## 1. Claims and Projects within Economic Analysis of Law


### 1.1 Rationality in Economic Analysis of Law



Economic analysis of law deploys the tools of micro-economic theory to
study legal rules and institutions. The various approaches and
projects within economic analysis of law thus share a common core.
That core consists of the conception of action at the center of
micro-economic
 theory.[1]
 When economic analysis of law first emerged in the 1960s, scholars
adopted the standard rationality assumptions that dominated
microeconomic theory at the time. This practice still dominates the
literature; we shall call it the standard or classical model. In the
1990s, some scholars (see e.g. Jolls, Sunstein, and Thaler [1998])
began to apply the methods of behavioral economics to economic
analysis of law. Behavioral economics rests on a different
understanding of the underpinnings of choice and decision than the
classical model. 


#### 1.1.1 Rationality in the Classical Model



Rational action in economics means that each agent acts to maximize
her "preferences" in whatever environment she finds
herself. A *preference* is a ranking of the elements in her
domain of preference. The agent's domain of preference consists
of the things that fundamentally matter to her. In standard models of
consumer behavior, for example, the agent has fundamental preferences
over consumption bundles. Her decision problem consists of choosing a
consumption bundle from the set of feasible consumption bundles, where
feasibility is defined by the prices of goods and the agent's
income. Arlen and Kornhauser [2021] elaborate on the structure of
preferences in economic analysis of law. 



In most economic analyses of law, the situation is more complex. The
agent has preferences over some set of consequences--her income
or wealth, her state of health, etc.--and she chooses some action
that in part determines which consequence is realized. Typically, her
domain of preference differs from her domain of choice, often because
she chooses a *strategy* that, in conjunction with the strategy
choices of other agents, jointly determines the consequence. 



At its most abstract level, this conception of rationality is very
flexible as the constraints on preferences are almost purely formal.
(The discussion in section 4 essentially investigates the extent of
this flexibility.) 



Basically, the agent's ranking of elements of her domain of
preference must be complete and transitive. Completeness means only
that the agent, when presented with any pair A and B of elements in
her domain of preference can rank A and B. That is, the agent either
prefers A to B, prefers B to A, or is indifferent between A and B.
Some, but not all, relations are complete. The relation "Pareto
superior to," discussed at length in section 6.2, for example,
is not complete.



Transitivity means that if the agent prefers an element A to an
element B and she prefers the element B to a third element C, then she
prefers element A to element C. Many, but not all, relations are
transitive. The relation "friends with," for example, is
not transitive as A may be friends with B and B may be friends with C
while A and C mutually detest each other. The two conditions are thus
minimal though not empty. 



Every economic analysis of law provides some substantive content to
each agent's preference ranking. Typically, the analyst
attributes *self-interested* preferences to each agent. The
agent ranks consequences solely on the basis of their effect on her.
In the standard market model, for example, the agent cares only about
her own consumption not the consumption of others. In the standard
economic model of accident law, she cares only about injuries to
herself and costs that she may incur; she pays no attention to
injuries to others or costs that others incur. 



Of course, one might define "self-interested" in a broad
way to include anything that motivates the agent. Typically, however,
the analyst assumes that the agent's preferences are
*narrowly* self-interested; she cares only about her own
economic advantage or her own health and safety. The assumption of
narrowly self-interested preferences is very restrictive. An agent
with narrowly self-interested preferences seems to be incapable of
following a rule or having anything other than a prudential reason for
action. The assumption of narrow self-interest thus seems to limit the
conception of the normativity of law to a bare sanction theory of
duty. We discuss this issue in section 4 below.


#### 1.1.2 Behavioral Economic Analysis of Law



Behavioral economic analysis of law takes three forms. The first
accepts the formal framework of rational choice but rejects the
interpretation of preferences in this framework as self-interested.
Call this the "broad RCT" branch of behavioral economics.
The other two forms of behavioral economics derive from psychology
which seeks to understand the mental processes that agents actually
deploy in their decision making. Both of these forms of behavioral
economics reject the apparent assumption of the classical model that
agents consciously and directly maximize their preferences. But each
form adopts a different stance towards human rationality. The
"fast and frugal heuristics" branch claims that agents are
ecologically rational. The heuristics and biases form of behavioral
economics contends that agents are not rational. We discuss these in
turn. 



The broad RCT approach endorses the formal preference model of the
classical model; it only rejects the narrow interpretation of
preferences as self-interested. Individuals may have
non-self-interested preferences. They may have
"pro-social" preferences that reflect a concern for
others. They may have preferences for "fairness" which
reflect a "preference" for more equal distributions of
benefits and burdens. Indeed, one might posit preferences that reflect
concerns for almost anything. The approach thus risks the *ad
hoc* ascription of preferences, an issue discussed further in
section 4. 



The ecological rationality school accepts the classical model as a
normative standard against which individual behavior should be
assessed. It rejects the classical model as descriptive of individual
decision procedures. An agent does not solve the optimization problem
that the classical and broad RCT models posit. This school recognizes
that computation is costly and that often the agent lacks adequate
information to complete the calculation. Consequently, individuals
deploy heuristic decision procedures that, under these constraints,
perform well as measured by the RCT model of rationality. 



The heuristics and biases school, by contrast, understands the
existence of heuristics and biases as evidence that individuals behave
irrationally. Any decision process that deviates from classical logic,
Bayesian updating, or strict preference maximization constitutes
irrational behavior. 



Behavioral economic analysis of law typically adapts the classical
model to include a heuristic or bias. The model, that is, specifies a
decision process that, except on the dimension along which the
heuristic or bias works, conforms to the classical model. The analysis
then identifies equilibrium behavior in this model. The structure of
analysis thus parallels the structure of a classical analysis. 


### 1.2 The Basic Claims Underlying Economic Analysis of Law



Posner [1973] made two claims that have usually defined the debate
around the philosophical foundations of economic analysis of law. The
first claim, often called the *positive* claim, asserts that
common law legal rules are, in fact, efficient. The second claim,
often called the *normative* claim, asserts that common law
legal rules ought to be efficient. In both claims, Posner understood
"efficiency" to mean the maximization of the social
willingness-to-pay but subsequent authors have sometimes used the term
in its more conventional economic sense of Pareto efficiency. As both
of these claims predate the emergence of behavioral economic analysis
of law, each relies on the classical theory.



Each claim is ambiguous. Consider the first claim, the positive claim.
On the one hand, it might mean that common law legal rules
*induce* efficient behavior. On the other hand, it might mean
that the *law* is efficient; that is, that the content of the
law is identified by its efficiency. Or the claim might mean that
efficiency provides the best rationale of the "law" in
some doctrinal area. 



The second of Posner's claims, that the common law ought to be
efficient, also presents multiple ambiguities. Do we interpret the
claim as a theory of adjudication (i.e., as a theory of how common law
judges ought to decide cases)? Or should we understand the claim as
asserting that efficiency is the appropriate criterion against which
to assess judicial performance? Or should we understand the claim as
asserting that lawmakers, whether judges, legislators, or
administrators, should choose efficient rules?



This disambiguation of Posner's claims yields six distinct
claims about law that fall into a positive and a normative cluster. A
third set of two claims follows from the methodology of economic
analysis of law--the application of the tools of micro-economic
theory to the study of legal rules and institutions.



I begin with the three positive claims that correspond to the
disambiguation of Posner's positive claim and the two claims
that flow from economic methodology. Claim (I), the
*explanatory* claim, asserts that common law legal rules induce
efficient behavior. Claim (II), the *content* claim, asserts
that the criterion of efficiency determines the content of the law. A
positivist might understand this claim as a claim about the content of
the rule of recognition. Claim (III), the *doctrinal* claim,
states that the criterion of efficiency *rationalizes*
prevailing legal rules and institutions. This doctrinal claim is
weaker than the content claim; the latter asserts either that
efficiency causes the content of the law or that it justifies it. The
doctrinal claim, by contrast, asserts only that efficiency makes sense
of the legal materials.



For clarity, note the ambiguity in the sense in which a legal rule is
"efficient" in claims (II) and (III). In the most
straightforward, economic interpretation, claims (II) and (III) refer
to the efficiency of the behavior induced by the legal rule. Claims
(II) and (III) therefore seem to presuppose claim (I). Many, if not
most, economic analyses of law, however, assert only that the legal
rule is efficient within some
 model.[2]
 A judge, policymaker, or analyst might believe, on the basis of the
efficiency of a rule in a model, that the rule induces efficient
behavior in the world but the efficiency of the rule in the model does
not logically entail efficiency in the world. 



Claims (I), (II) and (III) apparently all presuppose the classical
model of narrowly self-interested actors as these preferences underlie
the first and second welfare theorems of general equilibrium analysis.
These theorems state that every competitive equilibrium is Pareto
efficient and conversely, every Pareto efficient allocation can be
supported by a competitive equilibrium. Of course, it is possible that
ecological rationality would lead to similar desirable outcomes. 



I now turn to the two claims that derive from the methodological
commitments of economic analysis of law. These two claims are also
explanatory claims. Claim (IV), the *behavioral* claim, asserts
that economic theory explains how individuals respond to legal rules
and institutions. Claim (V), the *causal* claim, asserts that
economically motivated action by both public officials and private
citizens explains the content of legal rules and the structure of
legal institutions. Each of these claims in principle has two
variants. Claim (IVa) for example asserts that the classical theory
explains how individuals respond to legal rules. Claim (IVb)asserts
that some behavioral theory explains how individuals respond to legal
rules. Similarly, claim (V) asserts that private citizens and public
officials conform to the *same* behavioral theory. In practice,
virtually all research addressing claim (V) attributes classical,
narrowly self-interested preferences to both private individuals and
public officials. 



Both claims (IV) and (V) might refer to the classical model or to any
of the three variants of the behavioral model. In fact most of the
literature relies on the classical model though, increasingly,
scholars are investigating the consequences of the behavioral model
within the context of claim (IV). 



Claim (I) differs from claim (IV). The explanatory claim asserts that
(some) legal rules and institutions induce efficient behavior but does
not identify the mechanism through which this efficient behavior
results. The behavioral claim, by contrast, identifies the mechanisms
through which legal rules and institutions influence behavior, but it
does not assert that the resulting behavior is
 efficient.[3]
 Claims (II) and (III) are equally silent about the mechanisms that
yield efficiency though one might think that claim (II) asserts that
judges and other public officials intentionally pursue efficient
rules. 



Note also that claim (II) differs from Claim (V) for similar reasons.
Claim (II) states that efficiency is one of the grounds of law. Many
legal rules should thus be efficient. Claim (V), by contrast, asserts
only that law results from the self-interested behavior of individual
citizens and public officials. This behavior does not necessarily
yield efficient rules or institutions.



Finally, note that the methodological claims (IV) and (V) apparently
reject standard accounts of the normativity of law, an issue addressed
more fully in section 4.



Consider now the three normative claims that follow from the
disambiguation of Posner's initial normative claim. Claim (VI),
the *adjudicatory*, claim asserts that judges ought, in their
decision of cases, to promote efficiency. This claim understands
Posner's claim as a theory of adjudication. Claim (VII), the
*evaluative* claim, asserts that the primary criterion against
which to assess legal rules and institutions is efficiency. Claim
(VIII), the *design* claim, asserts that policymakers should
design legal rules and institutions to promote efficiency. Note that
claims (VII) and (VIII) are independent. Designing efficient legal
rules and institutions might be desirable for non-efficiency reasons.
Conversely, efficiency might dictate the design of inefficient
institutions.



In the late 1970s and early 1980s, controversy raged primarily over
the evaluative claim. This debate largely recapitulated the debate
over the "new welfare economics" that occurred in
economics in the late 1930s and early 1940s. Debate over this claim
briefly resurged with the publication of Kaplow and Shavell [2004].
More recently, however, claim (III), the doctrinal claim has received
the most philosophical attention. 



The philosophy of law has traditionally focused on a limited set of
questions centered around the "concept of law" and the
existence or non-existence of an obligation to obey the law. Thus,
philosophers of law have investigated the nature of law, its relation
to coercion and morality, how judges ought to decide cases, and
whether, to what extent, and how law gives agents reasons for action.




