concept in libertarian thought which describes the act of using the law to redistribute wealth. This was coined by Frédéric Bastiat, most famously in his 1850 book The Law.Libertarians have described many actions of governments as "legal plunder", including taxation, protectionism, and eminent domain.Original appropriation
Appropriation is a process by which previously unowned natural resources, particularly land, become the property of a person or group of persons. The term is widely used in economics in this sense. In certain cases, it proceeds under very specifically defined forms, such as driving stakes or other such markers into the land claimed, which form gave rise to the term “staking a claim.” "Squatter’s rights" are another form of appropriation, but are usually asserted against land to which ownership rights of another party have been recognized. In legal regimes recognizing such acquisition of property, the ownership of duly appropriated holdings enjoys such protections as the law provides for ownership of property in general.
Under some systems using this method of acquiring ownership of land, it is permitted to employ violence in defending the duly appropriated holding against encroachment against the ownership or usage claims, again usually according to specifically defined forms including warnings to the encroaching party, exhaustion or unavailability of duly constituted law-enforcement resources, etc..
Libertarian and other property-rights-oriented ideologies define appropriation as requiring the “mixing” of the would-be owner’s labor with the land claimed. A prime example of such mixing is farming, although various extractive activities such as mining, and the grazing of herds are often recognized. Personal, physical residence is often recognized after some minimum documented continuous period of time, as is built structures on the land whose ownership has not previously been recognized by the authority whose recognition is sought.
Appropriation through use can apply to resources other than the exclusive right to use of the surface of the land. As mentioned, mineral rights are recognized under various conditions, as are riparian rights. Appropriation can apply to inland waters within a certain distance of appropriated land, and even to the liquid water in a reservoir, lake, or stream. Appropriation has been applied under common law to resources as disparate as radio broadcast frequencies and Internet Web site names, but many such claims have been overturned through legislated arrangements mandating other standards for the assignment of ownership rights in such things.
Appropriation as a means of acquiring property is related to the schools of thought that call for ongoing use as a condition of continued ownership, as is the case in some regimes with trademarks, but it applies to initial ownership.Pareto efficiency
Pareto efficiency or Pareto optimality is a state of allocation of resources from which it is impossible to reallocate so as to make any one individual or preference criterion better off without making at least one individual or preference criterion worse off. The concept is named after Vilfredo Pareto (1848–1923), Italian engineer and economist, who used the concept in his studies of economic efficiency and income distribution.
The Pareto frontier is the set of all Pareto efficient allocations, conventionally shown graphically. It also is variously known as the Pareto front or Pareto set.A Pareto improvement is a change to a different allocation that makes at least one individual or preference criterion better off without making any other individual or preference criterion worse off, given a certain initial allocation of goods among a set of individuals. An allocation is defined as "Pareto efficient" or "Pareto optimal" when no further Pareto improvements can be made, in which case we are assumed to have reached Pareto optimality.
"Pareto efficiency" is considered as a minimal notion of efficiency that does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society. It is simply a statement of impossibility of improving one variable without harming other variables in the subject of multi-objective optimization (also termed Pareto optimization).
Besides economics, the notion of Pareto efficiency has been applied to the selection of alternatives in engineering and biology. Each option is first assessed, under multiple criteria, and then a subset of options is ostensibly identified with the property that no other option can categorically outperform the specified option.
In addition to the context of efficiency in allocation, the concept of Pareto efficiency also arises in the context of efficiency in production: a set of outputs of goods is Pareto efficient if there is no feasible re-allocation of productive inputs such that output of one product increases while the outputs of all other goods either increase or remain the same.Property rights (economics)
Property rights are theoretical socially-enforced constructs in economics for determining how a resource or economic good is used and owned. Resources can be owned by (and hence be the property of) individuals, associations or governments. Property rights can be viewed as an attribute of an economic good. This attribute has four broad components and is often referred to as a bundle of rights:
the right to use the good
the right to earn income from the good
the right to transfer the good to others, alter it, abandon it, or destroy it (the right to ownership cessation)
the right to enforce property rightsIn economics, property is usually considered to be ownership (rights to the proceeds generated by the property) and control over a resource or good. Many economists effectively argue that property rights need to be fixed and need to portray the relationships among other parties in order to be more effective.Richard Posner
Richard Allen Posner (; born January 11, 1939) is an American jurist and economist who was a United States Circuit Judge of the United States Court of Appeals for the Seventh Circuit in Chicago from 1981 until 2017, and is a senior lecturer at the University of Chicago Law School. He is a leading figure in the field of law and economics, and was identified by The Journal of Legal Studies as the most cited legal scholar of the 20th century.Posner is known for his scholarly range and for writing on topics outside of his primary field, law. In his various writings and books, he has addressed animal rights, feminism, drug prohibition, same-sex marriage, Keynesian economics, and academic moral philosophy, among other subjects.
