Law and Economics in Cyberspace

Abstract:     
The growing entity of Cyberspace exerts a crucial influence on the perception of the state, markets and the law, and, by derivation, on the economic analysis of law. The paper is intended to provide a preliminary and tentative look at the challenges posed by Cyberspace to the project of the economic analysis of law.

We begin by applying the Chicago model of law and economics to cyberspace, examining the characteristics of the market in Cyberspace, analyzing possible market failures in comparison to market failures in the non-virtual world. This analysis is followed by an application of transaction cost economic analysis to Cyberspace, focusing on the Calabresi-Melamed model of private law. We find that the traditional analysis of competition, market failures, and the role of central intervention have to be significantly modified in order to remain useful in Cyberspace. Cyberspace is predicted to eliminate or at least notably diminish some of the common market failures, such as some of the traditional public goods (i.e., information) or monopolies, and some of the non-virtual market problems of lack of information, externalities, and transaction costs. On the other hand, Cyberspace creates some market deficiencies that are less notable in the traditional markets. The technological race between enforcement measures by the code and counter measures is the most significant example. Costs involved in verifying information is another.

The last part of the paper provides a discussion on the role of "law", and offers several general thoughts about the "state" or our public sphere in light of the Neoinstitutional school of law and economics. Some general descriptive and prescriptive insights are drawn. Our major conclusion from the analysis relates to the challenges Cyberspace poses to the whole project of economic analysis of law. The emergence of Cyberspace requires some fresh conceptual thinking by the Law and Economics movement, towards which we provide just an outset.

Note: This is a description of the article and not the actual abstract.

Accepted Paper Series