The eight claims identified above do not correspond directly to these
traditional questions in the philosophy of law. As already noted,
claim (II) at least implicitly adopts a legal positivist understanding
of law. Claim (VI) offers an explicit normative theory of
adjudication, though one apparently at odds with how judges in fact
decide cases. Central philosophic questions concerning the concept of
law, its normativity, and the obligation to obey the law, however, are
not directly addressed. The behavioral claim (IV) as well as the
causal claim (V) and the explanatory claim (I), by contrast, concern
empirical issues that philosophers of law generally neglect.
Nevertheless, the controversy within the legal academy has generally
regarded economic analysis of law as providing a comprehensive theory
of law that challenges traditional approaches to law. Indeed, an
explanation of the vehemence of the controversy should identify
differences in fundamental views concerning law.


### 1.3 Three Strands of Thought within Economic Analysis of Law



The vast literature of economic analysis of law is not easily
characterized. As the set of distinct claims suggests, the literature
contains a large number of different projects. For purposes of this
essay, we may identify three distinct strands of thought within
economic analysis of law. A large percentage, but not all, of the
literature in economic analysis of law falls within one of these three
strands. I shall call one strand *policy analysis*, the second
strand *political economy*, and the third strand *doctrinal
 analysis*.[4]



Policy analysis generally focuses on the analysis of the effects of
legal rules and institutions on *outcomes*. An outcome usually
consists of the "objective" effects of the rule or
institution on the behavior of "private" individuals.
Policy analysis then typically evaluates the rule or institution under
study against some social objective function. Often policy analysis
adopts "efficiency" as the evaluative criterion.



Policy analysis is thus linked both to the behavioral claim (Claim IV)
and the design claim (Claim VIII). Neither of these links is logical
or conceptual. The behavioral claim concerns the causal mechanism that
determines how individuals respond to legal rules and institutions;
these rules have effects through standard economic processes. The
design aspect of policy analysis, however, requires not that the
policymaker *explain* the effects of legal rules on behavior but
that the policymaker *predict* the behavior the rules will
induce. Prediction does not necessarily require the identification of
a causal mechanism. Correlation suffices.



A gap also exists between the design aim of policy analysis and the
design claim. The policy analyst may choose to assess the predicted
behavior against any criterion she deems relevant; she may thus,
contrary to the design claim, adopt non-efficiency criteria to select
a legal rule. 



Political economy, by contrast, investigates the operation of
political institutions such as electoral systems, courts,
legislatures, the executive and administrative agencies. These
institutions make policy or determine which people make policy.
Political economy thus seeks to explain how the content of the law is
determined. In some instances we might understand political economy
simply as the application of the behavioral claim to the
constitutional and legal rules and practices that structure
legislation, administrative action, and adjudication.



Both policy analysis and political economy examine behavior. The
policy analyst focuses on the behavior induced by legal rules and
institutions. Political economy concentrates on behavior that causes
legal rules and institutions. Doctrinal analysis, by contrast, focuses
on the content of the legal doctrine developed by courts in
adjudication. It asserts that efficiency rationalizes the content of
the law. We might understand "the content of the law" in
at least three ways. First, it might, as the behavioral claim does,
refer to the behavior induced by the legal rules announced in judicial
opinions. Alternatively, the analyst interprets these opinions and
other texts to extract an economic *model* that underlies the
decision's legal view of the world. On this interpretation,
claims (II) and (III) might be true even though legal rules induced
inefficient behavior in the real world because the announced legal
rule might be efficient within the implicit model used by judges but
inefficient in the world as it actually is.



The first understanding of doctrinal analysis suggests a connection to
the classical behavioral claim (claim (IVa)). It would also suggest
that doctrinal analysis would have developed a substantial empirical
component that investigated what behavior doctrine actually induced.
As this empirical component is largely absent, we may understand
doctrinal analysis in the second, alternative way. The next section
examines the philosophical debates that have emerged from this
alternative, non-behavioral understanding of doctrinal analysis. 



These three strands may be differentiated in a number of ways. First,
each strand makes different motivational assumptions about public
officials. Policy analysis generally assumes that public officials in
general, and judges in particular, are conscientious. Judges thus
enforce the legal rules as they are announced, regardless of the
judge's own view of the desirability of the legal rule or its
impact on her personally. Political economy assumes that public
officials have the same motivation as private individuals; they are
self-interested (or subject to the same biases that private
individuals are). In the context of adjudication, as will be
elaborated below, the political economist interprets self-interested
judicial behavior as decisions that promote the policy preferences of
the judge. Doctrinal analysis does not analyze the behavior of public
officials; it rationalizes the decisions of judges without necessarily
imputing motivations to them.



Second, policy analysis and doctrinal analysis generally adopt a
welfarist stance towards evaluation of legal rules, while political
economy has evolved from a more contractarian tradition. Policy
analysts, when evaluating legal rules, ask whether that legal rule
induces behavior that satisfies some welfarist criterion, usually
either Pareto efficiency or (constrained) social welfare
 maximization.[5]
 Political economy, however, has to a large extent emerged from an
economic tradition, exemplified by James
 Buchanan,[6]
 that rejects the maximization of social welfare as a criterion and
seeks to evaluate political institutions on grounds of (actual or
hypothetical) consent. The political economist often asks not whether
the rule induces Pareto efficiency but whether the parties have acted
voluntarily, consented to the rule, or would have (rationally)
consented to the rule.



Finally, we might understand the distinction among the three strands
as a difference in the view each adopts about the instrumentalism of
law. "Instrumentalism" here means that an agent designs
the law to promote some collective goal. Kornhauser [2000, 2010]
discuss this idea at length. For our purposes, we need only note
several ambiguities in the brief definition just given. A more careful
definition would specify the agent who designs, the meaning of design,
what counts as "law," and what is a collective purpose.
Right now, we note only that instrumentalism may occur at the level of
the rule, the institution or the legal system as a whole.



Policy analysis tends to proceed legal rule by legal rule. It asks,
for example, how does a change in the standard of care affect the
behavior of tortfeasors and tort victims? Or how does contracting
behavior differ if the measure of damages shifts from expectation
damages to reliance damages? The analyst thus imputes a purpose
(usually, but not necessarily, the maximization of social welfare) to
the promulgator of the legal rule. The analyst then assumes that the
policymaker has chosen the legal rule that best promotes her (imputed)
objective. Legal rules are then instrumental to the achievement of the
posited goal; call this approach *rule instrumentalism*.



The political economist, by contrast, generally denies that any
purpose can be attributed to the promulgator of a legal rule largely
because legal rules are not promulgated by a single individual with
power unilaterally to control the content of the rule. Certainly, from
the perspective of political economy, legislators have no common
purpose and one should not assume or expect that any statute maximizes
social welfare. Legislation results from the interplay of interest
groups that do not reflect all interests within society. Even if the
legislature did reflect all interests within society, each interest
does not have an equal (or proportionate) say in the formulation of
the
 statute.[7]
 Finally, even if each interest did play a "proportionate"
role in the formulation of the statute, Arrow's General
Possibility Theorem teaches that the aggregation of interests might
still not yield a coherent purpose. Political economy thus rejects
rule instrumentalism.



Further understanding of the approach of political economy requires
acknowledgment of divergent views within political economy. I
distinguish two such views: *constitutional political economy*
and *radical political economy.* Each rejects rule
instrumentalism but only the latter rejects instrumentalism
altogether.



One might attribute the rejection of rule instrumentalism within
political economy to a commitment to an explanatory rather than a
normative project. At the level of constitutional political economy,
however, the research program usually adopts the perspective of a
constitutional designer and this designer arguably has a view of law
that includes *institutional instrumentalism*: i.e., legal
institutions, rather than specific legal rules, promote the specific
goals of the constitutional
 designer.[8]
 The constitutional designer seeks a political structure that promotes
her goals. The project of constitutional political economy is thus
normative in nature. Indeed the normative nature of the project
dominates any explanatory aim. Many within the project -- see
Brennan and Buchanan [1981, 1985] -- argue that one ought to
adopt an economic theory of behavior of public officials and private
individuals even if that theory is not the best explanatory
theory.



Radical political economists reject this reasoning. They carry the
logic of the argument about the incoherence of legislative behavior
through to the level of institutional and constitutional design.
Constitutions are drafted by agents with political and economic
interests that they seek to forward when they create the basic social,
economic, and political institutions of the society. Incoherence may
thus infect these institutions as well. The compromises over slavery
in the US Constitution, for example, illustrate, when viewed against
the democratic and equality elements of the document, such
incoherence. Radical political economists thus reject the claim that
the law is *designed* and hence reject instrumentalism
altogether.



The relation of doctrinal analysis to instrumentalism depends on our
understanding of the project of doctrinal analysis. If we understand
doctrinal analysis simply as a rationalization of doctrine, it would
appear to make no assumptions about the instrumental nature of law.
The fact that doctrine is efficient might result from intentional
behavior on the part of agents or might simply emerge from the
structure of the institutions within which public officials work. On
the other hand, if we understand doctrinal analysis as a theory of
adjudication, then it clearly adopts a rule instrumental view of law.
The project of doctrinal analysis is discussed at greater length in
the next section.



These differences in the level at which law is instrumental, if the
law is instrumental at all, suggest that the three strands of economic
analysis of law will adopt different approaches to the study of
adjudication. These theories are sketched and discussed in section 5
below.



More significantly for purposes of this entry, however, the classical
variants of both policy analysis and political economy adopt the
standard assumption of neo-classical economics that each individual
seeks to maximize the satisfaction of her preferences. Moreover, they
generally assume that each individual acts in her own self-interest,
narrowly defined. This approach presents the single, greatest obstacle
to the articulation of a general theory of law that confronts economic
analysis: it has no room for the *normative* aspect of law. It
is this denial of the normativity of law that accounts for the
vehement resistance that economic analysis provoked within the legal
academy.


## 2. Doctrinal Analysis



Doctrine organizes the vast legal materials of advanced societies as
well as legal education and much of legal scholarship. First year law
students study basic common law courses such as tort and contract;
upper year courses address subjects such as antitrust, business
organizations, and administrative law. The casebooks in these courses
are organized doctrinally. Similarly, legal scholars typically
specialize in the study of one or two doctrinal areas. 



Posner was trained as a lawyer. Posner [1973] was organized
doctrinally. Leff [1973] described Posner [1973] as a picaresque novel
in which the eponymous protagonist Economic Analysis traveled down the
river of doctrinal subjects, offering insight into each set of legal
rules. Most current work in the field still analyzes some doctrinal
rule, typically assessing its efficiency.


### 2.1 Doctrinal Analysis as a Rationalization of Private Law



Scholars thus generally consider doctrinal analysis the core project
within economic analysis of
 law.[9]
 Certainly, legal scholars who work in the central private law areas
of tort, contract, and property typically understand economic analysis
of law as doctrinal analysis. This doctrinal analysis has provoked
substantial philosophical attention and critique.



Critiques fall roughly into two groups. The first accepts the
instrumentalism of law, at one level or another. It rejects, however,
either efficiency as the aim of the designer or the assumption of
rationality underlying any behavioral claim that may be implicated in
a rationalization of doctrine. Issues related to the efficiency
criterion are discussed below in section 6. The rejection of economic
rationality generally rests on its failure to accommodate normativity,
an issue we discuss in section 4.



The second set of critics have offered a panoply of alternative
explanations of the relevant area of law. These alternative
explanations share two features. First, they all take the language of
"obligation" seriously. Second, and related, they all
reject the view of doctrine as instrumental. Following Ripstein
[2016], we shall call these alternative theories *deontic*
theories.



To assess the debate, however, one must first determine how each side
in the controversy understands the nature of doctrine and what counts
as an explanation of it. Phrased differently, we must answer a
substantive and a methodological question: what is private law theory
(or doctrinal analysis of private law) a theory of? And against what
criteria do we assess such theories? 



