The Rise and Fall of Efficiency in the Common Law: A Supply-Side Analysis

Abstract:     
This article revisits the debate over the institutional foundations of the efficiency in the common law by examining the supply-side conditions of the production of common law legal rules. Previous models of efficiency in the common law, such as those proposed by Paul Rubin and George Priest, have stressed the "demand" side of the production of common law legal rules. They have argued that the driving force in the evolution of the common law are the actions of private litigants that generate a "demand" for the production of legal rules. It has been argued that these litigation efforts by private parties can explain both the common law's historic tendency to produce efficient rules as well as its more recent evolution away from efficiency in favor of wealth redistribution. This article does not directly challenge the traditional "demand side" model, but it proposes to supplement the model with a "supply side" model of the evolution of the common law that examines the institutional incentives and constraints of common law judges over time. It is argued that the traditional efficiency of the common law arose in the context of a particular historical institutional setting and that changes in that institutional framework have made the common law more susceptible to rent-seeking pressures and thereby undermined its pro-efficiency orientation.

The article first describes the traditional demand-side explanation for the rise and fall of efficiency in the common law. The article then distinguishes a supply-side model of efficiency in the common law, examining the historical institutional framework that generated the common law. It will be argued that the common law evolved in a particular institutional framework that differed substantially from the modern set of institutional constraints faced by judges and which render the modern understanding of judicial constraints quite anachronistic. The article argues that there were certain characteristics of the institutional structure that produced the common law that tended to encourage the production of efficient common law rules: (1) the doctrine of "weak precedent" under the common law, (2) the polycentric legal order of the judicial system in the era in which the common law was formed, and (3) the reliance of the common law on private ordering, including freedom of contract and custom. The article then explains how changes in this institutional framework has generated a decline of the efficiency of the common law and a rise in rent-seeking pressures that has caused the common law's evolutionary path to deviate in recent decades.

Keywords: law & economics, efficiency of common law, economic history, new institutional economics

JEL Classifications: K10, K40, B53

Accepted Paper Series