A Behavioral Approach to Law and Economics

Abstract:     
Economic analysis of law usually proceeds with the behavioral assumptions of neoclassical economics. But empirical evidence gives us much reason to doubt these assumptions; people are boundedly rational and boundedly self-interested, and they have bounded willpower. The result is to call into question many of the predictions and prescriptions offered by traditional law and economics .In this paper we offer a broad vision of how law and economics analysis may be improved by increased attention to insights about actual human behavior. Our analysis divides into three categories: positive, prescriptive, and normative. Positive analysis of law concerns how agents behave in response to legal rules and how legal rules are produced; here we suggest that in many areas, a behavioral approach improves predictions about both the effects and content of law. Prescriptive analysis concerns what rules should be adopted to advance specified ends; here we offer alternatives (in areas including informational disclosure and criminal law) to standard law and economics prescriptions based on behavioral insights. Finally, normative analysis attempts to assess more broadly the ends of the legal system: Should the system always respect people's choices? What is the appropriate domain of paternalism? By drawing attention to cognitive and motivational problems, behavioral law and economics offers answers distinct from those offered by the standard analysis. In addressing many specific topics in law, we attempt to provide some answers, and also to outline an extended research agenda for future work in behavioral law and economics.

JEL Classifications: K00

Working Paper Series