To begin, consider the substantive question. This question has two
aspects: a jurisdictional aspect and a "textual" aspect.
Consider the textual aspect first. In doctrinal analysis, economic
analysts of law seek to explain the *outcomes* of cases. An
"outcome" here means the *disposition* of the case;
the disposition of a case identifies the party that prevailed in the
litigation, i.e, on the facts of the case, whether defendant was
responsible or
 not.[10].
 The critics of economic analysis of law understand the task of
doctrinal analysis differently. Explaining doctrine requires an
explanation not of the dispositions of decided cases but of the
reasoning of those cases and, often, structural and procedural
features of the litigation that gives rise to the
 reasons.[11]



The position of the critics is at least perplexing and arguably
problematic. They apparently regard dispositions as mere applications
of law to fact. Yet the practice of common law adjudication arguably
treats the disposition as fundamental, i.e., as the aspect of the
decision that requires respect. The priority of the disposition over
the rule fits the English practice of *seriatim*  opinions
well. In such a practice, each judge offers her reasons for the
disposition and may articulate rules. There are no reasons for
dispositions or rules announced by the *court*. The court,
however, does announce a disposition.



Similarly, it is not clear why an account of *doctrine*
requires a rationalization of the bilateral nature of private law
litigation. Critics (such as Coleman [2001], Ripstein [2016] and
Weinrib [1995]) of the doctrinal analysis project in economic analysis
of law consider this bilateral nature--the fact that
*this* plaintiff sues *that* defendant and not someone
else--essential. They point to the doctrinal analysts'
failure to provide an essential explanation as an important aspect of
the superiority of their account of private law.



Though the critics are correct that doctrinal analysis does not
consider the bilateral structure of private law as essential, it
nonetheless can account both for how it emerged and why it persists.
At the time of the emergence of private law, states were relatively
small and had little capacity to monitor and enforce rules and
regulations. Indeed, Henry II arguably introduced the common law
courts to exert his power more broadly within England. At the time of
the emergence of these private law institutions, there were no
alternative institutions available to induce the desired behavior.




Moreover, the bilateral structure of private law exploits the private
information of injured plaintiffs in enforcing the law. It is costly
for the state to monitor everyone's behavior; it is difficult to
observe behavior that does not comply with announced norms. Injured
victims, however, are well-placed--and, when the law enforces
monetary claims for non-compliant behavior, injured victims have the
incentive--to observe non-compliant behavior. The state
frequently exploits this informational advantage of victims by
creating private actions as in the antitrust and employment
discrimination regimes in the United States. 



The systematic use of these "private attorneys general" to
promote public interests points to a deeper reason why the critics err
when they treat the bilateral nature of private litigation as
essential. This "bilateral nature" is a feature not simply
of private law adjudication but of adjudication generally. Its
explanation should therefore not rest on features peculiar to private
law but on something fundamental to adjudication generally.



Turn now to the jurisdictional aspect of the substantive question.
Which outcomes do doctrinal analysts rationalize? The reasoning of
which opinions do the critics analyze? For a practicing lawyer, these
questions have an obvious answer: analyze the outcomes or reasoning of
the cases in the jurisdiction the law of which applies to the dispute.
On this account, we would have a doctrinal analysis of, say, the
contract law of New Jersey or the libel law of Montana. Private law
theorists, however, have broader ambitions; they seek a more general
theory though it is unclear how to generalize from the doctrine of
jurisdiction J to doctrine in the abstract.



Doctrinal analysts within economic analysis of law face a somewhat
lesser difficulty. Their project simply asks whether a legal rule that
rationalizes a pattern of outcomes induces efficient behavior (perhaps
within some model). One can pursue this task rule-by-rule and
independently of the jurisdiction. The general claim then states
simply that the doctrine in most jurisdictions is by-and-large
rationalized by rules that induce efficient behavior. As more than one
rule governing the same conduct may induce efficient behavior, there
is no implication that rules are identical in different
 jurisdictions.[12]




For the critics, however, the problem seems deeper. Some structural
features of private law may not vary across jurisdictions but the
rules and the reasons for them do. It is less clear how one explains a
mass of reasons and rules from different jurisdictions. The difficulty
increases the more diverse the set of jurisdictions is. We might
expect tort law in the United States to be relatively uniform across
the fifty states. After all, the states largely share an approach to
opinion writing and judges of one state may refer to the decisions of
another. We would expect courts from different states to offer similar
 *types* of reasons. That unity might decrease if we consider
all common law jurisdictions. After all, the conventions of opinion
writing vary across these jurisdictions. Opinions issued from the
judges of the Queen's Bench do not obviously offer similar types
of reasons as those issued by the California Supreme Court. An
expansion to civil law jurisdictions increases the range of styles.
Opinions of the French Cour de Cassation look nothing like the
opinions of the two previously mentioned common law courts.



Though doctrinal analysts have not been methodologically
self-conscious, several private law theorists--e.g., Coleman
[2001], Kraus [2002], Smith [2006], and Ripstein [2016]--have
outlined the requirements that a theory of private law must satisfy.
These authors have articulated at least three criteria that apply to
the evaluation of theories of private law: fit, transparency, and
determinancy.



"Fit," of course, refers to the extent to which the theory
accounts for the observed phenomena--for the doctrinal economic
analysts, the extent to which it accounts for the observed outcomes
and for the deontic critics the extent to which it accounts for the
reasoning of the courts and the relevant structural features. Though
comparing degrees of fit across interpretations may be difficult, fit
is uncontroversial as a criterion.



"Transparency" requires that the explanation be internal
rather than external in the sense that the explanation relies on
concepts deployed by judges and other actors producing the outcomes
and reasoning to be explained. Doctrinal analysis, according to the
critics, fails as an explanation of private law because it is opaque
rather than transparent. Indeed, most of the criticisms of doctrinal
analysis reduce, in one way or another, either to a claim that (1) it
fails to satisfy transparency or (2) as discussed above, it fails to
account for the bilateral nature of private law. 



Transparency, however, seems an important theoretical ambition only
for some accounts of doctrinal analysis. Most obviously, the content
claim (claim II) that holds that efficiency determines the content of
the law requires transparency when we interpret it as part of the rule
of recognition. But neither the explanatory claim (claim I) nor the
doctrinal claim (claim III) presuppose transparency. The content of a
legal rule may be efficient even if judges do not aim at efficiency.
An external account of the explanatory claim, however, provides an
incomplete explanation until it identifies some mechanism that
explains how judges, unconcerned about efficiency, nevertheless
generally announce efficient
 rules.[13]
 Similarly, the doctrinal claim (claim III) that efficiency
rationalizes the outcomes reached by the common law does not
necessarily require transparency. 



"Determinacy" requires an explanation to make a clear
prediction of the application of legal rules to facts. Doctrinal
analysis often satisfies this criterion; indeed, to the extent it
seeks to rationalize dispositions, any successful doctrinal analysis
must make such predictions. An explanation in doctrinal analysis
identifies some "efficient" rule and this rule is
determinate in the sense that it dictates a precise outcome or
disposition in specific cases. On the other hand, efficient rules are
often not unique; more than one rule will induce efficient behavior
and these rules will not necessarily dictate the same disposition of a
 case.[14]



Deontic theories, by contrast, fare badly under the determinacy
criterion. This lack of success may follow from the choice of subject
matter to explain. These theories focus on the rules not the
dispositions.



Deontic critics also reject the instrumentalism of doctrinal analysis.
Doctrinal analysis treats the law as a means to the end of inducing
efficient behavior. The value of legal rules derives solely from the
value of the goal sought. On the deontic accounts, by contrast, the
point of the law is to do justice between the parties. 


### 2.2 Doctrinal Analysis as a Concept of Law?



Does doctrinal analysis implicitly or explicitly rely on some theory
of law? It might be understood in a number of ways. It might be
understood as the content claim (claim II) that holds that an
efficiency criterion identifies the content of the law. The literature
contains arguments that virtually every (common law) legal rule is
efficient. This claim has both an empirical interpretation that each
legal rule induces efficient behavior and a doctrinal interpretation
that the prevailing legal rule is identified by its efficiency. The
literature, however, has offered scant explanation or justification
for the underlying theoretical claim that efficiency
*identifies* the content of these legal norms. On what theory
of law does efficiency become a ground of law?



One might justify the content in a variety of ways. A legal positivist
might argue that the rule of recognition identifies efficiency as an
appropriate ground of judge-made law. Or one might argue, as Dworkin
has suggested, that efficiency provides the best interpretation of the
practice governing the law of accidents. On either account, the claim
that efficiency identifies the content of the law is a contingent
claim. For the positivist, the content of the rule of recognition is
contingent on the social practice of the relevant public officials;
they may, but they need not, adopt an efficiency
 criterion.[15]
 Similarly, for Dworkin, the law derives from the best interpretation
of the past political decisions of the community. These decisions are
of course contingent; a different history of decisions might yield a
different account of law. Claim (II) thus does not constitute a
competing concept of law.


## 3. The Nature of Law



Philosophical inquiries into the nature of law have generally gone
under the rubric "the concept of law." Unfortunately, as
multiple projects and questions fall under this single rubric, the
debate has generated more confusion than clarity. This section seeks
first to disentangle the various questions that have been conflated
within a single concept of law.



The section then focuses on two of those concepts, identified in the
next subsection as the doctrinal and sociological (or social
scientific) concepts of law. We argue first that economic analysis of
law is not committed to any specific doctrinal concept. Second, and
finally, we argue that economic methodology does suggest how to define
a sociological concept of law that is parasitic on a concept of
governance and on the value of legality. 


### 3.1 Concepts of Law



Since Dworkin's initial challenge to Hart's positivism in
the mid-1960s, a robust but unresolved debate over the concept of law
has riven the philosophy of law. Hart [1994] viewed this debate with
some perplexity as he thought the two sides had not engaged. More
pointedly, he thought there was nothing to argue about as he felt that
he and Dworkin asked two different questions; and, consequently,
explicated two distinct concepts of law. 



Dworkin [1986] considered identification of the *grounds of
law* the central question for the philosophy of law. The grounds
of law identify the truth conditions of propositions of law. The
*doctrinal* concept of law answered this question. For him, the
jurisprudential debate thus focused on whether the grounds of law
included moral principles or not. Implicitly, then, Dworkin
interpreted Hart [1961] as centrally addressing this doctrinal
question. 



Hart, by contrast, did not understand his project as centrally focused
on the grounds of law. Hart [1961] offered various, non-equivalent
characterizations of his central task. In the first chapter, he
suggests as a central aim the differentiation of law from a variety of
other phenomena, specifically morality, religion, and coercion. In the
preface, however, Hart suggests that his study might be regarded as an
essay in "descriptive sociology." The answer to the former
question would rely on what Dworkin [2006] called a *taxonomic*
concept of law that distinguished law from other social phenomena; the
latter question, by contrast, demands what Dworkin [2006] called a
*sociological* concept of law that furthers the aims of social
science.



Before identifying further concepts of law, it is important to
understand how the taxonomic and the sociological concepts of law
differ. A taxonomic concept of law has two functions. As noted, it
distinguishes legal norms in society S from other norms in that
society. Second, and derivatively, it makes comparative law possible.
Comparative law must identify which rules and institutions to compare
across societies. A comparative study of tort law, for instance, must
be able to identify which norms in country X are legal norms governing
accidents between strangers in order to compare them to the legal
norms governing accidents between strangers in country Y. 



The sociological concept, by contrast, must serve the needs of social
theorists who seek to understand society and social behavior. It will
be a technical concept that emerges from the theory or theories that
best explain the phenomena the social theorist studies. Note,
moreover, that a social scientist might require more than one concept
of law. Hart's descriptive sociology might be interpreted as
offering a *functional* concept of law. Anthropologists, by
contrast, often seem more interested in an  *expressive*
concept of law. (See Pirie [2010] for a discussion that suggests an
expressive account of the concept of law.) 



The doctrinal, taxonomic and (various) sociological concepts of law do
not exhaust the possible concepts that might be useful. Obviously, we
require, for instance, an *evaluative* concept of law that
identifies the value of legality. Similarly, some legal philosophers,
such as Raz and Coleman, understand the inquiry as an investigation of
a *folk* concept of law that underlies ordinary usage of the
term. This folk concept will differ from the other concepts of law but
it may be influenced (or perhaps tainted) by the others, particularly
the doctrinal and evaluative concepts. Kornhauser [forthcoming] offers
an achievement concept of law according to which law is a contingent
achievement of a functioning governance system in specific
circumstances. It realizes some value of legality. This view is
elaborated at greater length in section 3.3. 



