Abstract
The purpose of this chapter is to provide a general and cross-national economic analysis of procedural law, both civil and criminal. The presentation here emphasizes two refining perspectives that have been neglected or de-emphasized in the prior literature: (1) the property of procedural law as a substitute for as well as a complement to substantive law; and (2) the tradeoffs involved in a second dimension of subtstitution, which is between private and public enforcement. Within this framework, economic analysis is compared and contrasted with normative criteria as supplied by conventional legal dogmatics.
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Notes
- 1.
See Clemenz and Gugler (2000). A second finding of this research was that the GNP growth rate per person is inversely related to the number of new law suits filed (per person), indicating that an economic boom correlates with a decrease of new litigation, while recession periods stimulate litigation. Note, however, that even on the basis of this empirical research the aggregated volume of litigation is ambiguous as to social welfare or efficiency. Despotic regimes may have little or no litigation, but this is not an indication of high social welfare.
- 2.
The environmental pollution context provides one example of potential substitutability between substantive and procedural law, as one alternative to public enforcement could be the assignment of private property rights to the public good involved; these private property rights would, however, also require enforcement.
- 3.
More generally, if punishment is only seen in a mere response setting without regard to its deterrent effects, the disutility of punishment, as experienced by the punisher, is likely to dominate possible retributive concerns. If aware of this mechanism, the trespasser can even successfully exploit the punisher. This “punishment dilemma” helps explaining both the disutility of a mother educating her misbehaving child (“Wait until Daddy comes back, he will spank you!”) and the seemingly puzzling empirical fact that jurors (lay judges) in some jurisdictions have been found to sentence more leniently than their professional peers on the bench, because of a systematic disregard for the deterrent effects of punishment.
- 4.
The analysis is further complicated by the existence of lawyers representing their clients. This legal representation can be explained as a “principal-agent-relationship” and there is much law-and-economics literature on this. The client-lawyer-relationship is one of asymmetric information regarding the lawyer’s quality and costly monitoring that can produce either over-provision or under-provision of services. There are various methods, such as success-based remuneration or reputational markets that can produce convergence between the interests of both parties.
- 5.
There has been a good deal of attention to the effect of “fee-shifting” rules (i.e., awarding litigation costs depending upon the outcome of trial) on the trial-versus-settlement decision, with ambiguous results. For example, a “loser pays” rule (as opposed to the “American rule” where both sides bear their own costs except in extreme cases) may do nothing more than raise the stakes for both parties, which may eliminate a bargaining range that might otherwise exist, or it may create an asymmetry of stakes if the two sides face differing cost functions or have differing attitudes toward risk, which may either discourage or encourage settlement.
- 6.
However, there are cases (such as in tort law) where high ex ante transaction costs prevent that solution, and there are cases in which an external benefit (through formulation or clarification of legal rules for the benefit of third parties) perhaps would be lost or under-provided.
- 7.
In arbitration, the litigants regularly opt for a different institutional mix regarding the goal of minimizing total costs. Whereas in state courts, there is a division of labor (and a split of costs) between trial courts and courts of appeal, the parties of arbitral proceedings tend to divert the resources of the appellate level to a more extended procedure in the first instance where the parties usually submit to a panel of three experienced arbitrators, one of whom each party assigns, the chairman being determined by the two other arbitrators.
- 8.
A very substantial proportion of national and international commercial litigation is decided by arbitral tribunals. One factor that contributed to the success of arbitration is the near-universal recognition of their awards under the New York Convention. Arbitral tribunals are both ad hoc tribunals (contractually agreed upon but established only at the occasion of the dispute) or institutionalized arbitration that provide a set of general procedural rules and a “hosting” institution that sponsors the selection of the panel to decide the concrete dispute.
- 9.
Under this system the attorney is paid according to success. In the standard conditional fee contract the attorney’s reward in case of success amounts to a certain percentage to the claim (mostly around 33 %).
- 10.
