Legal Design and the
Production of Law
Gillian K. Hadfield
University of Southern California
ESNIE 2008
Framing the problem of legal
design
Legal design: institutional/organizational
structure of “rule” production and implementation
– Courts, legislatures, legal profession . . .
– Distinguish “efficient rule” analysis
– Distinguish jurisprudence/moral theory
Legal inputs as products
– How are they/should they be produced, priced,
distributed and invented?
– Differentiated spheres/functions with different
positive/behavioral and normative considerations
• Political/democratic
• Economic/market
Framing the problem of legal
design
Decentralized organic processes (evolution)
– Endogeneity of legal production to legal
implementation/use
Problems of agency/incentives
– What is the impact of private incentives on
achievement of socially optimal rules (corruption,
lobbying, etc.)?
Problems of knowledge/information
– How do legal institutions & actors ‘learn’ and adapt
rules?
How is law produced?
 Conventionally: by the state
– Legislation (constitutions, statutes, codes)
– Agency regulation
– Courts (‘judge-made’ law, doctrine)
 “Non-law” substitutes
– Goals of coordination, commitment, risk allocation, distribution…
• ‘Law’ as means not ends
– Reputation, technology, social norms, organization
 Private (market) third-party producers
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Trade association (Bernstein 1992, 2001)
Stock exchanges (Macey & O’Hara 1999)
Internet (Hadfield 2004)
Private Law Inc? (Hadfield & Talley 2007, Hadfield 2008)
Example
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Franchise contract
Rule: Parties to a contract must perform in good faith
•
Source?
– Code/statute obligation
– Common law implied term
– “Private Contracting Inc”
•
Function?
– Commitment, risk allocation, bounded rationality, contracting cost
reduction….
•
Non-law substitutes?
– Reputation
– Norms/community sanctions
– Organization (change actor, information)
– Technology (change choice set, information)
Common law versus statute law
“The efficiency of the common law” (Posner 1977:
empirical claim)
 Mechanism?
– Judicial preferences (Posner 1977)
– Insulation from lobbying/capture (Rubin 1978)
– Litigation/settlement incentives (Priest 1978, Cooter Kornhauser
& Lane 1979)
– Superior ex post information (Gennaioli Shleifer 2007, Shavell
2007)
• Rules versus standards (Diver (1983), Rose, Kaplow)
– Learning
 Issues?
- Biased evolution (path dependence of information set available to
courts) (Hadfield 1992)
- Judicial bias (Gennaioli Shleifer 2007)
- Asymmetric stakes (repeat versus one-shot players) (Galanter 1974)
Common law versus civil code
 Empirical claim (LLSV 1997, 1998, 2004; Djankov et al
2002, 2003, Botero 2004)
– “English origin legal regimes/common law systems produce
better law/economic growth than German, Scandinavian and
French origin/civil code regimes”
– Source of law—code versus judge-made
 Theory
– Insulation from politics (judicial independence, juries) (Glaeser &
Shleifer 2001, Mahoney 2001, Feld & Voigt 2003)
• Protection of contract/property rights from state
– Ex post information (Anderlini Felli & Riboni 2007)
• static
– Adaptability/learning (Johnson 2000, Beck et al 2003)
• dynamic
Researchers have accumulated evidence that the bottom-up
approach to law has proven to be superior for economic
development to more top-down approaches. A series of
studies compare development outcomes in countries with a
common-law tradition to those with a civil-law tradition.
In [the common-law] tradition judges are independent
professionals who make rulings on cases based on
precedents from similar cases. The principles of the law
evolve in response to practical realities and can be adapted to
new situations as they arise.
In [the civil-law] tradition, laws are written from the top down by
the legislature to cover every possible situation. Judges are
glorified clerks just applying the written law…the law is less
well adapted to reality on the ground and has trouble adapting
to new situations as technology and society change
William Easterly, The White Man’s Burden (2006)
What’s wrong with this picture?
 Mechanisms under-theorized
– Information structures missing
– Judicial incentives to adapt not analyzed
– Comparative institutional content thin
 Behavior treated as institution
Common law = judicial independence
Civil code = legislative control
– All rules must be interpreted and applied case-by-case
– All judges have (in theory) discretion
 Research challenges
 Distinguish behavior & institutions
 Model judicial incentives, learning and adaptation of law
 Identify institutional parameters
Levers of Legal Design (2008)
Model
Two periods, N judges, N defendant, N plaintiffs
R : Period 1 existing rule: All defendants liable, damages D
R′ : “Good” defendants should not be liable (socially optimal)
How does system ‘learn’ new rule?