A complex web of relations might connect these various concepts.
Hart's theory does yield a ground of law, and hence a doctrinal
concept, from his sociological or taxonomic concept. What makes a
proposition of law true, for Hart, is its pedigree which must trace
back ultimately to the rule of recognition in the community.
Similarly, we might create a taxonomy by considering how the grounds
of law differ from the grounds of morality or religion. A taxonomy,
that is, follows directly from comparing truth conditions for
propositions of law to truth conditions for propositions of morality.




No necessary relation, however, holds among the concepts. One might
have a sociological concept of law that does not rely on the doctrinal
concept of law as their grounds are very different. What makes a
proposition of law true bears no obvious relation to what concepts
will shed light on questions of interest to social theorists.


### 3.2 The Doctrinal Concept of Law in Economic Analysis of Law



The prior section identified a plethora of concepts of law. On which
of these concepts does economic analysis of law rely? On which of
these concepts does it shed light? This section addresses these
questions with respect to the doctrinal concept of law that lies at
the center of legal practice. The next section addresses these
questions with respect to the sociological concept of law that might
play a role in the development of social theory.



Most doctrinal analyses take the "legal materials" as
given. They seek to rationalize the decisions of some set of courts.
Any concept of law that identifies the materials as the relevant ones
to rationalize serves the doctrinal analysts' purposes.



Policy analysis and political economy have also largely been silent
about the doctrinal concept of law on which they rely or shed light.
Each has largely put the questions that motivate the debates over the
concept of law to one side.



An economic analysis of the behavioral effects of a legal rule
generally begins with the assumption that the legal rule is clearly
known not only to judges and other public officials but also to those
subject to the legal rule. This knowledge of private citizens might
amount simply to the knowledge of what consequences follow from each
possible action the agent might take. Actions that provoke a response
from public officials generally, or judges in particular, have no
special character to them; the citizen in her deliberations treats the
consequences of rule-following or rule-breaking as she treats any
other price.



Similarly, investigations into the causes of legal rules and
institutions typically take the background institutions and rules as
given and, generally, known to all parties. It is not clear that the
analysis attributes any special character to legal rules and
institutions other than, perhaps, centralized legislation,
adjudication, and
 enforcement.[16]
 Thus political economy, like policy analysis, seems agnostic about
the central philosophical questions. Nothing in the analysis requires
that legal rules be distinctive in any way. Indeed, radical political
economy holds that self-interest governs individual and institutional
action all the way down. It leaves no room for any normative force to
law. 



This agnosticism about the doctrinal concept of law is, on two
accounts, harmless. First, as Murphy [2014] argues, competing
positions on the role of morality in the truth conditions of
propositions of law do not have many, if any, substantive consequences
for the practice of law. Ignoring the doctrinal concept of law thus
has no substantive consequence for economic analyses of these rules.




Second, as argued in Kornhauser [2015], a doctrinal concept of law is
unnecessary for the practice of law. What legal theory requires is not
a doctrinal concept of law but a set of theories of decision-making
for various agents--judges, legislators, public officials, and
citizens. 


### 3.3 Law as an Achievement: Towards a Social Scientific Concept of Law?



Both policy analysis and political economy pursue projects
substantially different from the philosophical ones. Policy analysis
seeks to understand how legal rules influence behavior; political
economy seeks to understand the ways in which society structures its
political, economic, and legal institutions. These projects suggest a
social scientific concept of law rather than a doctrinal or taxonomic
one. A social-scientific concept of law would help us understand the
social world in general, the emergence and persistence of social
groups over time and the causes and consequences of different
governmental structures. Political economy and policy analysis, or a
general sociology, then seek to answer the question: How do we
differentiate the structures of social governance in order to
understand social phenomena? 



An understanding of society and social phenomena, of course, may not
require anything akin to the concept of law at issue in the
philosophical debates. Two different reasons, however, suggest some
relation between the philosophical debate and the social-scientific
inquiry. One should recall that Hart [1961] characterized, perhaps
off-handedly, his project as one in the descriptive sociology of law.
Such a sociological project presumably requires a social scientific
concept of law. Moreover, once one has articulated a viable and useful
set of social-scientific concepts, one might ask what relation they
bear to the issues at the center of the philosophical inquiries of the
value of legality and of articulating the criterion that distinguishes
legal from other grounds of decision. 



Adopting Hart's discussion as a starting point, we shall in the
rest of this subsection, sketch a social-scientific concept of a
governance structure and suggest how it might relate both to the
project of political economy and to the philosophical debate over the
concept of law. (Kornhauser [2004, 2015, forthcoming] provide a more
extended account.)



One of Hart's rhetorical devices provides a useful starting
point for the development of a social scientific (functional) concept
of governance. To introduce the concept of a secondary rule, Hart
[1961] recounts a fable concerning the emergence of a legal system in
a small community. He suggests that a small, homogeneous, stable, and
closely knit society requires no differentiated structures of
governance. These structures emerge to resolve problems that arise in
societies that are large, heterogeneous, or subject to environmental
uncertainty. Though Hart identifies only three such problems, we shall
identify four distinct functions that might be distributed across
societal structures: (1) the characterization of socially acceptable
(or unacceptable) behavior, a task the importance of which grows as
the rate of change in society increases;(2) policing of behavior to
identify likely instances of deviant behavior; more anonymous
societies may require more institutionalized policing; (3) definitive
adjudication of non-conformity to social norms; again, when society is
no longer face-to-face, such adjudication may be necessary to trigger
sanctions; and (4)sanctioning of deviant behavior; informal sanctions
grow more difficult to impose when society is not face-to-face.



Governance within a society requires that the society somehow
accomplish each of these four tasks. A society might do so in a number
of different ways. A governance structure is the set of institutional
structures within a society that address one or more of the four
problems of adaptation, detection, application, and sanction that are
the central elements of governance. An institutional structure is a
decision-making protocol that specifies procedures relevant to the
resolution of one or more of the problems of adaptation, detection,
application, and sanction. Clear understanding requires a distinction
here between institutional structures, realized institutions, and
functioning institutions. This distinction parallels the distinction
between game forms, games, and plays of a game in the theory of games.
As noted before, an institutional structure is simply the basic rules
or protocol for governance; a realized institution is an institutional
structure situated in a given society and populated by particular
individuals; and a functioning institution is a realized institution
as it operates in a society in actual conditions.



All societies have governance structures. The simplest, face-to-face
societies have undifferentiated structures in which all of these
functions are informal and diffused through the society. As social
groups grow more numerous and their environment becomes more volatile,
governance structures become more complex.



A crude taxonomy of governance structures might distinguish them along
three dimensions: the degree of institutional differentiation in the
governance structure, the degree of organization (or
"direction," or "structure)" - for
further discussion see Kornhauser [forthcoming] - and the
mechanism of internal, "bureaucratic" control. 



A governance structure may be more or less differentiated from other
institutions (such as those governing exchange or reproduction) in a
society. Hart considered two extremes: a simple society with no
differentiation of governance from other institutions and modern,
municipal legal systems that have distinct institutions for
adaptation, policing, adjudication, and sanctioning. Indeed, a society
such as the United States has multiple legislative, executive and
judicial institutions that relate in complex ways. 



"Organization" refers to the degree to which governance in
a given realm or of a given function (such as norm creation or norm
monitoring) are "centralized" or "directed" by
specified individuals. Simple, face-to-face societies typically have
decentralized (and undifferentiated) institutions. The community as a
whole monitors compliance and sanctions non-compliance. Private law is
typically monitored in this decentralized way. Modern municipal legal
systems, by contrast, are typically more structured and organized.




The mechanism of internal control refers to the character type that
the governance institutions (seek to) select for public officials. As
noted above, governance depends on who occupies official roles;
governance structures function differently when public officials are
self-interested rather than when they are conscientious. Hart
contrasted two motivations for compliance with law or legal
obligations: incentives that rely on the self-interest of individuals
and acceptance of rules as guides to action. For Hart, law required
that a core set of public officials had to accept the rule of
recognition as an authoritative guide to action. 



Political economy, by contrast, aims to explain all legal phenomena in
terms of the self-interest of agents. This analytic strategy precludes
a Hartian account of law; legal rules cannot play any role in the
explanation of behavior of either private individuals or public
officials because no agent has the relevant internal attitude towards
the rule. An individual faced with a choice considers the costs and
benefits that each option presents to her. These costs and benefits
will include "legal costs and benefits" but these costs
and benefits are not determined by rules; they are the result of the
incentives that private and public officials face. Rules are only
rules of thumb that express the response of average individuals under
normal circumstances to particular events. Which rules of thumb are
used, of course, may greatly affect the social equilibrium achieved in
a particular jurisdiction.



Political economy thus seeks a concept of governance that relies only
on incentives; it consequently denies the existence of legal systems
in Hart's sense. It might nonetheless acknowledge a different
concept of law. Some political economists, for example, suggest that
legality in the sense of an impartial "rule of law"
promotes economic growth. The political economist then might identify
law or legal systems as those governance structures that realize such
a rule of law (in given circumstances). The political economist, then,
might adopt two related concepts. The first concept of a governance
structure is an explanatory one; it characterizes the mechanisms of
social governance in terms of the degree of institutional
differentiation and the mechanism of bureaucratic control within these
institutions. The second related concept is normative. It identifies a
value that a governance structure might realize. Call this value
*legality*. The concept of law is thus a normative one; that
identifies the value of legality. The social scientist then seeks to
identify conditions under which specific governance structures will
realize the value of legality.



The above discussion sketches a concept of governance, a concept
clearly necessary for social science. We might understand law in two
distinct ways. The first, traditional way regards law as a
*mode* of governance, or, we might say, as a species of
governance. On this account, some specific feature or features of a
functioning governance system characterize law; these features
identify the "essence" of law. Debates about the concept
of law are thus debates over the features that are essential for law.




The alternative approach understands law as an *achievement* of
a functioning governance system. On this account, the essence of law
lies in the character of the achievement, i.e., in the value of
"legality" that the functioning governance system
realizes. Debates about the concept of law on this achievement account
are thus debates over the nature of the value of legality.


## 4. The Normativity of Law



Traditional approaches to law treat legal rules as *normative*,
i.e., as giving citizens reasons for action. These approaches present
two philosophical questions: what is the nature of the reasons for
action that law gives? and do individuals have a general obligation to
obey the law? The first question is generally understood as asking
whether a legal rule provides a moral reason for action. The second
question has been extensively examined in the legal and philosophical
literature. Murphy [2014] provides a clear perspective on this
literature.



Claims (IV) and (V) assert that individuals respond to legal rules in
an economic way. On classical economic accounts of rationality, an
economic response is a prudential rather than a moral response. Legal
rules, on the economic account, thus do give individuals reasons to
act, but they are not regarded as moral reasons. A traffic sign
designating a street as within a school zone both indicates that
children may dart into the street and sets a reduced speed limit. Each
of these indication provides the agent with reasons for action. The
rule thus affects the agent's behavior by affecting his beliefs
about the likelihood of a causing an injury when traveling at various
speeds and his beliefs about the expected costs of different courses
of conduct. The sign and the legal rule give the agent prudential
reasons for action. Economic analysis of law in its current form thus
largely adopts the Holmesian "bad man" theory of law.



Critics of economic analysis of law contend that this failure to
address the normativity of law provides ample grounds on which to
reject its adequacy as a theory of law. This argument, however, does
not satisfactorily address two questions.



To understand the first question, recall that, in the projects of
policy analysis and political economy, micro-economic theory serves as
a positive theory of behavior. For the critics' objection to
apply, then, the normativity of law must have behavioral implications.
Legal obligation thus must influence behavior. Whether the economic
theory of behavior can accommodate legal normativity must depend on
what behavior that normativity induces. 



Philosophers, however, have not addressed this question. Their
investigations of practical reason generally and of legal reasons in
particular typically understand their inquiry as setting the
requirements of practical rationality not as being an actual theory of
behavior.



The second question arises once the implications of legal normativity
for behavior have been identified. Can the economic theory of behavior
accommodate the requisite normative behavior?
"Accommodation" in this context means that economic theory
can generate models that predict the behavior that a legal obligation
induces. Clearly, standard economic models do not attempt to
accommodate normativity. The economic theory of behavior, however, is
very flexible. Section 4.3 suggests some basic strategies that
economic theorists might adopt to accommodate normativity. 