Posner is the author of nearly 40 books on jurisprudence, economics, and several other topics, including Economic Analysis of Law, The Economics of Justice, The Problems of Jurisprudence, Sex and Reason, Law, Pragmatism and Democracy, and The Crisis of Capitalist Democracy. Posner has generally been identified as being politically conservative; however, in recent years he has distanced himself from the positions of the Republican party authoring more liberal rulings involving same-sex marriage and abortion. In A Failure of Capitalism, he has written that the 2008 financial crisis has caused him to question the rational-choice, laissez faire economic model that lies at the heart of his Law and Economics theory.Ronald Coase
Ronald Harry Coase (; 29 December 1910 – 2 September 2013) was a British economist and author. He was the Clifton R. Musser Professor of Economics at the University of Chicago Law School, where he arrived in 1964 and remained for the rest of his life. He received the Nobel Memorial Prize in Economic Sciences in 1991.Coase, who believed economists should study real markets and not theoretical ones, established the case for the corporation as a means to pay the costs of operating a marketplace. Coase is best known for two articles in particular: "The Nature of the Firm" (1937), which introduces the concept of transaction costs to explain the nature and limits of firms; and "The Problem of Social Cost" (1960), which suggests that well-defined property rights could overcome the problems of externalities (see Coase theorem). Additionally, Coase's transaction costs approach is currently influential in modern organizational economics, where it was reintroduced by Oliver E. Williamson.Royal University of Law and Economics
The Royal University of Law and Economics (Khmer: សាកលវិទ្យាល័យភូមិន្ទនីតិសាស្ត្រនិងវិទ្យាសាស្ត្រសេដ្ឋកិច្ច, French: Université royale de droit et des sciences économiques, abbreviated as RULE) is one of the oldest higher educational institutions in Cambodia.RULE was established in 1949 as the National Institute of Law, Politics and Economics. In 2003, the institution was officially deemed a university.The George Washington International Law Review
The George Washington International Law Review is a student-run, student-edited publication of the George Washington University Law School. In its four annual issues, the International Law Review presents articles and essays on public and private international financial development, comparative law, and public international law. The International Law Review also publishes the Guide to International Legal Research annually.
Founded in 1966 as the Journal of Law and Economic Development, the International Law Review has also published as the Journal of International Law and Economics and the George Washington Journal of International Law and Economics.The Journal of Law and Economics
The Journal of Law and Economics is an academic journal published by the University of Chicago Press. It publishes articles on the economic analysis of regulation and the behavior of regulated firms, the political economy of legislation and legislative processes, law and finance, corporate finance and governance, and industrial organization. The journal is sponsored by the University of Chicago Law School.Tilburg University
Tilburg University is a public research university specializing in the social and behavioral sciences, economics, law, business sciences, theology and humanities, located in Tilburg in the southern part of the Netherlands.
Tilburg University has a student population of about 14,300 students, about 15 percent of whom are international students. This percentage has steadily increased over the past years. Tilburg University offers both Dutch-and English-taught programs. In 2018, 45 of the total 70 (22 bachelor and 48 master programs) were English-taught. Tilburg University awards approximately 70 PhDs per year.
The institution has gained a reputation in both research and education. In the field of economics, REPEC in October 2017 ranked the Faculty of Economics and Business Administration as the 25th most productive research department in the world, and the 7th in Europe. According to the 2017 Shanghai Ranking, Tilburg University is ranked 5th in the field of Business Administration and 8th in the field of Finance worldwide. In the field of law, Tilburg University was ranked #1 in the Netherlands for the last three years according to Elsevier Magazine. Furthermore, the School of Social and Behavioral Sciences offers a unique two-year master program in Medical Psychology (in Dutch), in which students are trained as scientist practitioners in the medical setting.United States Court of Appeals for the Seventh Circuit
The United States Court of Appeals for the Seventh Circuit (in case citations, 7th Cir.) is a federal court with appellate jurisdiction over the courts in the following districts:
Central District of Illinois
Northern District of Illinois
Southern District of Illinois
Northern District of Indiana
Southern District of Indiana
Eastern District of Wisconsin
Western District of WisconsinThe court is based at the Dirksen Federal Building in Chicago, Illinois and is composed of eleven appellate judges. It is one of thirteen United States courts of appeals.
The court offers a relatively unique internet presence that includes wiki and RSS feeds of opinions and oral arguments. It is also notable for having one of the most prominent law and economics scholars, Judge Frank H. Easterbrook, on its court. Richard Posner, another prominent law and economics scholar, also served on this court until his retirement in 2017.University of Chicago Law School
The University of Chicago Law School is a professional graduate school of the University of Chicago. It employs more than 200 full-time and part-time faculty and hosts more than 600 students in its Juris Doctor program, while also offering the Master of Laws, Master of Studies in Law and Doctor of Juridical Science degrees in law. It is consistently ranked among the top law schools in the world, and has produced many distinguished alumni in the judiciary, academia, government, politics and business.
The law school was conceived in 1902 by the President of the University of Chicago, William Rainey Harper, who requested assistance from faculty at Harvard Law School in setting up the new school. Harper and the law school's first Dean, Joseph Henry Beale, designed the school's curriculum with inspiration from Ernst Freund's interdisciplinary approach to legal education. The construction of the school was financed by John D. Rockefeller and the cornerstone was laid by President Theodore Roosevelt. The law school opened for classes in 1903.
In the 1930s, the law school's curriculum was transformed by the emergence of the law and economics movement. Economists Aaron Director and Henry Calvert Simons taught courses integrated with the antitrust curriculum taught by statesman Edward H. Levi, leading to the development of the Chicago school of economics and the Chicago School approach to antitrust law. The law school expanded rapidly in the 1950s under Levi's leadership and, in the 1970s and 1980s, many scholars with connections to the social sciences were attracted to the school's influence in law and economics, including Nobel laureates Ronald Coase and Gary Becker and the most cited legal scholar of the 20th century, Richard A. Posner.The law school's flagship publication is the University of Chicago Law Review. Students edit two other independent law journals, with another three journals overseen by faculty. The law school was originally housed in Stuart Hall, a Gothic-style limestone building on the campus's main quadrangles. Since 1959, it has been housed in an Eero Saarinen-designed building across the Midway Plaisance from the main campus of the University of Chicago. The building was expanded in 1987 and again in 1998. It was renovated in 2008, preserving most of Saarinen's original structure.Virginia school of political economy
The Virginia School of political economy is a school of economic thought originating in universities of Virginia (University of Virginia, Virginia Tech, and George Mason University) in the 1950s and 1960s, mainly focusing on public choice theory, constitutional economics, and law and economics.
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