Andrei Shleifer: The failure of judges and the rise of regulators
Ronald Coase (1937) argued that transaction costs determine whether allocations will be made through the market or by hierarchical decision making within a firm. In The failure of judges and the rise of regulators, Andrei Shleifer makes a similar argument about the choice between litigation and regulation. Parties governed by a litigation system may be analogized to traders in a market who transact (that is, determine levels of activity and care) according to prices (damages) set by judges. Regulation, by contrast, gives a planner the right to determine activity and care levels for the parties. The choice between these two methods of social control, Shleifer argues, reflects the relative cost of the two forms of governance in a given situation.
The book argues that this framework sheds light on changes in the mix between litigation and regulation over time and across countries. As the title suggests, when judges fail to produce efficient outcomes because ex post litigation is too...
I am grateful to John Harrison and Andrei Shleifer for comments.