To set the stage for this analysis, we first set out a simple example
of choice against which to assess different understandings of
behavior. We then consider why philosophers of law and lawyers
generally might think that law provides non-prudential reasons for
action.


## 4.1 Interpreting Choice



Consider Liza who has gone to a restaurant with friends. The menu
offers two main courses: beef and tofu. Liza must choose one. Suppose
Liza chooses tofu. How can we understand or rationalize her
choice?



A rational choice explanation will refer to her preferences, her
beliefs, and the environment in which she chooses. Liza might choose
tofu because she prefers tofu to meat. She might choose tofu because
she prefers healthy meals to unhealthy meals and she believes that
tofu is healthier than meat. She might choose tofu because she is
budget-constrained and tofu is cheaper than meat. Or Liza might have
more complex preferences. Perhaps all of Liza's friends have
chosen tofu and Liza has a taste for conformity.



Suppose, however, that Liza believes that it is wrong to inflict pain
on sentient creatures. She believes she has a moral obligation not to
eat meat. She thus chooses tofu. How does the rational choice model
accommodate this belief? It might accommodate this moral attitude by
incorporating it into her preferences in one of two ways. Liza, that
is, might internalize the norm in two distinct ways. Liza might
develop a substantive preference for tofu over meat. She would
internalize the *content* of the norm. On this account, if her
moral view changed, Liza's preference for tofu over meat would
remain. The moral norm, or Liza's endorsement of that norm,
would not have had any (direct) influence on her behavior. 



Or she might have a preference for norm compliance; that is, all other
things equal, she prefers actions that conform to the norm to actions
that violate it. One might say that Liza incurs a "cost"
from non-compliance with a norm. Then, if she prefers meat to tofu,
all else equal, she will choose tofu when the cost of norm violation
is sufficiently high. If Liza's moral views changed, she would
revert to eating meat. The two forms of internalization thus yield
different behavioral predictions. This account of normativity,
however, has an ad hoc quality to it as the cost of norm violation is
not directly observable. 


### 4.2 Legal Form



Legal regulation takes a number of distinct legal forms to which
legislators and judges pay strict attention. The state might impose,
on the same conduct, one or more of the following forms of regulation:
criminal penalties, a civil fine, an administrative fine, a tax, a
license, or a private civil action. Different forms of regulation
clearly have different expressive features. But typically the legal
profession and the public may think the different forms have different
behavioral consequences. These different behavioral consequences may
suggest that the law, or at least the form the legal regulation takes,
provides distinctive reasons for action.



Contrast, for example, enforcing an air pollution emission standard
through a criminal penalty rather than a tax. The two regulatory
regimes clearly express different attitudes towards emissions. The
criminal penalty *prohibits* emissions (above the stated
standard); the tax *permits* emissions (above the stated
standard). Lawyers tend to believe that a criminal prohibition will
reduce emissions more than the tax. 



Similarly, a city might redesignate a section of the curb from
"no parking," enforced by an administrative fine to
metered parking. The "no parking" designation prohibits
parking in the identified zone while meters permit parking upon
payment of the (licensing) fee. The city presumably expects that,
under "no parking", the stretch of curb will remain clear,
while it expects cars to use the same stretch when parking is metered.
The distinction between a prohibition and a permission clearly has
expressive
 content.[17]




These legal forms, of course, differ not only in their expressive
content but also in their substantive features. Monitoring for
criminal violations differs dramatically from monitoring for
regulation through a private civil action. In the latter case, private
citizens identify violations of the standard; in the former,
government officials police the regulated conduct. Further, the fora
in which violations are adjudicated may differ not only in the burdens
and standard of proof but also in the identity of the fact-finder that
might be an administrator, a judge or a jury (with varying decision
rules from majority to unanimity). Finally, the size and nature of
both the formal and informal sanction may vary. The policymaker sets
the formal sanction but the informal sanction arises from the informal
social response to violation of the norm. Violating a criminal law
typically provokes more severe social sanctions than violating an
administrative regulation or a norm enforced only through private
civil actions.



These institutional variations suggest that the rational policymaker
will determine that different forms, even if they impose identical
sanctions, will create different expected penalties for violating the
norm and give rise to different distributions of type 1 and type 2
errors, where a type 1 error incorrectly rejects plaintiff's
claim and a type 2 error incorrectly accepts it. The different legal
forms will thus create different incentives and induce different
behaviors, even when imposed sanctions are identical. Moreover, the
policymaker might in fact choose among these forms on the basis of
these different incentives and on the relative importance of Type 1
and Type 2 errors.



The elaborate differences among these legal forms thus make it
difficult to isolate a distinctive account of legal normativity. The
subtle variations in form have consequences for behavior on the
economic account that might explain variations in responses to the
various legal forms that we might have initially attribute to
normativity.


### 4.3 Strategies of Accommodation



As the last subsection noted, prudence can explain differences in
behavior that result from the different legal forms. Each form creates
a different expected sanction and an economically rational actor will
respond differently to these different expected sanctions. Moreover,
any differences in expected behavior might be attributable to
differences in the policymaker's objective function. Different
burdens of proof generate different distributions of error types. A
policymaker might tolerate more deviant behavior to ensure that
innocent people do not suffer
 penalties.[18]



Nevertheless, one might intuitively expect greater compliance to
emissions standards regulated through a criminal penalty than to
emissions standards regulated by a tax, even if the expected payment
for each available action were identical under the two regimes. This
intuition runs counter to the rational choice explanation. Only if
this intuition is correct could we say that the law provides
non-prudential reasons for action. 



The economic model of behavior, however, is extremely flexible. It
requires careful consideration to conclude that the model cannot
accommodate "normativity." This section assesses the
techniques available to the economic model of behavior to determine
the extent to which ideas of normativity may be accommodated.



From the philosophical literature on obligation and the very limited
economic literature on obligatory behavior, one may extract four
possible mechanisms through which obligation influences individual
action. The first mechanism simply reduces obligations to the standard
model of (narrowly) self-interested rationality. The discussion of
legal form above suggested how this reduction might proceed. Further
methods of reduction are discussed below. 



Second, one might weaken the assumption of full rationality. Boundedly
rational agents may have reason to follow rules and these rules,
though perhaps best treated as rules of thumb, might cause the agent
to mimic normative behavior. 



The third mechanism identifies preference as the pathway through which
obligation operates; obligations motivate when they are
"internalized." Internalization may take at least two
different forms. One form dissolves the normativity of law while the
other has an *ad hoc* quality. 



Finally, obligation may influence the agent's deliberative or
decision process. One might understand this mechanism as treating the
agent's preferences as context-dependent; how she ranks
alternatives depends on whether (and which) obligations apply. I
consider each of these mechanisms in turn.


#### 4.3.1 Reduction



Economic analysis of law easily accommodates sanction theories of
duty. The analyst here simply reduces the sanction theory to
self-interested preference maximization. This approach, as noted
above, adheres to the assumption that agents are (narrowly)
self-interested. It recognizes, however, that a legal rule may either
provide the agent with relevant information (and hence change her
beliefs) or place a price on certain actions. The price a legal rule
places on conduct will depend on the legal form as the legal form
determines the monitoring mechanism and the burdens of proof, both of
which determine the probability that the legal sanction will be
imposed. 



It is also straightforward to see how a legal rule might provide
information that alters the agent's beliefs about the likely
outcome of various courses of action. Consider, for example, a driver
on a mountain road who encounters a sign that indicates an impending
curve on which the speed limit has been lowered to 15 miles per hour.
In light of this sign, the agent should adjust her beliefs about the
highest safe speed at which she can negotiate the road. Regulations of
health and safety may operate in a similar way. 



A third way that obligation might be reduced to self-interest relies
on repeated interaction. Agents with foresight understand that
behavior that deviates from the legal norm today may have consequences
for their subsequent dealings in the future. This harm arises even
when the legal sanction is not imposed. The threat of future harm thus
may induce compliance with a legal norm even in the absence of
sanction. 



Finally, in many instances, rational agents need to coordinate their
actions. In coordination games, for example, each agent ranks the
different possible outcomes identically; but, when multiple equilibria
exist, the agents may fail to coordinate on a desirable equilibrium. A
legal rule may publicly announce an equilibrium to play and that
announcement may coordinate the agents' actions. 



Announcement of a legal rule in this context can coordinate the
players' actions. It gives each agent a reason to choose as the
rule dictates if it affects the individual's beliefs concerning
which strategy the other agents will adopt. On this account, the
social fact that individuals accept the law provides each individual
with a reason to act. This reason is independent of any sanction that
the law might impose for non-compliance. Moreover this reason is
prudential in that it best promotes the agent's own welfare. Of
course, one might say that the reason is also moral as it best
promotes the well-being of all. This coincidence between the moral and
prudential results from the coincidence of interests of all agents.



#### 4.3.2 Bounded Rationality



A second route to the accommodation of normativity within the economic
model acknowledges that individuals are boundedly rational. The
assumption of bounded rationality admits the possibility that agents
should follow rules. A legal rule would then be justified, in a manner
consistent with Raz's [1979, 1986] account of authority, when
adherence to the rule improved the decision making of the agent.



In the simplest model in which such an account exists, agents face a
cost of deliberation. The more complex the deliberative calculation,
the higher the costs the agent incurs. When the marginal cost of
deliberation is sufficiently high, the agent might do better to follow
a rule that quickly, and therefore cheaply, identifies a good but not
optimal
 action.[19]
 If the expected benefit from choosing the optimal action (relative to
the good action) is less than the cost, it is prudent for the agent to
adopt the rule of thumb. More sophisticated accounts of an economic
rationale for rule-following rely on more complex models of bounded
rationality. 



To complete an economic account of the authority of law requires that
one explain why the agent should consider legal rules as the relevant
rules to which she should defer. One might argue that those who
promulgate legal rules have special expertise that makes it likely
that they will enact rules that are better than the rules that the
agent herself would formulate. For some legal rules--technical
rules concerning health and safety promulgated by administrative
agencies--the argument may have merit. After all the decision at
issue depends on a mass of technical data that is not easily
assimilable or manipulable. For many other legal rules promulgated by
legislatures and courts, however, the argument may not apply.



Several other features of this argument merit attention. First, it
parallels the argument for authority offered by Joseph
 Raz.[20]
 As in Raz's argument, authority is specific to legal rules
rather than to law in general. An agent might believe the law more
expert than she with respect to some decisions but not with respect to
other decisions. In fact, agents with different expertise themselves
would find different legal rules authoritative.



Second, on this account of authority, the legal rule affects the
agent's deliberation not because of the sanction for
non-compliance but because compliance with the legal rule, even in the
absence of a sanction, is in the agent's best interest. This
feature of the account of authority conforms to notions, developed
further below, of the way in which rules enter the deliberative
process. But this feature also limits the applicability of the account
to those legal rules that bear on the agent's immediate
interest. Many legal rules direct the agent to adopt actions that
raise her own costs; in the absence of a sanction for non-compliance,
her own interest would dictate non-compliance. For example, a rule
requiring that an agent adopt due care in certain activities may raise
the agent's
 costs.[21]



The prudential account of authority outlined above primarily addresses
private individuals. One might ask the parallel question concerning
the obligation to obey the law of public officials. In some respects,
this question has greater significance than the question concerning
private individuals because many acknowledge that the motivation of
private individuals to obey the law is usually prudential, the desire
to avoid sanctions. Moreover, on some jurisprudential accounts, most
notably the legal positivism of H. L. A. Hart, the attitudes and
behavior of public officials determine the existence and nature of
law.



The economic account of authority, however, does not provide a
compelling explanation of official behavior. Consider how the economic
account applies to public officials. The relevant obligations here are
the official obligations of the individual: the judicial obligation to
decide cases according to the dictates of *stare decisis* and
other obligatory practices; or the executive official's
obligation to apply the law. Two difficulties arise immediately. How
is compliance with these official obligations in the
individual's interest? Why must the agent follow a rule rather
than optimize in each instance? This second difficulty is less
troublesome than the first; Ronald Heiner [1986], for example, has
offered a prudential account, grounded in bounded rationality, of the
judicial obligation to adhere to *stare
 decisis*.[22]




One might attempt to resolve the first difficulty concerning the
agent's interest by arguing that compliance with official
obligation is in the individual's interest because she desires
to maintain her employment. But this explanation rests on an incentive
argument. The sanction of dismissal induces the compliance rather than
normative motivation to comply with one's obligation; it is
another prudential account. The prudential account of authority thus
fails to overcome this first difficulty. It is not clear then that the
prudential account of authority can ground the normativity of law.


