what's yours is mine: rent-seeking and the common law

What's Yours Is Mine: Rent-Seeking and the Common LawAuthor(s): Evan OsborneSource: Public Choice, Vol. 111, No. 3/4 (Jun., 2002), pp. 399-415Published by: SpringerStable URL: http://www.jstor.org/stable/30026072 .

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Public Choice 111: 399-415, 2002. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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What's yours is mine: Rent-seeking and the common law

EVAN OSBORNE Department of Economics, Wright State University, Dayton, OH 45435-0000, U.S.A.; e-mail: evan.osborne @wright.edu

Accepted 3 February 2001

Abstract. The paper develops a rent-seeking theory of the common law. The general finding is that the law's form depends on the comparative advantage each group has in production versus appropriation generally, and appropriation via litigation in particular. The model generates new interpretations of developments in United States common law, and is used both to supplement and to criticize two dominant theories of such law, the efficiency theory associated with the law and economics movement and that generated by critical legal studies scholars.

1. Introduction

The theory of rent-seeking, in particular its seminal analysis of the use of scarce resources to redistribute rather than produce wealth, has been an extraordinarily fruitful innovation in economic and political theory. How- ever, until recently most of the application of rent-seeking to government involved analysis of politicians and civil servants. The application of rent- seeking models to the judiciary was seldom found in the literature. Recently, that has begun to change. For example, Farmer and Pecorino (1999) use a rent-seeking model to explore the individual lawsuit and Rubin, Curran, and Curran (2001) explain a particular pressure group's choice to rent-seek via lobbying or litigation.

However, there has been little analysis of how the common law as a whole develops in a rent-seeking environment. To the extent it exists, it has focused on investments in the single precedent-setting case (Jung, Krutilla, Viscusi, and Boyd, 1995; Bailey and Rubin, 1994) rather than a general-equilibrium characterization of redistribution through the courts, and has omitted cooperative production among potential litigants. In addition, the existing analysis often focuses on individual or single-group efforts, without analyzing the total shape of the resulting common law in the presence of appropriative activities. This paper seeks to analyze the development of common law when it is generated purely through such a process. While there is a substantial body of theoretical literature, not based on rent-seeking, that predicts how the common law is shaped, much of it contends that the common law tends



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toward economic efficiency. Landmark work in this vein includes Posner (1998), Goodman (1978), Rubin (1977) and Priest (1977), while criticism of it not based on rent-seeking considerations can be found in Wangenheim (1993).

The approach taken here yields sharply different predictions from efficiency theory about what the law looks like. It is also useful because it allows assessment of the claims of some American legal scholars of the school known as "critical legal studies" that "law is politics, all the way down" (Tushnet, 1991: 1526). That hugely influential body of scholarship does claim that the law evolves to benefit particular groups, but its emphasis on the benefits the powerful receive at the expense of the powerless is not derived from constrained optimization. The paper proceeds as follows: Section 2 presents the model, Section 3 traces its implications for legal evolution in a common-law framework, and Sections 4 and 5 argue that it outperforms the two dominant theories in explaining some aspects of modem United States law.

2. The model

I proceed under the assumption that the legal system's rules are determined solely by resources spent on litigation by each contending party. Because legal decisions, especially at the appellate level, establish precedents in which members of some groups have different entitlements and obligations than members of other groups, they yield rules that transfer income from one group to another (e.g., from employers to employees). While the idea of litigation as a speculative investment is commonplace in economic analysis of legal evolution, additional modifying assumptions are usually added. For example, precedent is assumed to have some force that partially offsets resource com- mitment (Goodman, 1978) or inefficient rules form a disproportionate amount of litigated cases (Priest, 1977). In this paper I make no such assumptions, and assume that the legal system is purely a means to forcibly transfer income.

However, two objections must be overcome if pressure-group considerations are to be included. Epstein (1990) has argued that the institutional arrangements of the judiciary insulate it from the two pressure points in many rent-seeking models of politicians, reelection and financial gain. These arrangements substantially dilute judges' susceptibility to pressure-group influence. In addition, Landes and Posner (1975) argue that an independent judiciary is in fact a key ingredient of pressure-group games, because by acting as a reliable referee it provides credibility for transfers obtained from a legislature whose membership can change from election to election.



