Taking the Costs of Consent Seriously: An Alternative Understanding of Legal Efficiency

Abstract

Most law and economics literature employs efficiency criteria that fit poorly with the structural features of the legal environment. The major limitations trace back to the analytical separation of law from its formative process, which has resulted in an almost exclusive focus on the allocative efficiency of legal entitlements and little or no attention paid to the causal relationship between the efficiency of legal rules and the efficiency of the lawmaking process. I contend that this conventional output-oriented approach is susceptible to the following criticisms: 1) it is affected by logical circularity and/or logical incompleteness; 2) it fails to provide any assurance of increased social welfare, 3) it does not account for the presence of losers, and 4) it does not account for the predictability/adaptivity trade-off associated with legal change.

Based on the foregoing considerations, this paper proposes an alternative understanding of legal efficiency. Efficiency is not an objective property of the outcome independent of the process; rather, it depends on the ability of the law-making process to embody, in a cost-effective manner, the general consensus of all the people concerned. Based on this premise, this paper proposes a methodology focused on the “process-outcome” relationship within the production of law, which I call “process efficiency analysis”. It relies on the analytical tools offered by transaction-cost economics and is grounded in the normative principles of constitutional contractarianism. In the last section of the paper, I illustrate process efficiency analysis by using an example from tort law.

Keywords: Pareto Efficiency, Wealth-Maximization, Lawmaking Process, Lawmaking Costs, Unanimity, Product Liability

JEL Classification: K00, K40