#### 4.3.3 Obligation within Preference



Economic theorists offer a highly abstract account of individual
decision-making. Its abstract nature renders the theory remarkably
flexible. As it is an account of instrumental rationality, it can
accommodate many different substantive accounts that differ in their
specification of what ends are rational or, more simply, whatever ends
the agent happens to have. 



Briefly, the economic explanation of decisions states simply that the
agent chooses the feasible option that she ranks most highly according
to her "preferences." "Preference" is a
technical term, not a psychological concept. By definition, a
preference is a linear order over some domain of objects. A linear
order is complete, asymmetric, and transitive. Less formally, we may
understand preference as a relation "at least as preferred
as" over the relevant domain. Completeness requires that, for
any two objects *a*, *b*, either *a* is at least as
preferred as *b* or *b* is at least as preferred as
*a*. Asymmetry states that if *a* is at least as preferred
as *b* and *b* is at least as preferred as *a* then
*a* is indifferent to *b*. Finally transitivity requires
that if *a* is at least as preferred as *b* and *b* is
at least as preferred as *c* then *a* is at least as
preferred as *c*. 



An agent typically has a number of competing ends. One can interpret
the agent's preferences as her all-things-considered ranking of
all possible outcomes. One might then consider the obligations under
which the agent finds herself as among the agent's competing
"ends". The question of compatibility between economic
rationality as preference and obligation then reduces to the question
of whether obligations may be integrated with the other concerns of
the agent into an all-things-considered ranking that satisfies the
preference axioms.



Integrability presents a serious challenge to the economic account of
rationality. Nevertheless, the theory has substantial resources to
meet this challenge. To illustrate, consider Neumann's [2007]
analysis of the famous example used by Anand [1993] and Sen [1993]. In
this example, they consider an agent whom we shall call Freddie.
Freddie is Liza's guest for dinner and he has been offered a
plate with three slices of cake on it. One slice is small, one medium,
and one large. Freddie has two concerns: he wants the largest piece of
cake available and he wants to conform to the social norm "never
take the largest piece". In Sen's and Anand's
account, Freddie cannot integrate these two concerns into a preference
because his choices violate a condition of contraction consistency
which is necessary for transitivity. That is, from the pair (small
slice, medium slice), Freddie chooses the small slice but from the
triple (small slice, medium slice, large slice), Freddie chooses the
medium slice. These choices, however, are inconsistent only under the
description given. 



Sen and Anand use the absolute size of the pieces of cake to describe
Freddie's options. As Neumann points out, this description
ignores a decision relevant aspect of Freddie's choice
situation; Freddie cares about the *relative* size of the pieces
of cake. Freddie's choices under a description using relative
sizes conform to the axioms defining a preference.



Will appropriate redescription resolve all conflicts between
"preference" and "obligation"? A related
approach to this problem suggests that the answer to this question
depends on the structure of the norm. Baigent [2007] and Xu [2007]
consider the rationalizability of choice when the agent faces
normative constraints. In these situations, the agent, facing a set of
feasible options, first eliminates those acts that are normatively
prohibited. He then chooses the best available option from this
restricted set of feasible options. Whether we can attribute an
all-things-considered preference to the agent depends on the structure
of the obligation and the detail of the agent's preferences.



#### 4.3.4 Deliberation.



Rationality in economics is instrumental; the agent's ranking is
taken as given and as fundamental. The agent does not deliberate about
her
 ends.[23]
 Accounts of practical reason, however, often involve deliberation
over ends. The economic account of rationality may have less success
in accommodating these accounts of obligation.



Raz [1975] provides an account of practical reasoning in which
obligation plays a central role. On this account, obligations are
exclusionary reasons that provide the agent with both a first-order
reason to take the obligatory act and a second-order reason not to
consider some set of first-order reasons actions. This structure
differentiates obligations (or prohibitions) from taxes (or
permissions).



A simple example illustrates this logic. Consider a prohibition on
emitting more than 75 parts per billion of sulfur dioxide per hour
into the air. This prohibition gives a power-generating plant reason
not to emit more than that amount of sulfur dioxide per hour. But it
also excludes a variety of other first-order reasons for action from
the plant's consideration. On Raz's account, the firm
should not act on, for instance, the fact that emitting more than 75
parts per billion of sulfur dioxide per hour would increase its
profits (or lower its costs). The obligation would not, presumably,
exclude reasons that arose from a situation in which a temporary
failure to exceed the emissions standard posed a substantial threat to
the health and safety of employees. 



A tax on sulfur dioxide emissions above 75 parts per billion per hour,
by contrast, provides the firm with only a first-order reason for
action. The firm regards the rate of taxation as a price on such
emissions and can weigh that price against its other costs and
benefits. On this account, then, a tax and a fine that create
identical expected sanctions and the same distribution of type 1 and
type 2 errors should induce different behaviors. The fine will never
lead to higher emission rates and, under some circumstances, should
induce lower emission rates. 



Can the economic theory of rationality accommodate this understanding
of normativity? Arguably, the *ad hoc* assumption that the
agent incurs a cost when she fails to comply with a legal duty
captures this idea. This *ad hoc* cost implies that ordinary
costs and benefits must be sufficiently large to outweigh the cost
imposed by the prohibition. But this approach fails to capture some of
the potential subtleties of an exclusionary reason as the obligation
may not depend on the size of the costs (or force of the reason) but
on the nature of it. An obligation may exclude some types of costs, no
matter how large, but not exclude other types of costs, no matter how
small. 



Alternatively, one might understand the agent's preferences as
context-dependent. The agent's ranking of alternatives depends
on which set of obligations apply to her. In each situation, she faces
a different set of reasons for action and she must adjust her ranking
of her options to reflect these different reasons.


## 5. Theories of Adjudication



Adjudication plays a central role in legal institutions and in legal
philosophy. This centrality extends beyond the articulation of
theories of adjudication. Debates about the concept of law, for
instance, generally highlight the role of the judge. For Hart, judges
are an important subset of those public officials whose social
acceptance of a rule of recognition constitutes the community's
legal system. For Dworkin, the theory of adjudication itself
determines the content of the law. 



Each strand of economic analysis of law has, at least implicitly,
articulated a theory of adjudication. Doctrinal Analysis as a theory
of adjudication was discussed in section 2.2. In this section, I
consider the theory of adjudication implicit in each of the other two
strands of economic analysis of law. 



Each theory occurs at the level at which the strand finds the law
instrumental. Policy analysis offers a normative theory of
adjudication that addresses the judge; it specifies that she should
decide cases to maximize social welfare. Constitutional political
economy, by contrast, offers a normative theory of court structure. It
specifies the design of adjudicatory structures within which judges
will, of necessity, act in a self-interested fashion. We briefly
discuss each theory in the following subsections. 


### 5.1 Adjudication in Political Economy



As noted earlier, the political economy strand of economic analysis of
law itself contains two strands that are in tension with each other.
On the one hand, the radical political economy strand seeks only to
explain legal phenomena rather than to prescribe either the structure
of legal institutions or the content of particular legal rules. One
might find within this strand of political economy a positive theory
of adjudication but not a normative theory. Indeed, the positive
theory advanced argues that judges seek to promote their interests.
Usually, these interests are defined as policy interests, that is, an
interest to promote particular policies.



The second strand of political economy, *constitutional political
economy*, does have normative aims. It assumes that political
actors will act in a self-interested fashion *within* existing
political institutions but that agents will act more impartially in
the *design* of the political institutions within which they
will
 work.[24]
 A normative theory of adjudication does emerge from this strand of
political economy, but it differs significantly from the normative
theory endorsed by the policy analysis strand of economic analysis of
law. For constitutional political economy, a normative theory of
adjudication must be a structural one; it should describe the
structure of adjudication. The theory thus cannot dictate directly
judicial motivation because, according to political economy, judges
will always act self-interestedly. Adjudicative institutions, however,
can be designed to align better the interests of judges with the
interests of the designer of the constitution.



In 1975, Landes and Posner offered a justification for the
independence of the judiciary that is often understood as a normative
theory of adjudication within the tradition of constitutional
political economy. On the account of Landes and Posner, an independent
judiciary serves the interest of legislators who seek to impose their
policies on the jurisdiction for periods that exceed the length of
their majority in the legislature. As a consequence, they find it in
their interest to have the judiciary enforce the original bargain
struck in all legislation.



This argument contains a normative theory of statutory interpretation.
Judges ought to enforce the bargains reached by the legislature that
enacted the statute. On this account, a judge ignores the views of the
current legislative majority. She also eschews interpretation of the
statute in terms of her own policy preferences.



One should note that, from the perspective of constitutional political
economy, the argument of Landes and Posner is incomplete. They ground
their theory of judicial independence in the interests of legislators.
The interests of legislators within extant legislative institutions
may not coincide with the interests of the constitutional
designer.


### 5.2 Adjudication in Policy Analysis



The normative theory of adjudication implicit in both policy analysis
and doctrinal analysis follows from Posner's early claim that
the common law ought to be efficient. The theories are essentially
identical. The two projects differ only in the seriousness with which
they take actual behavior. Policy analysis rests on the behavioral
claim and hence must look to the actual behavior induced by legal
rules, while doctrinal analysis often seems to rely only on
"efficiency" within some specified model.



A normative theory of adjudication was among the earliest claims
advanced in the economic analysis of law. Posner [1973, 1979, 1980,
1985, 1990, 1995] asserted claim VI in the introduction: the common
law *ought* to be efficient. He interpreted efficiency as
"wealth maximization" but then interpreted wealth
maximization as "willingness to pay." This interpretive
stance yielded an argument that judges in (common law) cases ought to
choose the legal rule that maximized the ratio of benefits to costs as
measured by the sum of individual willingnesses to pay.



Posner's claim evoked great controversy in the late 1970s and
early 1980s. (See, e.g., *Symposium* [1980].) Twenty years
later, Kaplow and Shavell [2001] revived and revised Posner's
claim. The revision had two components. First, and most importantly,
they chose *welfarism* generally rather than cost-benefit
analysis in particular as the normative basis for adjudication.
Welfarism requires that evaluation depend solely on the well-being of
individuals. Cost-benefit analysis is thus a form of welfarist
evaluation; but Kaplow and Shavell's argument allows them to
avoid various criticisms of cost-benefit analysis. Second, Kaplow and
Shavell do not argue primarily for a normative theory of adjudication.
Rather, they contend that evaluation of legal rules and institutions
by scholars ought to be welfarist. They suggest, however, that judges
by and large have the same evaluative obligation as the third-party
analyst.


#### 5.2.1 A brief critique of cost-benefit analysis as a theory of adjudication



Cost-benefit analysis attempts to implement a Kaldor-Hicks evaluative
criterion. According to the Kaldor-Hicks criterion, a distribution of
goods (broadly understood) *X* is superior to a distribution of
goods *Y* if and only if there exists a third distribution of
goods *Z* such that (a) *Z* is a redistribution of the
distribution *X*; and (b) *Z* is Pareto preferred to
 *Y*.[25]



Cost-benefit analysis proceeds in two steps. First, for each
individual, it identifies a particular representation of the
individual's ordinal ranking of the options open to the policy
maker. Second, it aggregates these representations of each
individual's preferences into a social ranking.



