Edited by Robert E. Litan
Chapter 1: Is the Law Dynamically Efficient?
Robert E. Litan1 Arguably the most important intellectual development in legal scholarship and judicial decision-making over the past four decades has been the increasing use of economic modes of analysis in legal reasoning. From its initial use in antitrust law, where the relevant statutory language on its face had economic content, ‘law and economics’ has since spread into virtually every nook and cranny of the law. Every revolution, in thought and action, must start somewhere, and ‘law and economics’ is no exception. Its first practitioners sought to rationalize or encourage legal rules that promoted what economists call ‘static efficiency’ – or the allocation of resources that maximize the size of an economy at any given point in time. Initially, this meant that rules should be designed so that no person or firm could be made better off without making another worse off (‘Pareto efficiency’). This objective was broadened to setting rules that maximized the size of the economic pie regardless of who won and who lost, provided that there were sufficient gains from adopting a new rule or institution to more than compensate the losers (‘Kaldor-Hicks efficiency’). Many insights were developed from this simple objective or premise. Even before modern ‘law and economics’ had been ‘invented’ or given a name, Nobel Laureate Ronald Coase demonstrated that in the absence of transactions costs, assignment of legal property rights had no impact on the socially efficient outcome because post-assignment bargaining would produce the right result (though the distributional impact of rights assignments would...
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