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There are two reasons these claims do not suffice to rule out rent-seeking considerations. The first is that they are based on assumptions about judicial incentives that may or may not be true. The second is that pressure groups can function even granting these considerations. Judicial rulings at the trial and appellate level are presumably a function of information provided by the contending litigants. The nature of court rulings will depend to some degree (and perhaps decisively) on the quality and quantity of information the two sides can produce, and the frequency with which one side can mount challenges. If litigation and information quantity and quality are costly to produce then resource availability matters. In general, it is not necessary to suppose that judges respond to pressure per se. Instead, the model only requires that the amount of effort exerted matters in obtaining a favorable ruling, a notion that is almost universal in economic models of litigation, and that such effort is costly. As long as the judiciary does not have an active hostility to redistributive considerations, the rent-seeking model of litigation is a plausible one. Its essential components are presented in this section.

2.1. Productive and appropriative technology

Assume there are m groups that participate in the economy. Each group j consists of nj identical members. Each member of group j is endowed with

rj resources. These resources can be put to three uses: joint production with other agents, investment in litigation or investment in lobbying the legislature. The resources devoted to production generate income, which is divided up among the agents according to the resources devoted to the two redistributive activities.

Production is given by the specific-factors production function

am

(1)

The lij are the resources devoted to productive effort by each member i of group j. The aj are productivity coefficients for the factors that members of

m

each group j possess. Assume constant returns to scale, so that aj = 1. j=1

Finally, A is a general-productivity coefficient, similar to the source of the Solow (1956) residual in neoclassical growth theory.

Resources devoted to legal effort and to lobbying of the legislature collectively determine how produced income is divided up. The necessity of having two alternative appropriative processes is due to the insight of Rubin, Curran and Curran (2001) that rent-seekers may generally choose between the legislative and judicial arenas. His paper, however, does not include an



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opportunity for the contenders to engage in cooperative production, which here is what generates the income to be redistributed. The technology con- verting resources to success in obtaining a proportion of produced income is the contest success function (CSF). It is a variant of the standard Tullock (1980) CSF, and is given by

nj

(2)

Pj is the share of income going to the members of group j. It depends on the weighted share of collective appropriative effort exerted in the two activities by the members of that group. eij and fij are, respectively, the resources devoted by member i of group j to appropriative activities in lobbying the legislature and in litigating to achieve changes in common-law rules respectively. Diminishing returns prevail, so that a, b < 1.

A sensible assumption is that laws operate on types of individuals rather than individuals. This means that a sharing rule among group members must be specified. This problem has been studied in, among other places, Lee (1995) and Noh (1999). Because both legislation and common-law legal rules are binding on all members of a group, it is assumed that the sharing rule for income accruing to a group, Yj, is to divide it equally among group members. Thus income for a member of group j, yij, is simply Yj/nj.

2.2. Optimization

Each agent faces a budget constraint, which is that the total amount of activity devoted to production and appropriation not exceed the resource endowment. This constraint is given by

eij + fij + lij = rj. (3)

The assumption of identical agents within groups and the constant-returns property of the production function allow the optimization problem for a member of group j to be expressed as

j=1

(4)

After substituting via the budget constraint, the first-order conditions are



403

S

ii

(5a)

eb

j=1+

(5b)

Recalling that a, b < 1, the relative intensity of effort between the two litigation systems reduces to a very simple formula:

fl-a (5)

Thus, the relative division of effort between the two types of conflict is determined by the relative productivity of effort devoted to each type. At the same time, the total amount of effort devoted to the two types or appropriative activity and, implicitly, to production depends on the productivity of resources used in production.

The primary phenomenon of interest in this paper is the common law. The two types of conflict collectively determine the Pj for each group, and a series of implicit functions can be defined that express the proportion of income that is channeled to each group via politics and the courts, Aj(e; a, a, b, r, n) and yj(f; a) respectively. They take as arguments the vectors of effort in the



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types of conflict for each representative group member, as well as the various productive parameters. The determinants of the amount of litigation and the common law that results, i.e., of Aj(.) and yj(.), are discussed in the next section.

3. Comparative statics and the evolution of the common law

Modeling the law as a function of investment in rent-seeking yields several testable hypotheses. The first-order conditions in (5), in combination with the CSF in (2), imply that the law changes in response to changes in the parameters of production, litigation and wealth. Such predictions can be contrasted with those of other theories of legal evolution. Efficiency theory predicts that when circumstances governing the terms of trade between types of litigants change, the law changes to facilitate market transactions and maximize value. In contrast, critical legal theory asserts that the law systematically protects the interests of powerful citizens and pressure groups, absent sustained struggle by the relatively less powerful.