The first step is unproblematic. Consider agent *K*. *K*
has preferences over states of the world. A representation of these
preferences begins with a baseline policy and ranks all policies
relative to the baseline. Specifically, it assigns a number to each
state of the world such that *K* prefers state *X* to
state *Y* if and only if the number assigned to state
*X* is higher than the number assigned to state *Y*.
Cost-benefit analysis defines states of the world as (policy, wealth)
pairs and defines the agent's willingness to pay for a move from
state *X* to *Y* as the change in wealth in state
*Y* that would the agent indifferent to the state *X*.
This procedure thus links the range of numbers that the agent may
assign to the agent's wealth as willingness to pay is defined in
part in terms of the agent's ability to
 pay.[26]
 The procedure for assigning numbers on the basis of an
individual's willingness to pay in fact yields a representation
of that agent's preferences. Willingness to pay is a utility
function that accurately represents the agent's (ordinal)
preferences over states. Notice, however, that, if the agent chooses a
different baseline policy, the numbers, though ordered identically,
will not be the same as those derived from the original baseline. (One
sees this immediately when one notes that the baseline policy always
receive a value 0.)



The second step of cost-benefit analysis is more problematic. To
aggregate the individual willingnesses to pay, cost-benefit analysis
simply sums the individual willingnesses to pay. One can see
immediately several difficulties with this procedure. First, each
ranking is ordinal; the numbers have no significance beyond the order.
Suppose that, using the status quo Q as a baseline, *K* assigns
a number 2 to policy *X*, a number 4 to policy *Y* and a
number 16 to policy *Z* while, when using policy P as a
baseline, she assigns a number 3 to policy *X*, a number 9 to
policy *Y* and a number 27 to policy *Z*. As the
representations are ordinal, one cannot conclude anything about
*K*'s intensity of preference; her Q-based representation
of her preferences "assesses" the difference between
*Z* and *Y* as six times the difference between
*Y* and *X* while her P-based representation of her
preferences thinks the difference between *Z* and *Y* is
only three times the difference between *Y* and *X*. not
prefer *Z* to *Y*. The choice of baseline may thus
affect the choice of policy.



Second, cost-benefit analysis adopts a method of interpersonal
comparisons of well-being that is particularly unconvincing.
Interpersonal comparison of well-being requires that one identify the
appropriate representation of each individual's preference
ordering and compare those representations. Cost-benefit analysis,
however, does not identify representations on moral or political
grounds; rather it chooses the representations that contingently arise
from the actual distribution of wealth and income in the
 society.[27]
 If Tom is poor while Bill is wealthy, it is unclear why the
representations of the well-being of each that derives from
willingness to pay provide interpersonally comparable measures.
Equally, if Tom and Bill are equally wealthy but Tom is disabled and
Bill is not, the willingness to pay of each may still not be
interpersonally comparable.


#### 5.2.2 A Structural Critique of Welfarist theories of adjudication.



One might construct a normative theory of adjudication at either of
two levels. First, one might take as given the general structure of
adjudication within a particular judicial system and ask what
obligations the judges within that system ought to have. Second, one
might more fundamentally design the judicial system from scratch. On
this second account, the institutional environment in which judges act
as well as the obligations of judges within that institutional
environment would be subject to evaluation.



Most normative theories of adjudication are of the first type. They
take the institutional structure in which adjudication occurs largely
as given and then identify the obligations of judges within that
system. Phrased differently, normative theories of adjudication are
interpretive of an ongoing practice rather than efforts to design a
practice from scratch. Welfarist theories of adjudication face several
difficulties when understood as interpretive theories of existing
(common law)
 practice.[28]



First, the structure of adjudication does not generally provide
adequate or appropriate information for the selection of rules that
maximize social welfare. Adjudication in a common law system usually
focuses on a past transaction between particular parties. This
transaction may not be typical of transactions that were litigated; it
certainly will not be typical of the entire population of transactions
that a rule would govern. Under a given rule, for instance, the set of
transactions that do not lead to litigation are likely to differ
systematically from the set of transactions that do give rise to
litigation. Equally important, different legal rules are apt to
generate different sets of transactions. The current structure of
adjudication does not provide any information that would help a
decision maker assess these differences across potential legal
rules.



Second, the selection procedure for judges does not identify
individuals with the appropriate training and background to make
accurate calculations of social welfare. Judges in common law
countries have generally not been trained systematically in economics
and statistics, two disciplines necessary (but not sufficient) for the
determination of social welfare under alternative legal rules.



Third, and related, judges usually face severe constraints in the set
of legal rules they may consider in any adjudication. When confronted
by a tort case, for example, the court usually considers a limited
number of legal regimes; perhaps it will reformulate the standard of
care or shift from a regime of negligence to one of strict liability.
A court, however, is unlikely to adopt a complex scheme of no-fault
insurance or to impose a different insurance scheme, even though these
more radical transformations of social institutions would provide
higher overall welfare.


## 6. Evaluation of Legal Rules and Institutions



The evaluative tradition in economics is resolutely welfarist. That
tradition extends to the policy analysis branch of economic analysis
of law. In the prior section, we considered the manifestation of this
tradition in the advocacy of cost-benefit analysis as a normative
theory of adjudication. In this section, we consider arguments for
welfarism as the sole evaluative standard against which to appraise
legal rules and institutions. 



The critique of cost-benefit analysis described in section 5.2.1 was
directed against cost-benefit analysis, a specific and concrete form
of welfarism developed to implement the more abstract evaluative ideas
underlying welfarism. Objections to this specific instantiation of
welfarism do not necessarily run against the more general class of
evaluative criteria. Similarly, the critique described in section
5.2.2 focused on the institutional structure of adjudication; though
this structure may be hostile to an implementation of a welfarist
theory of adjudication, it has no bearing on the appropriate criteria
against which a third party should assess legal rules and
institutions. 



The discussion in this section reviews the debate over whether the
evaluation of legal rules and institutions should rely *only*
on welfarist criteria. As noted earlier, Kaplow and Shavell [2001]
offered an extensive argument for welfarism as the sole criterion.
Their argument has several
 elements.[29]
 The first element identifies an individual's well-being with
her preferences. Thus, an individual *K* has greater well-being
in state *X* than in state *Y*, if and only if she
prefers state *X* to state *Y*. In the second, key
element of the argument, welfarism interprets the agent's
preferences as her all-things-considered ranking of alternatives. This
step thus incorporates within the agent's preference ordering
anything that the agent considers relevant to her decisions.
Consequently, the claim about an agent's well-being now becomes:
*K* prefers state *X* to state *Y* if and only if
*K* believes, all things considered, that state *X* is
better than (or ought to be promoted rather than) state *B*.




*K*'s all-things-considered judgments, of course, will
included many considerations that, in ordinary language, are not
usually considered as in *K*'s self-interest or even as
contributing to her well-being. So, for example, her
all-things-considered judgments will incorporate concerns for the
well-being of others as well as considerations of justice and
deontological constraints on action. Section 6.1 discusses the
counterargument that an individual's concerns for justice and
her endorsement of deontological constraints cannot be integrated into
an adequate concept of well-being.



Kaplow and Shavell's argument for the exclusivity of welfarism
as an evaluative criterion rests on a third leg. The argument contends
that use of any non-welfarist criterion is incompatible with the
Pareto criterion. Section 6.2 accepts this claim for purposes of
argument. The discussion then points out that the Pareto criterion
conflicts with principles of rationality, valuation, liberty, and
responsibility that have an equally strong
 appeal.[30]
 It is thus not clear that we should accept the Pareto criterion and
reject these others principles.


### 6.1 Preference and Well-being



Call an ordering that incorporates every consideration that the agent
views as relevant to her decision "an extended preference
ordering". Kaplow and Shavell include the agent's moral
concerns in this extended preference ordering. We may call this
approach the "strategy of incorporation." 



A complete argument that the extended preference ordering does not
correspond to a morally compelling conception of well-being would
require articulation of the concept of well-being, a task well beyond
the scope of this entry. Here we outline two formal arguments against
the strategy of incorporation that treats the agent's moral
concerns, her views about equality, fairness, and distributive and
corrective justice more generally, as elements of well-being.



We broached the first formal argument in section 4. There we noted
that not every norm could be integrated with self-interested concerns
into an all-things-considered set of judgments that satisfied the
formal conditions of a preference. To succeed, the strategy of
incorporation must show that each of the agent's moral
"tastes" or concerns have a normative structure that is
compatible with her underlying, self-interested preferences. The
strategy of incorporation thus might fail because of the structure of
the obligations that the agent endorses.



Second, a welfarist theory distinguishes between the well-being of
each agent and the criteria that determine the structure of the social
welfare
 function.[31]
 The theory, that is, distinguishes what makes an individual's
life go better and the concerns that determine how one integrates the
well-being of individuals into "social welfare." These
latter concerns weigh the well-being of individual *J* against
the well-being of individual *K*. Consider two states of the
world *s* and *t*. Agent *J*'s well-being is
higher in state *s* than in state *t* while agent
*K*'s well-being is higher in state *t* than in state
*s*. To rank the two states, society must determine the relative
importance of the well-being of the two individuals. 



Moral norms perform precisely this function. A moral norm determines
when the well-being of agent *J* should take precedence over the
well-being of agent *K*. Indeed, we say that agent *J* has a
*right* against agent *K* precisely when we think that the
decisions or choices of agent *J* should prevail over the
decisions or choices of agent *K*. The moral concerns of each
agent thus reflect the agent's views about the structure of the
social choice function, not (necessarily) her views about what
constitutes her own well-being. 



Of course, an agent might believe that her life goes better if she
lives in a more egalitarian society. But she might also believe to the
contrary that her life would go better if she lived in a more
hierarchical society. Then, the social structure would affect the
agent's well-being. The choice of social structure, however, is
not dependent on the agent's well-being. The structure of the
social choice function rather determines the social structure. Thus,
an agent may believe that an egalitarian social welfare function is
appropriate (or perhaps even "better than" a hierarchical
social welfare function, but she may nonetheless believe that her own
well-being would be higher in a hierarchical society than in an
egalitarian one. 



The social welfare function resolves conflicts of
"interest" between individuals. Moral disagreements,
however, reflect not conflicts of interest but a dispute over how such
conflicts should be resolved. The resolution of a moral conflict
determines whose well-being counts not how much well-being the agent
has. The strategy of incorporation confuses these two
 concepts.[32]



Many of the concerns that, under the strategy of incorporation, are
included in an individual's extended preference ordering thus
bear on the structure of the social choice function; they do not
necessarily make the agent's life go better. Concerns for
distributive justice, for example, reflect moral judgments about how
to integrate different distributions of well-being. They do not
reflect judgments about how well-off each agent
 is.[33]
 Similarly, respect for deontological constraints on action reflect
the judgment that the effects on the well-being of the constrained
agent do not bear on our assessment of the social state. 



The social welfare function aggregates or integrates the well-being of
each individual in society into a social ranking of states. It does
not integrate or aggregate the differing views of the individuals
concerning the appropriate social welfare function. Conflicts over the
appropriate social welfare function must be resolved through some
separate process. Society for example might vote on which social
welfare function to adopt. Such a vote might be justified on epistemic
grounds; it cannot be justified on social welfare grounds. We do not
choose our social welfare function in order to maximize social
 welfare.[34]



### 6.2 The Pareto Criterion



Let us first define the Pareto criterion. Consider a society of n
individuals, each of whom has a well-defined preference over all
possible states of the world. The Pareto criterion states that a state
of the world *x* is socially better than a state of the world
*y* if and only if each individual considers state *x* at
least as preferred as state *y* and at least one person strictly
prefers *x* to *y*. It follows from this definition, of
course, that, if each individual prefers *x* to *y*, then
*x* is socially better than *y*. 



The Pareto criterion has a strong intuitive appeal. If everyone agrees
that a state *x* is preferred to a state *y*, certainly the
collective assessment must rank *x* more highly than *y*.
The Pareto criterion moreover appears to be weak, i.e., to impose few
constraints on social choice. After all, each member of the society
will only rarely rank two alternatives as every other member of the
society. Nevertheless, the Pareto criterion has strong implications
for the aggregation of individual judgments. Indeed, as summarized
below, the Pareto criterion is inconsistent with a large number of
other principles, each of which also has strong intuitive appeal. 



Perhaps the inconsistency that would most disconcert an economist
arises between the Pareto criterion and the demand for aggregate
rationality under uncertainty. Consider again our society of n
individuals. Assume now, though, that society must choose among a
number of policies, the consequences of which will depend on the
underlying but unknown state of the world. Each individual has
preferences over these policies that satisfy the axioms of subjective
expected utility theory. Consequently, one may represent each
individual's preference over actions by a set of preferences
over consequences and a set of beliefs (that satisfy the probability
axioms) over states of the world; moreover, the individual prefers
policy *p* to policy *q* if and only if the expected utility
from policy *p* exceeds the expected utility from policy
*q*. 



