Transaction Costs and the Law in Cyberspace

Abstract

The book as a whole analyzes the effects of Cyberspace on the Economic Analysis of Law and argues that the networked information environment should exert a crucial influence on economic thinking, on the perception of law, and, by derivation, on the economic analysis of law.

One can describe the Law and Economics Movement as comprising three generations, which can be perceived as separate paradigms of sorts: the traditional Chicago School, Transaction Cost Analysis and Neo-Institutional Economic Analysis of Law and Legal Institutions. The book systematically examines each of the paradigms in light of the information revolution. Chapter 8 focuses on Transaction Cost Law and Economics, and concludes that cyberspace seriously undermines its underlying assumptions.

Traditional transaction costs analysis treats the state of technological development as exogenous. Under this analysis, the efficient outcome at any given circumstances would depend on the availability of technologies and their costs. Parties may make use of technologies that could increase the value of resources or lower the cost inflicted by harmful uses. The availability of technologies and their cost, would affect the cost of bargaining. Indeed, cyberspace reduces significantly traditional transaction costs, such as negotiating and contracting. This has ramifications for various branches of law, such as contracts and torts. At the same time, however, digital technologies introduce new types of transaction costs that call for special consideration.

In treating technology as exogenous, transaction cost analysis fails to recognize the interdependency between technologies and legal rules. It does not give adequate consideration to technological progress, and moreover to the way technology changes in response to economic conditions and legal regimes. This multi-layered relationship between law and technology is a key factor for understanding technological innovation in the information environment. Our discussion suggests that technologies cannot be regarded as independent outcome of scientific progress, but contingent upon various socio-economic factors, of which law is one. That is particularly crucial in the context of information technologies that are characterized by high pace of technological change. We therefore conclude that technology should become endogenous to the analysis, and the economic discourse should be expanded to address it.