Law, economics, and inefficient norms.

• Jurisdiction: United States
• Author: Posner, Eric A.
• Date: 01 May 1996

INTRODUCTION

The recent law and economics literature on social norms focuses on two issues. The first issue concerns the conditions under which norms should be expected to be efficient. One well-known hypothesis, for example, states that efficient norms emerge in closely knit groups of well-informed and similarly endowed people whose cooperative behavior does not produce negative externalities.(1) The second issue concerns the attitude the state should take toward norms. There is some argument, for example, over whether courts should enforce as law the norms of apparently efficient groups or should instead insist that parties use formalities.(2) A related question concerns the extent to which courts should defer to or intervene in attempts by groups to resolve disputes using nonlegal mechanisms.(3)

This Article addresses both issues. First, it criticizes the view that the norms of closely knit groups are efficient, arguing that under a variety of plausible conditions those norms are likely to be inefficient, in the sense of failing to enable group members to exploit the full surplus of collective action.(4) Second, it argues that under a variety of plausible conditions, the state-in particular, its legislatures and courts-produces rules that are more efficient than group norms and, furthermore, that help correct the deficiencies of group norms.

This Article uses theories about the efficiency of the common law and the efficiency of statutory law to shed light on the likelihood that norms are inefficient. Part I draws some preliminary distinctions between these three forms of social control and argues that the conventional claims regarding the efficiency of the common law and the inefficiency of statutes provide no support for the view that norms are efficient. Part II discusses phenomena that inhibit the evolution of efficient norms and suggests some conditions under which statutes or common law doctrines are more efficient than norms. The discussion focuses on the roles of information asymmetry, strategic behavior, and moral tradition in the development of inefficient norms. Part III discusses ways in which the state can transform, undermine, or minimize the impact of inefficient norms. Part IV provides some illustrations.

1. NORMS, STATUTES, AND COMMON LAW DOCTRINES

   The concept of a "norm" is slippery, and scholars use it in different ways. I will begin by offering some definitions, and if they seem arbitrary, it at least can be said that this is a defect shared by all writings on this subject.(5)

   A norm can be understood as a rule that distinguishes desirable and undesirable behavior and gives a third party the authority to punish a person who engages in the undesirable behavior. Thus, a norm constrains attempts by people to satisfy their preferences. In these ways, a norm is like a law, except that a private person sanctions the violator of a norm, whereas a state actor sanctions the violator of a law.

   The rule-like nature of a norm should not disguise the fact that norms are not enacted and enforced like statutes. It is more plausible to say that when people observe some behavior, they more or less spontaneously approve or disapprove of it (or fail to react), and then reward, penalize, or ignore the actor. People might contemporaneously or subsequently describe their reactions as a rule (or "norm"), or they might formulate a rule by generalizing from these reactions and from reactions they and others have had in similar cases. Their reactions might even be influenced by such prior formulations. But this is different from "applying" a preexisting rule to the behavior.

   Norms thus resemble common law doctrines more closely than they resemble statutes. When judges make decisions, they do not strictly apply a preexisting doctrine to the facts of the case; they are guided partly by their sense of justice. If judges or norm-enforcers simply applied preexisting rules, then the rules could not evolve: there must be some element of discretion that allows the decision-maker to revise the rules in light of new situations. But norms are not identical to common law doctrines. Judges are more self-conscious about making their decisions consistent with prior decisions, whereas norm-producers are more likely to be swayed by their sense of justice. This is why it is more difficult to describe a norm than it is to describe a doctrine of the common law. Norms are fuzzy.

   The use of the word "norm. in these ways could be criticized for being too narrow and for being too broad. It is narrow, as it excludes the rules self-consciously formulated and issued by private institutions, such as trade associations.(6) The exclusion of this kind of rule sacrifices some generality, but it focuses attention on the issues that so far have driven the debates.(7) The definition is also perhaps too broad: it blurs a variety of different rules that evolve through private enforcement. But I try to deal with these issues as they arise.

   Norms and laws can be usefully distinguished according to their degree of centralization, that is, the extent to which the power to create and modify the rules is concentrated in the hands of a small number of people who can easily cooperate. Compared to decentralized rulemaking, centralized rulemaking is both (1) more effective and streamlined, in the sense that fewer agents must cooperate in creating and changing the rules; and (2) less responsive to the needs of the governed, in the sense that those governed by the rules do not have a direct hand in the formation of the rules.

   Consider the first point. The creation of a statute requires the cooperation of a small number of professional politicians who have a great deal of contact with each other and who have the opportunity to create institutional mechanisms, such as committees, that facilitate the analysis of information and the coordination of legislative behavior. The creation of a common law doctrine requires the cooperation of a large number of judges, over long periods of time, who do not have much contact with each other and who do not actually communicate with each other, except indirectly through their opinions. Although sometimes judges appear to choose doctrines in the way a legislature enacts a statute, in fact the judge's choice is usually an attempt to unify a large number of earlier opinions, and whether his choice enters the common law depends on the willingness of other judges, in future cases, to recognize the doctrinal innovation. The creation of a norm requires the coordination of a large number of people who react more or less unconsciously to the conduct in question and to the accumulation of spontaneous reactions by others to that conduct.

   Now consider the second point. When legislators enact laws, the laws affect everyone in their jurisdiction, not just the legislators. While voting and related institutions cause legislators to pay attention to the interests of their constituents, it is clear that voters do not have a direct hand in the formation of statutes. When judges create doctrine, the doctrine affects everyone in the jurisdiction, not just the judges. Although judges may pay attention to the interests of citizens, the citizens do not have a direct hand in the writing of judicial opinions. In contrast, all people participate in the creation of the norms that affect them-simply by reacting approvingly or disapprovingly to the behavior in question and taking other steps to impose nonlegal sanctions on violators.

   These general distinctions help us focus on the main inquiry of this Article: whether norms are efficient. One way to pursue this inquiry is to analyze the extent to which the arguments about the efficiency or inefficiency of common law doctrines and statutes can be applied to norms.

   The starting point for analyzing efficiency is to say that a rule or group of rules is efficient if it can plausibly be understood to maximize social benefits.(8) But as this definition does not rely on any observables, more indirect tests are necessary. There are three alternatives that commonly arise in the literature. First, a rule is efficient if it has actually been chosen by rational actors under conditions in which they presumptively behave in a manner that maximizes social wealth (the choice test). Second, a rule is efficient if it would survive the competition of other rules in an evolutionary process that can be shown to produce efficient equilibria (the evolutionary test).(9) Third, a rule is efficient if it seems consistent with a model of economically efficient behavior (the behavioral test). These tests may seem vague, but they will become clear as they are applied.

   1. Statutes

      Economists writing in the public-choice tradition generally argue that statutes are inefficient. Consider the choice test: On one model of legislative choice, utility-maximizing legislators maximize their chances of reelection by favoring those parties who can contribute most to their reelection. Concentrated interest groups are such parties. Because the gain to interest groups from legislation that transfers wealth to them exceeds the cost of successful lobbying, the interest groups have an incentive to lobby. And since the resulting loss to any member of the public is less than the cost of lobbying to her, members of the public have no incentive to resist the legislation. Legislation should therefore reflect the desires of interest groups, and because these desires are likely to be redistributive, statutes are unlikely to be efficient.(10)

      A second argument-the evolutionary argument-is motivated by suspicion that the legislative-choice model depends too heavily on an assumption of legislative self-interest. But even if legislators tried to enact legislation in the public interest, one would still expect interest groups with more at stake to spend more on lobbying than people or entities with less at stake, such as members of the general public...