The Quality of Law: Judicial Incentives, Legal Human Capital and the Evolution of Law

Abstract

Much of the existing literature investigating the relationship between legal regimes and economic growth focuses on an abstract, often unrealistic, distinction between judge-made common law and civil codes and on the agency problem of aligning judicial incentives with largely static conceptions of social welfare. In this paper I look at the institutionallygrounded factors that in ‡uence the dynamic quality of law when judges have incentives to promote social welfare but they have limited knowledge, and information about a local or changing environment is costly to obtain. The central mechanism by which the law adapts to new information is the interaction among three factors: 1) judicial incentives for rule-following and rule-adaptation, 2) litigant incentives for investing in costly evidence and innovative legal argument and 3) the accumulation of shared legal human capital -de…ned as the sum of litigant investments in evidence and argument-which determines the systemic likelihood of judicial error. This analysis focuses attention on the detailed institutional structure of a legal regime rather than the abstract distinction between judge-made and code law. I identify …ve key legal institutional parameters that a¤ect the dynamic quality of law. These parameters, I claim, provide a better guide for the comparative analysis of the economic impact of legal regimes than the current focus on the dichotomous categorization of regimes as either common law or civil code.

The levers of legal design: Institutional determinants of the quality of law

“…The model in Hadfield (2007a) starts with a simple two-period world in which there is a population of judges, defendants and plaintiffs and an established legal rule, R e . This established rule, which could be either a statutory text or a common law case holding, determines the liability of defendants sued under the rule on the basis of information about a defendant's conduct that is costlessly observable to judges, plaintiffs and defendants.…”

“…This might be because of an incomplete understanding of the relationship between defendant characteristics, liability and welfare outcomes (what we could think of as an error of law), or it might be because of difficulty distinguishing between two types of defendants: good defendants who should not be held liable and bad defendants who should be (what we could think of as an error of fact). The model in Hadfield (2007a) explores both the case in which defendants are homogeneous and the case in which defendants are heterogeneous.…”

“…Bad defendants, however, will be encouraged to invest by the likelihood of judicial error: they benefit when judges make mistakes. Hadfield (2007a) does not focus on a question that others in the literature have already explored, namely the extraction of reliable information from a strategic presentation of evidence by competing plaintiff and defendant (Milgrom and Roberts, 1986;Shin, 1994Shin, , 1998Dewatripont and Tirole, 1999;Daughety and Reinganum, 2000). Judicial error is modeled in reduced form, as probabilities of type 1 and type 2 errors in each period and the analysis focuses on the systemic relationship between the information accumulated from litigants across multiple cases and the development of judicial capacity to distinguish good from bad defendants (assess when liability is optimal) over time.…”

“…Alternatively, if these first-period costs are too high (which is a function not only of the risk of error and expenditures in a given case but also of the distribution of judicial incentives, that is, how widespread is initial rule change) then the regime is better off sticking with the theoretically sub-optimal rule. Hadfield (2007a) presents a comparative analysis of legal regimes to determine what we can say about when legal regimes will do better or worse at achieving optimal rule adaptation. The analysis identifies five key parameters that affect optimal adaptation:…”

“…Section 2 first summarizes a model developed in Hadfield (2007a) that separates out behavioral and institutional elements in the analysis of a legal regime, specifically by endogenizing the extent to which judges follow established rules or draw on what they learn from litigants to fashion a more appropriate rule. That is, what the existing literature identifies as an institution-judicial discretion, development of new rules through caselaw, informality, etc.-is treated as a behavioral consequence in this model.…”