Review of Law & Economics

When “Stuff Happens” Isn’t Enough: How An Evolutionary Theory of Doctrinal and Legal System Development Can Enrich Comparative Legal Studies

Oliver R. Goodenough — Fri, 06 Jan 2012 17:50:53 PST

Comparative legal scholarship will benefit from better explanations of legal development. While the complications of legal systems are a challenge for cause and effect stories, evolutionary theory offers a powerful, yet relatively simple, set of explanatory principles that can be appropriately applied to both doctrinal topics and legal systems as a whole. The necessary starting point for an evolutionary analysis is to examine the three core components of evolution: descent, variation, and selection. Engaging these topics and developing good descriptions for each of them for the targeted system can be very helpful in providing good explanations to the “why” questions of comparative law analysis.

Is Law a Parasite? An Evolutionary Explanation of Differences among Legal Traditions

Jan M. Smits — Fri, 06 Jan 2012 17:50:51 PST

One of the most salient characteristics of law is that it can be seen as a tradition: law is passed on from one generation to another and, even though profound changes in the law may occur over time, its development is usually seen as a continuous one. Thus, in The Common Law, Oliver Wendell Holmes states that “‘the law embodies the story of a nation’s development through many centuries (...).” Alan Watson also emphasizes the extraordinary persistence of rules by noting that similar rules have been transplanted from one society to another. This paper seeks to explain differences among legal traditions by applying a specific evolutionary framework. This framework is based on ‘symbiosism,’ a Darwinian theory developed by linguists to explain the origins and development of language. The basis for this theory is that language is an organism residing in the human brain and therefore a memetic life form. In this respect, interesting parallels can be drawn between language and law. This theory can be used to help explain differences among jurisdictions, in particular why it is that these differences continue to exist over time.

The Emergence of a New Rule of Customary Law: An Experimental Contribution

Christoph Engel — Fri, 06 Jan 2012 17:50:49 PST

For most legal rules, an evolutionary perspective may be elucidating. Yet it would be hard to claim that otherwise one misses the essence of the rule-making procedure. This paper uses experimental data to show that customary law is different. While some doctrinal concepts of this source of law try to freeze the resulting rule, and to isolate it from the process of rule generation, Maurice Mendelson (in a 1998 paper in ‘Recueil des Cours’) forcefully argues that this conceptualization misses the very difference between statutory (treaty-based) and customary international law. Consequently, he also challenges the conventional claim that for a new rule of customary law to originate, two conditions must be met: there must be consistent practice, and it must be shown that this practice is motivated by the belief that such behavior is required in law. Mendelson claims that this doctrine misses the fundamentally incomplete nature of public international law. He claims that a new rule emerges when mere practice leads to convergent expectations. This paper uses data from public good experiments to back Mendelson’s theory. This evidence demonstrates that behavior converges even absent verbal communication; that convergence is guided by mean contributions in the previous round, which serve as an implicit norm; that free-riding on this implicit norm is regarded as illegitimate; that cooperation can be stabilized at a high level if the functional equivalent of what public international lawyers call “reprisals” are permitted. Hence the mechanism of norm formation proposed by Maurice Mendelson is fully borne out by the experimental data.

Evolutionary Theories in Law and Economics and Their Use for Comparative Legal Theory

Georg von Wangenheim — Fri, 06 Jan 2012 17:50:48 PST

Evolutionary Law and Economics explains how law evolves in possibly path dependent ways. The theory therefore seems apt to help comparative legal theory in understanding and evaluating legal variation across jurisdictions. This paper reviews evolutionary approaches in Law and Economics to study in a more precise way whether and how different strands of the approach may be useful for the comparative lawyer.

