Economic analysis of law.

• Author: Shavell, Steven

Economic analysis of law involves two elements: prediction of behavior in response to legal rules, assuming that actors are forward-looking and rational, and evaluation of outcomes in relation to well-articulated measures of social welfare. Thus, in its general description, the view adopted in analyzing law is the standard one of economics. Over the past 25 years or so, a relatively small group of individuals has undertaken research in economic analysis of law, but the number of interested individuals and the pace of their work has been growing. What has been accomplished in the field is indicated in a survey I have just written with Louis Kaplow for the next edition of The Handbook of Public Economics.1 A sketch of some of my current research areas will illustrate, I hope, the intellectual appeal of the field of law and economics and also the need for additional work, much of it empirical.

The Amount of Litigation

We constantly encounter the view that the legal system is a very costly social institution, whether measured by the magnitude of legal expenditures, the number of lawyers, or the sheer volume of litigation. This has contributed to a widespread belief that the amount of litigation is socially excessive and has led to various efforts to curb it (for example, by limiting damage awards or adopting no-fault automobile insurance statutes). At the same time, however, we see that some policies (such as legal aid programs) encourage litigation. What can economics say about the social desirability of the amount of litigation that we observe?

The basic answer developed in a number of papers that I have written(2) is that we can have no confidence that the actual amount of litigation activity tends toward the socially desirable - there are what may fairly be called "fundamental externalities" particular to litigation that may lead to too much or too little of it, depending on circumstance. On the one hand, there is a divergence between the private and the social costs associated with use of the legal system: the legal costs that would be incurred by a person who brings suit are only his or her own; they do not include those of the defendant or of the state. This creates a tendency toward overuse of the legal system. On the other hand, there is a divergence between the private benefits from suit - the dollar awards that would be won - and the social benefits associated with suit, inherent in the incentive effects brought about by the threat of suit. This divergence might exacerbate the cost-related tendency toward too much suit that I just noted. For example, the dollar awards that victims can win in suits might be high enough to stimulate much litigation, but at the same time the effect of suit on behavior might be quite low. (The dollar awards that victims of automobile accidents can win generate fully half of our tort litigation, but to what degree does the prospect of suit reduce the incidence of automobile accidents?) The divergence between private and social benefits might also lead to too little litigation, though. Suppose that harm is low relative to litigation costs, making it not worth victims' while to sue. But suppose further that, were suit threatened, there would be a substantial effect on the behavior of injurers. In this circumstance, suit would not be brought even though a regime in which victims would sue (say suit was subsidized or the legal costs were shifted to the injurers) might be socially desirable.

The general consequence of the existence of these underlying, significant differences between the private and the social incentives to use the legal system is that social intervention may be justified, either to discourage litigation or to encourage it, as the case may be. To ascertain what policy would be best, we need more empirical work on the costs of the legal system and its effects on behavior in different domains (such as automobile accidents, medicine, and product liability).

Public Law Enforcement

The general subject of public law enforcement - concerning the choice of degree of enforcement effort (the number of police, IRS agents, and the like), the magnitude of sanctions, and their form (fines versus imprisonment) - is of substantial importance...