It should be noted in passing that the “American rule” as encountered in the literature is only an approximation of the actual practice in American courts. While the general rule in America is that each party bears its own costs, this is subject to several exceptions, most notably the “bad faith” exception, which seeks to screen out dishonest or ill-founded claims for fee-shifting treatment. Similar provisions are found in most American procedural codes by provisions for fee-shifting or other sanctions upon both lawyers and parties asserting “frivolous” claims or defenses. Finally, in a number of areas, legislation has been enacted to permit “one-way” fee-shifting in favor of plaintiffs successfully asserting certain specified types of claims (for example, antitrust claims, civil rights claims) that are thought to be under-provided by the usual incentives of private enforcement.
- 11.
The problem of under-compensation for enforcement costs under the American rule has been one argument made in favor of the more common practice in the United States of awarding “punitive“ (i.e., higher than compensatory) damages in tort case, or what is known as the “collateral source rule” (which does not offset tort damages for insurance reimbursement or the like). However, neither measure seems well-adjusted to the problem.
- 12.
The importance of this factor may depend upon the nature of the procedural system and the stage of the case’s development. In American procedural systems, where preliminary proceedings are conducted largely without judicial involvement and there is a sharp distinction between the “pretrial” and “trial” stages, there seems to be no case for placing the parties on a judicially mandated timetable prior to trial, unless one or both parties request such a schedule. In this respect, European procedure may differ, as there is less of a distinction between pretrial and trial, and more active judicial involvement throughout. Still, also in private litigation under the rule of continental European procedure, there is no clear public interest in prompt disposition against the wishes of both parties, unless their delay prevents another case from advancing in the queue.
- 13.
The pertinent economic literature generally assumes that the behavior of judges can be explained precisely along the same lines as the behavior of ordinary people. From the economic viewpoint, judges maximize their utility (which encompasses several elements, such as income, promotion, prestige, avoidance of reversals, perhaps concern for fairness) under given constraints. These constraints are under most laws such that judges are immunized against direct performance-dependent incentives to secure their independence vis-à-vis political influences. Judicial compliance is secured by a system of more indirect incentives, regularly relying on postponed remuneration (where generous pension arrangements make it unattractive to drop out of the judicial career due to some misbehavior) and on monitoring schemes, to which peers, senior officials, and appellate courts contribute. Since judges regularly do not have fixed working times, they are partially remunerated by leisure, which creates an imperfect incentive device for expedient working.
- 14.
If judicial evaluation, funding, or personnel is determined by some measure of “throughput,” then judicial bureaucracies may have an incentive to make their dispositions more “speedy”, even if by doing so they are socially more expensive and erroneous, as those consequences are not as fully internalized to the judiciary. An alternative explanation could be that certain courts are attempting to attract certain types of judicial business by “signaling” to potential litigants or classes of litigants their willingness to accelerate either all cases or certain types of cases. Something like this effect may explain why the U.S. federal government has chosen to prosecute several of its recent terrorism cases in a certain federal district in Virginia (one of some 100 federal districts) that has cultivated the reputation of providing a “rocket docket,” thus inviting certain classes of litigants who particularly value speed. This is one way that judges can effectively “select” the types of cases they would like to hear, where jurisdictional competency is non-exclusive, which is often the case in the United States.
- 15.
This is conceived as a limitation on the jurisdictional competency of courts, which could be justified on any of several grounds: as rationing access to public decisional resources, ensuring adequate incentives to the parties, or protecting the reputation of courts as reliable dispute-resolution institutions.
- 16.
Institutional competition exists also among institutional arbitrational tribunals (such as those established at the Chambers of Commerce in leading European capitals). Since the hosting institutions (the Chambers) derive a direct benefit from litigation in terms of court fees (there are no public subsidies for arbitration) and parties go after what they deem the most efficient procedure, competition for litigation among these arbitrational tribunals has contributed to a remarkable convergence of the respective arbitrational codes.
- 17.
- 18.