Reinvigorating Comparative Law through Behavioral Economics? A Cautiously Optimistic View

Julie De Coninck — Fri, 06 Jan 2012 17:50:46 PST

The purpose of this article is to investigate whether (evolutionary informed) research in behavioral economics can be of use to reinvigorate comparative legal research. The article is structured as follows. After a brief introduction, the second section identifies two overarching (and closely related) deficiencies that seem to permeate the various contemporary comparative law methodologies: first, their widespread disinterest in empirical support that would substantiate or refute their distinct working assumptions and often sweeping claims, and second, the lack of specification of the otherwise oft-invoked notion of culture. The third section then explores whether research in behavioral economics can be put to use to address these deficiencies. First, it is submitted that the behavioral patterns that form the subject matter of behavioral economics offer an interesting avenue for developing empirically better underpinned and legally sufficiently neutral comparative standards. Subsequently, the article examines research that is collecting data on cross-cultural differences in behavior, attempting to relate the observed behavioral variability to more specified macro-level variables. Although clearly much work remains to be done, it is argued that this type of research can be instructive for comparative legal scholars who take an interest in developing an alternative to the (use of a) fourre-tout concept of culture in comparative law.

Bio-Legal History, Dual Inheritance Theory and Naturalistic Comparative Law: On Content and Context Biases in Legal Evolution

Bart Du Laing — Fri, 06 Jan 2012 17:50:44 PST

In this article, I take a closer look at what contemporary evolutionary approaches to human behavior and culture could have to offer comparative legal theory. I shall argue that these contemporary evolutionary approaches have reached a sufficient level of both sophistication and agreement to warrant their cautious re-inclusion into comparative legal theory. The article is structured as follows. In the first section I will introduce the concept of “bio-legal histories” as a new, but possibly better, variant – inspired by evolutionary psychology – of the much older idea that the “psychic unity of humankind” leads to “universal comparative law.” The contemporary evolutionary approaches to human behavior (and culture) underlying these views – evolutionary psychology and cultural epidemiology – will then be contrasted to dual inheritance theory – a contemporary evolutionary approach to human behavior that is, I believe, better geared towards understanding the mechanisms leading to cultural diversity. I aim to show that the differences between these approaches and their counterparts in the comparative law literature are in large part due to their differing views on the relative likely importance of two different classes of cultural evolutionary forces: content-based biases and context-based biases. This will also allow me to express some doubts as regards memetic approaches to (comparative) law and the application of Generalized Darwinism to evolutionary economics. Finally, some possible implications of the dual inheritance theoretical approach for comparative law are briefly discussed.

Legal Evolution: Integrating Economic and Systemic Approaches

Simon Deakin — Fri, 06 Jan 2012 17:50:42 PST

This paper explores the scope for synthesis between economic and systemic approaches to the understanding of legal evolution. The evolutionary and epistemic branches of game theory predict that stable norms will emerge when agents share common beliefs concerning future states of the world. Systems theory sees the legal order as a social system which reproduces itself by recursive acts of legal communication, thereby giving rise to self-reference and operational closure. At the same time, the legal system is cognitively open, that is to say, indirectly influenced by other social systems in its environment. This gives rise to the possibility of coevolution of law and the economy. It will be argued that systems theory, by developing the idea of law as an adaptive system with cognitive properties, provides a missing link in the evolutionary theory of norms. Recent game theoretical models imply that common knowledge is not entirely endogenous to agents’ interactions, but depends to a certain extent on emergent normative structures. These include the public representations of common knowledge which are provided by the legal system. The paper will explore the implications of this idea, argue for an integrated economic and systemic analysis of legal evolution, and consider some of the theoretical and methodological implications of such a step.

Introduction: Symposium on Evolutionary Approaches to (Comparative) Law: Integrating Theoretical Perspectives

Bart Du Laing et al. — Fri, 06 Jan 2012 17:50:35 PST

The papers in this theme issue arise from an expert seminar held at Ghent University’s Department of Legal Theory and Legal History on April 23-24, 2010. Evolutionary theory was once an important source of inspiration for some of the founding fathers of comparative law, as well as for legal theory more generally. Today, however, while evolutionary theory seems to have lost its appeal in the comparative law community, various evolutionary approaches to law and legal phenomena in general seem to have been regaining momentum. Hence, the main purpose of the seminar was to investigate (a) how these different evolutionary approaches relate to one another and what are their relative strengths and weaknesses, and (b) if and how they could be rendered useful and effectively combined for the purpose of developing a more rigorous explanatory comparative legal theory.