k : evidence/argument cost of rule change
Defendant incentives to invest
γ : Judicial reward for rule-following
α(i) : Judicial reward for accurate rule-adaptation
0 : Judicial reward for erroneous rule-adaptation
Judicial incentives socially aligned
Judges differ in perceived reward
σ (1) : probability of type 1 error
σ (2) : probability of type 2 error
Ex ante limited judicial competence
Information production
• Defendants seek ‘permission’ to present
evidence/argument for rule change
– Judge’s incentive to consider rule change depends on γ, α(i),
σ (1) and σ (2)
• Defendants’ incentives to seek rule change and invest
in evidence/argument depend on their type, k, D, σ (1)
and σ (2)
– None invest if k/D too high
– Only good types invest if k/D intermediate
– Good and bad types invest if k/D low
 Rule change requires both judge and defendant to
choose risky/costly action in period 1
Linking time: Legal human capital
Systemic errors σ (1) and σ (2) determined by shared legal
human capital (K(t))
Legal human capital determined by (initial) exogenous
factors and endogenous information processing
–
extent to which case specific learning shared with other judges
K(2) = K(1) + i(Δ)
 System can be ‘stuck’ at sub-optimal rule (no learning)
because of
 Too few judges rewarded for rule change OR
 Legal costs relative to damages too high (no investment) or too
low (too many bad defendants, judges won’t risk it) OR
 Initial judicial error too high/legal human capital too low
Optimal rule change
 Optimality of rule change depends on cost & error rates
 If rule change optimal period 1: higher social welfare if
– Lower legal costs
– Higher damages
– More effective information processing
– Higher/more widespread judicial rewards
– Higher initial legal human capital
 If rule change not optimal period 1 but potentially period 2:
 higher social welfare if
– Lower legal costs
– Higher damages
– More effective information processing
 Higher judicial rewards/initial legal human capital impact ambiguous
– Increases value of period 2 change BUT
– Can lead to excessive rule change period 1
– Problem of optimal capital growth
Institutional parameters
• Costs of legal services/inputs
• Damages
• (Distribution of )judicial rewards for rule
adaptation
• Exogenous legal human capital (judicial error)
• Information processing (sharing)
What institutions determine these parameters?
Institutional Dimensions of Legal
Regimes
• Judicial careers
– Career versus capstone judiciary
• Court specialization
• Information distribution
– Explication (reasons, findings)
– Publication
– Identification of judge
• Procedure
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Single versus sequential decisions (event trial versus multiple hearings)
Issue shaping, evidence selection (power of judge, litigants)
Number of trial judges (panels, examining judges, single trial judge)
Public versus private enforcement of orders
• Markets for legal services
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Regulation
Training
Advertising
Organizational restrictions (Partnership? Employment?)
Linking institutions to parameters
 Judicial rewards (α(j))
 Judicial audience determined by structure of judiciary
• Senior judges v. ‘public’
• Different preferences & information (homogeneous versus
heterogeneous)
• Vulnerability to punishment for ‘error’ (exit options)
 Specialization
• Expert peer evaluation (senior judges, law professors)
• Homogeneous
 Information distribution
• Publication of judicial identity: public attribution of
performance
• Evaluation of reasons, findings
 Procedure
• Judicial identification with decision
• Judicial control over fact-finding (panels, examining judge,
appeal)
Linking institutions to parameters
Exogenous legal human capital (K)
 Structure of judiciary
 Practical experience versus formal training
 Age/experience on entry
 Specialization in field
 Embedded expertise in code/statute
Linking institutions to parameters
Information processing (i(Δ))
 Structure of judiciary
• Analytical versus practical knowledge
 Court specialization
 Extent and publication of reasons, findings
• Quantity
• Quality (commentary)
 Procedure
• Volume of information (discovery, evidentiary rules)
• Retention of raw information versus processed (examining judge)
• Elimination or preservation of issues (trial, hearings, crossexamination, jury)
• Judicial capacity to seek evidence (verification, overcome bias)
 Legal markets
• Expertise
Linking institutions to parameters
Legal costs (k)
 Judicial careers, court specialization
• Expertise, incremental information needed
 Information distribution
• Larger stock of information (reduced incremental cost)
• Complexity
 Procedure
• Costly discovery, issue preservation
• Excess ‘bad’ information
• Public subsidy (judicial investigation)
 Markets for lawyers (Hadfield 2000)
Institutional attributes of “legal
families”
“Common law” versus “civil code”
revisited
 Empirical work based on theoretically meaningless (?)
attribute (“code” or not)
 Thin comparative knowledge of detailed institutions
(parameters)
 Intra-family variation
 A priori generalization
 “common law”: plentiful information, strong judicial incentives for
change (public audience), lower exogenous legal expertise,
higher factual expertise, expensive legal process & high
complexity
 “civil code”: limited information, weaker judicial incentives for
change (professional audience), higher exogenous legal & area
expertise, lower factual expertise, cheaper legal process, lower
complexity
Who wins? Can’t say…yet
 Comparative projects
 analysis of detailed institutional attributes
 Empirical projects
 Institutional attributes as independent variables
Theory projects
 Comparative quality of legislative/regulatory rule
production process
 Endogeneity of legal costs, complexity
 Strategic interaction of litigants
 Selection effects