Another interesting finding from this experimental research was that when revelation was achieved, then both systems tended to obtain roughly the same level of accuracy in the experimental referees’ decisions. When revelation was not achieved, both systems had roughly the same level of inaccuracy, but the errors were distributed in slightly different ways. In particular, the errors of adversarial decision tended more strongly toward a “split the difference” outcome. This finding suggests a more important role in adversarial systems for placement of a “burden of proof” on the plaintiff, which is the observed general rule in Anglo-American systems. Without such a rule, adversarial systems may unduly encourage the bringing of weak cases simply to obtain a “compromise” verdict.
- 19.
For example, in the United States, the general pattern of civil procedure devotes extensive resources to fact-finding procedures in the first instance, devotes little attention to appellate review of facts, and defers appellate review until after the final judgment of the court of first instance. However, some important states, such as New York and California, deviate from this pattern. Both of those states freely allow “interlocutory” appellate review to interrupt the first instance proceedings, and New York allows one level of appellate review of fact-finding. These variations may reflect differences in either the procedural system or its surroundings, such as the types of personnel available to trial or appellate courts, or the nature of the cases supplied to these systems.
References
As basic references see the entries in the Encyclopedia of Law and Economics V for ‘Civil Procedure General’ (Kobayashi/Parker), ‘Criminal Procedure’ (Lewisch), and ‘Evidence’ (Parker/Kobayashi).
The more interested reader shall also consult the entries: ‘Judicial Organisation and Administration’ (Kornhauser), ‘Appeal and Supreme Courts’ (Kornhauser), ‘Indemnity of Legal Fees’ (Katz), ‘Settlement’ (Daughety), Arbitration’ (Benson), and ‘Class Actions—Representative Proceedings’ (Silver).
See also Posner, Richard. 1998. Economic Analysis of Law, 5th ed, 563–672. Part VI ‘The legal process’.
Further References
Block, M.K., J.S. Parker, O. Vyborna, and L. Dusek. 2000. An Experimental Comparison of Adversarial versus Inquisitorial Procedural Regimes. American Law and Economics Review 2: 170–194.
Block, M.K. and J.S. Parker. 2004. Decision Making in the Absence of Successful Fact Finding: Theory and Experimental Evidence on Adversarial versus Inquisitorial Systems of Adjudication. International Review of Law and Economics 24: 89–105.
Clemenz, G., and K. Gugler. 2000. Macroeconomic Development and Civil Litigation. European Journal of Law and Economics 9: 215–230.
Cooter, R., and D. Rubinfeld. 1989. Economic Analysis of Legal Disputes and their Resolution. Journal of Economic Literature 27: 1067–1097.
Landes, William. 1971. An Economic Analysis of the Courts. Journal of Law and Economics 14: 61–107.
Posner, Richard. 1973. An Economic Approach to Legal Procedure and Judicial Administration. Journal of Legal Studies 2: 399–458.
Shavell, Steven. 1982. The Social versus the Private Incentive to Bring Suit in a Costly Legal System. Journal of Legal Studies 11: 333–339.
Tullock, Gordon. 1980. Trials on Trial: The Pure Theory of Legal Procedure. New York: Columbia University Press.
In German
Adams, Michael. 1981. Ökonomische Analyse des Zivilprozesses.
Ministry of Justice, P. Lewisch and W. Rechberger, eds. 1998. ‘100 Jahre ZPO: Ökonomische Anlayse des Zivilprozesses’ with the contributions by Clemenz/Gugler, ‘Gesamtwirtschaftliche Entwicklung und Prozeßverhalten’, and Parker/Lewisch, ‘Materielle Wahrheitsfindung im Zivilprozeß’.
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Lewisch, P., Parker, J. (2016). Procedure. In: Marciano, A., Ramello, G. (eds) Law and Economics in Europe and the U.S.. The European Heritage in Economics and the Social Sciences, vol 18. Springer, Cham. https://doi.org/10.1007/978-3-319-47471-7_11
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