Competition, Imitation, and R&D Productivity in a Growth Model with Industry-Specific Patent Protection

Malte Mosel — Fri, 06 Jan 2012 16:46:17 PST

Recent empirical studies suggest a need for a flexible patent regime responding to industry differences. In practice, industry-specific modifications of patent length already exist but lack theoretical foundation. This paper intends to make up for this neglect by scrutinizing in what direction industry characteristics influence optimal patent length. It is found that patents ought to be shorter, the more intense competition, the higher R&D productivity, and the more intricate reverse engineering in an industry are. Unlike similar Schumpeterian growth models, this model assumes Cournot competition and introduces an empirically substantiated measure of industry differences in the ability to catch up with a technological leader. It is found that for most empirically plausible cases the familiar inverted-U relation between patent length and growth carries over to the Cournot set-up.

Shooting Rampages and Maintenance of Campus Safety: An Incomplete Contracts Perspective

Bernd Süssmuth et al. — Fri, 06 Jan 2012 16:46:14 PST

This paper addresses the question of whether in-house or contracted maintenance of campus safety in U.S. colleges will be justified on efficiency grounds in the future. According to our analysis, the answer will crucially depend on whether emergency exceptions to amendments such as the Buckley Amendment (FERPA) will be more frequently applied by schools and tested in the courts. If the latter will be the case, we presume the resulting court rulings to be defining an implementable minimum quality standard. It is argued that the Virginia suicide-legislation that was passed before the Virginia Tech shooting could offset such a potential minimum standard. With or without a minimum standard, our model can make a point for in-house maintenance of campus safety. However, the two scenarios bear completely different policy implications.

Media and Litigation

Gil S. Epstein et al. — Fri, 06 Jan 2012 16:46:12 PST

In this paper we consider the relationship between the media and the outcome of civil litigation. We present a model dividing lawsuits into two main stages: a signaling stage and a rent-seeking contest. During the first stage the judge is exposed to signals regarding the true position of the defendant, and in addition pays attention to signals reported by the media. The judge forms an initial prejudice towards the plaintiff and the defendant based on the ratio between the true merit of the case and the burden of proof required to establish the plaintiff’s claim (the preponderance of the evidence). Then, we turn to the second stage and provide the plaintiff and the defendant with an opportunity to invest resources in order to influence their winning probabilities. We show how the media can influence the process with biased reports.

The Law and Economics of Enhancing Cartel Enforcement: Using Information From Non-Cartel Investigations to Prosecute Cartels

Vivek Ghosal — Fri, 06 Jan 2012 16:46:09 PST

I present the following proposal: information revealed during non-cartel investigations by competition law enforcement authorities, such as evaluation of mergers and acquisitions (M&As) or investigation of monopolization (dominance) conduct, should be directly used to investigate and prosecute cartels. Currently, in several jurisdictions, information acquired in, for example, an M&As investigation typically cannot be directly used for a cartel case due to the underlying statutes and the legal and administrative procedures that govern information use. Reviewing the management and corporate strategy literature, I note that M&As form a vital part of firms’ core business strategy, with the longer-run strategic aspects being more important. These longer-run strategies could be jeopardized if the firms were engaging in collusion, as the likelihood of detection and prosecution would increase under the proposed rule change, which would punish bad (collusive) behavior. I argue that irrespective of exactly how many cartels are actually prosecuted via this channel, the proposal has the likelihood of creating a meaningful deterrent effect. I also discuss the potential downsides related to Type 1 errors and administrative costs. Overall, I argue that the proposed rule change could increase the efficiency and effectiveness of cartel enforcement, and open an additional front in the fight against hardcore cartels that operate within jurisdictions as well as internationally.

Class Actions, Compliance and Moral Cost

Bruno Deffains et al. — Fri, 06 Jan 2012 16:46:07 PST

We study the effects of introducing class action lawsuits into a competitive environment where some firms have an intrinsic motivation to implement efficient care. The standard aggregation argument in favor of class action holds that there will be increasing efficiency due to lower litigation costs. In the short run, intrinsically motivated firms benefit from the introduction of a class action procedure. In the long run, new intrinsically motivated entrants are attracted into the market, thereby increasing consumer surplus. Overall, the average care level increases.

