Endogenous cases and the evolution of the common law

• Published date: 01 December 2018
• Date: 01 December 2018
• DOI: http://doi.org/10.1111/1756-2171.12252
• Author: Giri Parameswaran

RAND Journal of Economics

Vol.49, No. 4, Winter 2018

pp. 791–818

Endogenous cases and the evolution of the

common law

Giri Parameswaran∗

I develop a dynamic model of judge-made law in which the ideal legal rule is unknown but can

be learned. In contrast to existing articles, the flow of cases heard by the court is affected by

the court’s prior decisions. The model highlights the significance of this feedback in explaining

when and why the court will write broader or narrower opinions, and the long-run properties of

common law. In equilibrium, the law settles endogenously, because the incentives to make legally

controversial choices disappear as the law evolves. Settled law exhibits residual uncertainty and

ambiguity, and potentially implements inefficient outcomes.

1. Introduction

In common law systems, courts play an important role in creating or clarifying the law in

situations where it is silent or vague. In doing so, judges are often criticized for “legislating from

the bench,” but their law creation prerogative differs from that of legislators and other policy

makers in important ways. For example, judges cannot proactively initiate “policy” changes—

they are limited to resolving actual controversies that arise when the existing law is unclear.

Institutional norms, such as the doctrine of stare decisis, or respect for precedent, oblige judges to

extend the law in a manner consistent with previous judicial decisions. Even if they could freely

amend doctrine, courts cannot directly bring their desired outcomes to bear; at most, they can

create incentives for agents to behave one way rather than another.

These institutional features distinguish “policy making” in the judicial setting and affect how

the common law evolves. For example, when deciding cases, courts tend not to declare sweeping

legal rules but rather make incremental changes to the existing body of law. These changes are

described as “narrow” if the doctrine is extended only insofar as is necessary to resolve the instant

case, and “broad” if it implicates other cases as well. The incremental approach is beneficial in that

it avoids entrenching potentially costly mistakes into the law.1However, in failing to adequately

∗Haverford College; gparames@haverford.edu.

I would like to thank Charles Cameron, James Fogarty, John Londregan, Stephen Morris, seminar participants at Harvard,

Haverford,Princeton, UC San Diego, and the 2014 American Law and Economics Association Meetings, the Editor, and

anonymous referees for their helpful comments.

1For example, in City of Ontario v.Quon (560 U.S. 746 (2010)), Justice Kennedy opined that: “Prudence counsels

caution before the facts in the instant case are used to establish far-reaching premises. . .. A broad holding . .. might

have implications for future cases that cannot be predicted.”

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clarify law that is vague or has gaps,t heincremental approach may also deter agents from making

socially efficient choices.2

Courts thus face a trade-off between writing broader rules that reduce uncertainty about the

law, and narrow opinions that defer policy making to future (potentially better informed) courts.

The “option value” of deferral, in turn, depends on the future stream of cases that the court will

likely decide. However, the court’s docket is endogenous to its rules; because agents alter their

behavior in response to changes in the law, the court’s current and prior decisions feed back into

the future controversies that arise and, thus, into the court’s ability to affect the law in the future.

Toexplore these trade-offs, I build a dynamic model of judicial decision-making3that extends

the framework in Baker and Mezzetti (2012) byexplicitly modelling the case-arrival process. For

contextual concreteness, I consider the scenario of a long-lived court that regulates the activities

of a sequence of identical short-lived firms (the tortfeasors) whose production processes create a

(public) nuisance.4Given the established law, the court should apply a balancing test that holds

the firm liable if it “unreasonably interferes” with the victim’s enjoyment of property—that is,

if the “gravity of harm outweighs the utility” of the conduct.5The court is uncertain about the

size of the harm but can learn about it through the cases it hears. If found liable, the firm must

pay compensatory damages,6the predominant remedy in the common law.7As the size of the

nuisance is uncertain, so is the standard for “unreasonable interference” to be applied. In this

context, the court’s law creation role is to clarify which activity levels are reasonable and which

are not. The court’s legal rule defines the set of cases that will be decided summarily, that is, the

realm of conduct which the court has classified as either definitely unreasonable or definitely not

unreasonable. The legal rule may leave some cases unclassified; if so, the rule is silent as to the

tortfeasor’s liability status.

When confronted with a case in the silent region, the court examines the relevant evidence,

learns whether the firm’s output was unreasonable or not and updates its beliefs about the size of

the nuisance. In rendering its decision, the court must write an opinion that extends the legal rule

in a way that resolves the case at hand. The revised legal rule will be narrow if the new set of

cases to be decided summarily is limited to those whose ideal disposition became known to the

court, given the new information. By contrast, the revised rule is broad if the set of summarily

decided cases includes some whose ideal disposition remains uncertain. Thus, broad decisions

potentially misclassify cases and entrench these mistakes into law. The firm makes its output

2In his dissenting opinion in Blakely v. Washington (542 U.S. 296 (2004)), Justice Breyer argued: “But this case

affects tens of thousands of criminal prosecutions. . . . Federal prosecutors will proceed with those prosecutions subject

to the risk that all defendants in those cases will have to be sentenced, perhaps tried, anew. Given this consequenceand

the need for certainty, I wouldnot proceed fur ther piecemeal.”

3The model is one of the judiciary insofar as it incorporates the above-mentioned features that are particular to

the courts (including the inability to proactively initiate policy changes, the requirement that changes be consistent with

existing doctrine, etc.). The insights may apply more broadly to the extent that these constraints are salient to those

contexts.

4Alternatively, the model could accommodate a single long-lived firm that is myopic and so makes decisions in

each period to maximize its stage-game profits only,without regard to the implication for future profits.

5Restatement (Second) of Torts §826.a. (Am. LawInst., 1979).

6When damages are awarded,the standard practice is to compensate victims for harms suffered. “The fundamental

principle of damages is to restore the injured party, as nearly as possible, to the position he would have been in had it

not been for the wrong of the other party” (United States v. Hatahley, 257 F.2d 920 (1958)). (See also Laycock, 2012.

Feldman, 1996, lists other cases stating this principle.)

7Courts have applied both the common law remedy of damages and the equitableremedy of injunction in different

cases, and the question of which remedy to apply is as yet unsettled. The Second Restatement of Torts(§826.b.) allows

for damages where the balancing test is not met (i.e., the gravity of the harm does not outweighthe utility to the actor) but

nevertheless, “the harm caused by the conduct is serious.” The law and economics approach similarly recommends that

damages be applied when there is a social interest in the continuation of the activity and transaction costs make Coasian

bargaining prohibitive (see, e.g., Cooter and Ulen, 2011, or Bryson and Macbeth, 1972). Courts have adopted this view

in a sequence of cases, most famously in Boomer v.Atlantic Cement Co. (26 N.Y.2d 219, 309 N.Y.S.2d 312 (1970)). (See

also Northern Indiana Public Serv.Co. v. Vesey(210 Ind. 338, 200 N.E. 620 (1936)), Maddox v. International Paper Co.

(47 F.Supp.829 (W.D. La. 1942)), among others.)

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