Forces Shaping the Evolution of Private Legal Systems

Abstract:     
Private legal systems ("PLSs") are to the universe of law as dark matter is to the physical universe: while PLSs are invisible to the casual study of law, they are observable by their impact on individuals' behavior and by their interaction with the public legal system. PLSs expand to fill voids where the public legal system cannot or does not wish to enforce norms, and contract when the public legal system moves to displace them. But the public legal system is not the only force shaping the course of PLSs' development.

This chapter identifies two other forces that significantly affect the evolution of PLSs. The first - incumbent's enforcement advantage - impacts the identity of the PLS that will enforce the norm. The second - bias arbitrage - impacts the type of norms the PLS would choose to enforce. These forces challenge both parts of an idealized notion that PLSs form spontaneously (without reliance on pre-existing institutions) to enforce norms that maximize their members' welfare.

Due to the influence of incumbent's enforcement advantage, PLSs tend to begin their life enforcing a core norm that has very low enforcement costs (typically, providing social or spiritual services). Once this core has developed, PLSs may then choose expansion norms that can be more expensive to enforce, and that benefit from the PLS's ability to compel compliance with the new norm by denying a member the benefits of its enforcement of the core norm and any expansion norms already successfully enforced. The expansion norms that are chosen will not necessarily be those that maximize the social welfare of PLS members. Rather, the PLS's will often attempt cause its member to perceive it as valuable by conducting bias arbitrage through enforcing norms that address risks that its members significantly over-estimate.

JEL Classifications: D23, D78, H11, K40, L20, P41

Accepted Paper Series