The Law and Economics Analysis of Intellectual Property: Paradigmatic Shift From Incentives to Traditional Property

Eli M. Salzberger — Fri, 06 Jan 2012 16:46:04 PST

This paper focuses on the normative analysis of intellectual property rights, in light of the technological revolution of the Internet and accompanying technologies. After a brief overview of the various philosophical justifications for awarding intellectual property rights, it identifies two major Law and Economics paradigms for the analysis of intellectual property: the incentives paradigm, which is founded upon the public goods analysis of neo-classical microeconomic theory, and the tragedy of the commons literature, which is based on the economic analysis of externalities. The paper raises several points of critique towards both frameworks of analysis and especially towards their inability to point to the desirable extent of intellectual property rights (IPR) and the direction of their reform required as the result of the recent technological revolution. It further criticizes the dominant contemporary Law and Economics writings in this field as shifting to a new proprietary paradigm that pre-assumes information to be an object of property, overlooking its fundamental differences from physical property and focusing on its management rather than on its initial justifications. The paper is concluded with some tentative thoughts on the general notion of “Property Rights” in light of the contemporary approach concerning intellectual property.

Interjurisdictional Linkages and the Scope for Interventionist Legal Harmonization

Andrzej Baniak et al. — Fri, 06 Jan 2012 16:46:01 PST

We study the desirability of interventionist harmonization of legal standards across multiple, mutually interdependent jurisdictions which strive to adapt law to their local conditions, as well as to synchronize it with other jurisdictions. In a setting where jurisdictions are privately informed about their local conditions, we contrast the regime of decentralized standard-setting with two means of interventionist harmonization: through centralization and through allocation of lawmaking authority to a particular jurisdiction. Our analysis illuminates the importance of patterns of interjurisdictional linkages in delineating the scope for, and the appropriate means of, interventionist harmonization. We find that greater jurisdictional interdependence – the hallmark of globalization – does not per se justify interventionist harmonization, unless increased interdependence results in notable asymmetries in the pattern of jurisdictional interdependence. We also show that, in the presence of cross-jurisdictional externalities, harmonization is, contrary to conventional predictions, not desirable when local preferences are homogeneous across jurisdictions.

‘Take It or Go to Court’: The Impact of Sec. 1a of the German Protection Against Dismissal Act on Severance Payments

Laszlo Goerke et al. — Fri, 06 Jan 2012 16:45:58 PST

In 2004, a section was added to the German Protection against Dismissal Act, establishing a new procedure to dismiss an employee, given a predetermined severance payment. Most legal scholars presume the change to be without impact, while a minority of experts claims it to be either beneficial or unfavorable to employees. Our theoretical model suggests that firms will use the new procedure, but that the change in payoffs is indeterminate and, therefore, an empirical issue. Exploiting the fact that collective dismissals are not directly affected by the amendment, difference-in-differences estimates based on panel data for West Germany indicate that the legal change did have a negative effect on severance pay.

Damages for Breach of Duty in Corporate Disclosure

Urs Schweizer — Fri, 06 Jan 2012 16:45:55 PST

Information provided by an agent affects the prices at which equity transactions take place. The agent may breach his duty either by spending too little effort at investigating relevant matters or by unduly manipulating the obtained information. As a consequence of such breach of duty, market participants may suffer from losses. Legal systems provide a rather disparate array of remedies without providing a coherent theory that would support the design of these remedies. The present paper proposes a general principle according to which courts may award expectation damages and it identifies sufficient conditions under which such damages would generate incentives for the agent to investigate with due care and to duly disclose the information.

Introduction: CESifo Conference in Law and Economics - Munich, May 2010

Bruno Deffains et al. — Fri, 06 Jan 2012 16:45:52 PST

This issue of the Review of Law and Economics contains a selection of papers presented at the 1st Annual CESifo Conference in Law and Economics, which took place at Munich, in May 2010.