The Case for Economics in Law

Dear Lawyers, Judges, Economists, Lawmakers, and any other Persons of Interest,

The law has always been concerned with what is both just and for the good of society as a whole. While judges and juries may believe that what they are doing is for the best, the economic implications could be severe and it would take expert reasoning in order to see the bigger picture. Courts define how industries and contracts are regulated through the act of precedence and there is a larger scope than the individual case. Traditionally, the economist’s involvement in law was limited to anti-trust cases. In more recent years there has been significant improvements in how economic reasoning is applied to the law. With one of the main successes being in the regulation and privatization of the broadband spectrum.

In one of my earlier pieces on Daimler v. Bauman, I discussed how the court’s new rule on general jurisdiction has made firms less liable which should theoretically lead to an increase in social costs. The consultation of an economist on such a case could shed new light on what the most optimal reasoning would be. In the famous case, Tarasoff v. The Regent of the University of California, psychologists failed to adequately warn a victim that their patient planned to murder her. This led to a “duty to warn” in California, which has spread throughout the United States. A study by an economist at Emory found that duty to warn laws have led to an 8.9% rise in homicides annually, which is equivalent to 39.43 homicides a year. Thus a rule of law designed to protect people may have led to more homicides as doctors are less willing to accept high risk patients and patients are less willing to seek therapy as the sessions are no guaranteed to be confidential. Good expert testimony and economic methods would be able to reach more beneficial outcomes in the courts.

In addition, when jury’s rule on what type and the amount of damages to be awarded to a plaintiff there is a risk of over or under-rewarding the individual. Large awards lead to a moral hazard where an individual is over-insured and favors a state of the world in which a contract is breached or an accident occurs and would have incentive to behave dangerously. On the opposite side, small awards would cause firms to behave dangerously as the court is underestimating the harm they may have caused. Insurance has long been a controversial topic in economics as we want to deter dangerous behavior from one party, but this is often at the hazard of encouraging the other party to adopt the same behavior. For example, Volkswagen was caught in 2015 for having cheated emissions tests. The question the courts must answer is how much profit did they earn by cheating through the sale of more appealing vehicles (increased performance and mileage) and what is the implicit harm caused to the environment through the elevated harmful emissions. If the fines are too low, it may create incentive for other automakers to cheat emissions tests.

Economic models are in place to estimate the behavior of individuals in such occurrences. Models also exist in estimating how sanctions and regulation change a party’s behavior. Most legal actions can have a “market value” estimated for them, which can then be input in a model. Getting the right people to estimate these prices is crucial. Behavioral economics has paved the way in estimating outcomes allowing rulings to make the most efficient decisions. Furthermore, questions of allocation and who bears the burden from a certain policy can all be answered through economic reasoning. Laws are more than justice, they are implicit prices on behavior and tools to achieve market goals.

Good law is good economics. Every top law school in the United States has at least one economist and more schools are starting to offer Law and Economics joint graduate programs. There is a demand for good experts and it is important to stay the course in order to minimalize social costs for an efficient economy.




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