Aggregate rationality imposes two constraints on the construction of
collective preference over policies. First, it demands the
construction of a collective preference over policies that also
satisfies the axioms of subjective expected utility theory. Second,it
demands that each the collective preference be responsive to the
preferences of the members of the collective. This demand implies,
when individual preferences satisfy the axioms of subjective expected
utility theory, that each component of the representation of
collective preference be responsive to the corresponding component of
the representations. Both the collective utility function and the
collective beliefs must be responsive to the individual utilities (or
preferences over outcomes) and the individual beliefs about the
likelihood of states of the world. 



Suppose, in addition, that we demand that the collective preference
satisfy the Pareto criterion. That is, if each individual in society
prefers policy *p* to policy *q*, then society collectively
must prefer *p* to *q*. Unfortunately, Seidenfeld, Kadane,
and Schervish [1989] have proven that, if at least two individuals
both rank two consequences differently and assess the likelihoods of
two states of the world differently, then society cannot
simultaneously satisfy the Pareto criterion and the demands of
aggregate rationality.



The Pareto criterion also conflicts with substantive moral claims.
Larry Temkin [1993], for example, has argued that the Pareto criterion
is inconsistent with the existence of communal goods. A communal good
is one that provides social value but does not improve the well-being
of any individual. A communal good, that is, is good for *us*
even though it is good for *no* individual. He offers equality
as an example. A society with equality of well-being, for instance,
might be better than a society in which individuals have highly
unequal levels of well-being even if each person in the unequal
society has higher well-being than she has in the more equal society.




Communal goods often seem scarce or improbable; how could something
that is good for us together be good for none of us in particular?
Many people, for example, reject either the claim that equality is a
communal good or that it is valuable at all. Our prior discussion in
section 6.1, however, suggests a host of potential other communal
"goods". There is a sense in which each of the
determinants of the structure of the social welfare function is good
for us without necessarily being good for anyone. At least for a
welfarist, the structure of the social welfare function is
constitutive of the good. Everyone might be "better off"
under a regime of slavery but that regime would nevertheless remain
worse than a free society.



The Pareto criterion is also inconsistent with three different aspects
of the value of autonomy: liberty, responsibility, and
self-governance. A formal argument underlies each of these claims.
Amartya Sen [1971] first articulated the conflict between the Pareto
criterion and liberty. He began from the standard social choice
framework developed by Arrow [1963] in which each agent has
preferences over final states of the world. He imposed two of the
Arrovian conditions, universal domain and the Pareto criterion, but
substituted the condition of minimal liberty for the other two
(non-dictatorship and independence of irrelevant alternatives).
Minimal liberty is indeed minimal; Sen required only that each member
in society was decisive over two alternatives. He then proved that one
could not construct a social preference that satisfied all three
axioms; the Pareto criterion and minimal liberty conflict.



The Arrovian framework, however, does not present the ideal
environment in which to study minimal liberty. An agent may have the
right (or in Hohfeldian terms a privilege) to determine a social
decision. Typically, though, he need not exercise his right. Or the
agent may be willing to trade or waive his right in exchange for some
benefit. Gibbard [1974] argued that the power to waive one's
rights undermined Sen's claim. Subsequent authors then
reformulated Sen's argument within a more suitable, game
theoretic framework. See, e.g., Deb, Pattanaik and Razzolini [1997].
The conflict thus persists in a more plausible and appealing formal
framework. 



In Hohfeld's taxonomy of legal rights, a legal duty is the jural
correlate of a legal right. We might similarly consider responsibility
the ethical correlate of liberty within the conceptual framework of
autonomy. Recent formal work has shown that this aspect of autonomy
also conflicts with the Pareto criterion. 



Sen defined autonomy as liberty understood as freedom to choose.
Autonomy as responsibility for one's choices and actions
represents the obverse side of this freedom to choose. Political
philosophers have examined this issue in their study of distributive
justice. Rawls [1971] famously argued that individuals were not
responsible for their innate talents. Dworkin [1981] extended this
argument through his distinction between "brute luck" and
"option luck". Distributive justice in both arguments
required insurance against bad realization of risks of "brute
luck" but responsibility for the bad realizations of option
luck.



Within economics, the study of responsibility has emerged from the
literature initiated by Duncan Foley [1967] and Hal Varian [1974] on
fairness. An allocation is fair if and only if it is Pareto efficient
and envy-free. An allocation is envy-free if no individual would
prefer the outcome assigned to another individual to the outcome
assigned to her. In an exchange economy, a competitive equilibrium
that results from an initial, equal allocation of resources is both
Pareto efficient and envy-free because each individual has the same
set of options available to her. The competitive equilibrium is thus
fair. 



In a production economy, however, a similar argument will fail if
individuals have different talents. The argument fails for two
reasons. First, talents are not transferable though, of course, we may
transfer money between agents. Second, when two individuals have
unequal talents, they face different sets of feasible options. The
more talented have better options and hence do better. The less
talented may envy them. As a consequence, no efficient and envy-free
equilibrium exists. 



These arguments apply to the more abstract concerns of distributive
justice and responsibility. The no-envy test outlined above combines
two distinct ideas. First, individuals with identical attributes for
which they are responsible should have identical well-being. Second,
individuals with identical characteristics for which they are not
responsible should receive identical compensation for their losses.
The first condition addresses option luck; the second brute luck. 



Fleurbaey [2008] comprehensively explores the tensions between these
two aspects of the no-envy test and between the no-envy test and the
Pareto criterion. The compatibility of these two conditions depends on
the nature of the correlation of these effects of brute and option
luck on the agent's well-being. If the well-being of agents with
bad luck is unusually responsive to their bad luck, no fair allocation
exists. The requirements of no-envy and the Pareto criterion again
conflict. 



We now turn to a third aspect of autonomy, self-governance. In the
context of collective action, self-governance refers to democratic
governance. The vast literature on social choice theory investigates
the relation of self-governance to the Pareto criterion in this
context. 



Various assumptions reflect the value of democratic governance in this
literature. The most minimal assumption is non-dictatorship. We may
interpret Arrow's initial result as demonstrating, for direct
democracy, a complex incompatibility between the Pareto criterion and
several other axioms including non-dictatorship, the axiom of minimal
self-governance. The complexity arises because we cannot easily
determine which of the several axioms is most fundamental. The
literature, for example, has investigated the importance of the axiom
of independence of irrelevant alternatives more thoroughly than the
Pareto criterion. This emphasis perhaps reflects the strong appeal of
the Pareto criterion. 



Representative democracy, however, presents the conflict more starkly.
In modern society, communal self-governance generally operates through
representative institutions. Individuals do not directly enact
substantive legislative programs. Rather, they elect representatives
to legislatures that then enact substantive legislative programs.
Phrased differently, election procedures are candidate-based rather
than assembly-based or program-based. Notice that this distinction
persists even in those states that have adopted party-list
proportional representation schemes. In these schemes, an individual
votes for a party rather than an individual candidate that has
endorsed a specific program. The election determines the party
composition of the legislature. Each contesting party then constitutes
a candidate. 



These candidate-based procedures, however, are inconsistent with the
minimal demands of communal self-governance. Benoit and Kornhauser
[2010] have proven that the only Pareto efficient, candidate-based
procedure is a dictatorship. Again the Pareto criterion conflicts with
a (minimal) requirement of communal self-governance or autonomy.


### 6.3 The Argument for Welfarism Revisited



The discussion in the previous section has not decisively demonstrated
that we should reject welfarism as the sole evaluative criterion for
legal rules and institutions. We have argued only that arguments that
rest on the intuitive appeal of the Pareto criterion are insufficient
to establish the welfarist claim. The Pareto criterion has great
intuitive appeal but it also has strong implications that bring it
into conflict with other principles that also have strong intuitive
appeal. 



Legal rules and institutions offer a comprehensive guide to and
regulation of social life. The intuitive appeal of various principles
may vary with the range of activity governed by the legal rule or
institution. The intuitive appeal of the Pareto criterion is strongest
in those areas of law that regulate corporate and commercial behavior.
Perhaps here, indeed, welfarist considerations should provide the sole
guide to the structure of legal rules and institutions. Election law
and laws regulating political speech, by contrast, may be legal
domains in which the appeal of principles of communal self-governance
dominate. In these areas, evaluation based exclusively on welfarist
considerations seems less appropriate. 



Controversies in many areas of law, however, implicate many of our
values. Environmental regulation, for example, clearly implicates
welfarist concerns. Regulation determines in part the relative costs
of production of various goods and services that contribute to
individual well-being. Environmental regulation, however, also clearly
implicates questions of autonomy. Productive activities may impose
unwanted risks on individuals that limit the exercise of the
individual's autonomy. Tort law perhaps raises these issues more
starkly. 



Similarly, we may understand conflicts over the appropriate tax and
social welfare policy as raising questions not only of efficiency but
also of autonomy as responsibility. Exclusive focus on welfarist
concerns distorts these policy debates by ignoring fundamental issues
that divide us.


## 7. Concluding Remarks



Though the controversy over economic analysis of law has waned, its
project continues to disquiet many scholars who study legal phenomena.
The prior discussion identifies two distinct sources for that
disquiet.



Many legal scholars object to the normative theory of adjudication
advanced by policy analysts. These scholars generally reject the
welfarism to which policy analysis is committed. The prior discussion
suggests, however, that a rejection of welfarism as a moral theory is
neither necessary nor sufficient for the rejection of the normative
theory of adjudication advanced by policy analysts. Moreover, the core
commitments and achievements of economic analysis do not lie in the
construction of a normative theory of adjudication. Rejection of the
economic theory of adjudication thus leaves the central elements of
policy analysis, political economy, and doctrinal analysis largely
intact.



The methodology of economic analysis of law poses a more significant
challenge to traditional accounts of law. Economic analysis of law
provokes disquiet because the model of self-interested maximization of
preferences apparently does not admit a concept of normativity but
explaining the normativity of law is a central pre-occupation of
philosophy of law. The logic of this commitment to self-interested
maximization of preferences would appear to lead to a denial of the
need for a distinct concept of law in the explanation and evaluation
of social institutions. As section 4 suggested, this denial of
normativity may only be apparent as the methodological resources of
economic analysis of law allow for at least some accommodation for the
incorporation of some normative reasons into the explanation of
behavior.



Economic analysis of law seeks primarily to explain how people behave
in response to legal rules and institutions. This core project of
economic analysis of law complements traditional legal theory with its
emphasis on the nature of law and its normative claims. Within
economic analysis of law, however, lies a more ambitious project that
would radically reconstruct the debate over the concept of law (as
sketched above in section 3.3). It replaces the debate over the
concept of law with two related inquiries.



The first inquiry is explanatory. It requires a concept of governance
that facilitates our understanding of how societies resolve problems
of adaptation, monitoring, application, and sanction. Governance
regimes include purely coercive regimes as well as regimes with some
normative aspect to them. It regards the debate over which of these
systems should be called "legal systems" as fruitless and
uninteresting. 



The second inquiry is normative and treats the term "law"
as an honorific or a term of commendation that we apply to some
governance structures. The value of legality, of course, is neither
clear nor uncontroversial. It requires much elaboration. However
elaborated, this approach treats law as an achievement of governance,
not a mode of governance.



These two conceptual inquiries intersect. An analogy with economics
may clarify the intersection. Economics at its core studies resource
allocation mechanisms. In so doing, economists have identified a
particular value, efficiency, that good resource allocation mechanisms
achieve or manifest. Economists then seek to identify the conditions
under which specific resource allocation mechanisms, such as
competitive markets, will realize efficiency. 



Economic analysis of law suggests a similar research project. First,
characterize governance structures. Next, specify the value of
legality. Finally, identify the conditions under which specific
governance structures realize the value of legality. This project thus
transforms the project of legal theory as currently understood while
nonetheless leaving past legal theory both comprehensible and fertile.
Traditional legal theory suggests how we might articulate both the
concept of governance and the concept of legality that economic
analysis seeks to develop and elaborate.