The model generates different predictions. There are five groups of parameters of interest: the relative marginal productivity of each factor in production (the aj), general productivity in production (A), the productivity of litigation effort for each side (a and b), and the resource endowments of each group (rj).

3.1. Relative and general marginal productivity

Over time the available production technology changes. Innovation leading to technological improvement can take the form of a general productivity increase or factor-specific productivity changes. In the latter case, an innovation may alter the technical rate of substitution between the production factors, represented by a change in two or more (because of the constant-returns assumption) of the tj. Evidently, by (5), a rise (decline) in cj causes members of group j to invest more (less) and members of other groups to invest less (more) in production. Such an increase raises marginal productivity in production for the group benefiting from higher marginal productivity in production, thus raising the opportunity cost of its investment in both types of appropriation. The opposite is true for the other groups. Such a change in the productive process should be accompanied by increased use of the legal system by the latter. Thus, an increase in aj should cause a decrease in Aj(-) and yj(.) and an increase in Ak(-) and yk() for k - j.

Over time, the economy's general (as opposed to factor-specific) productivity rises. This can be modeled as a comparative-statics change in A.



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Because this productive factor cancels out in the first-order conditions, factor- unbiased technological change leaves the amount of resources each group devotes to each activity unchanged, so that the higher amount of income is distributed just as before. Legislative and judicial transfers among groups should thus be unchanged if such general technological progress is the only shock to the economy. Note, however, that the size of the income produced increases. The prediction is contrary to that of efficiency theory, which asserts that if productivity innovations, e.g. the invention of mass production, change then the allocation of cost-bearing between parties then the law will change to accommodate that.2 The model developed here predicts stability in the law in the presence of general productivity increases.

3.2. Productivity of the two types of conflict

When the litigation or lobbying technology changes, resources are redistributed from or to that appropriative activity to or from both production and the other type of appropriation. While investment in litigation can increase because litigation is relatively more productive than production, a change in its productivity relative to lobbying will yield the same result. Political developments that increase the difficulty of litigation should cause groups to shift resources toward lobbying. In fact, if the model is extended to allow different a for each group, election outcomes may result in lobbying becoming less productive only for some groups, causing them to shift their emphasis to the courts.3 The legal rules that result will be more favorable to the other groups, who now devote more resources to litigation. For them, yj () rises, although that does not guarantee that their total income goes up, because total income produced declines.

In addition, it is possible to imagine an equiproportionate increase in the productivity of conflict. If a and b change in equal proportions, total product will change in the opposite direction as legal conflict by all parties increases. In this particularly pernicious change, all groups fight harder over less. This might occur if, for example, legal research and lobbying becomes easier, so that producing a unit of information in civil discovery and exerting a unit of lobbying effort cost less. All parties will be driven to expand discovery efforts, but the effort will cancel out and society will simply be left with a greater amount of diverted resources. Nothing that favors any group will come of this expanded effort.

3.3. Resources

The connection among resource endowments, litigation and the law is straightforward. A wealthier group can devote more resources to effort and



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to both types of appropriation, increasing total product and its share of the output. Its total income thus rises by a larger proportion than its increase in resources. The effect on other groups' income cannot be unambiguously signed. If owners of resource j receive an identical increase in their resource endowment, then, on the one hand, the increase in their productive effort raises the marginal product in joint production for all other groups as well as the total pool of income. On the other hand, other groups take a smaller share of the higher total product. Other groups can see their output go down if the parameters scaling productivity of conflict, a and b, are sufficiently large. In any event, the law emanating from both the courts and the rest of the government become more favorable to the wealthier group. CLS criticism of the common law focuses entirely on this effect as it applies to more dominant (presumably wealthier) groups, but it is only one of several possibilities with respect to changes in the wealth of one group, let alone other comparative-statics possibilities.

4. Sacking the citadel: Rent-seeking, efficiency, and the evolution of product-liability law

Although they differ in their reasons, efficiency models of the common law share the prediction that the law evolves over time in a manner that enables the creation of more value through market transactions. However, they offer some predictions that are difficult to reconcile with some features of U.S. law. In this section three empirical patterns are presented to support a significant role for pressure groups in shaping the law: the persistence of inefficient doctrines (or, equivalently, inefficient changes in existing doctrines), significant differences in legal rules among common-law countries with similar economic environments, and the explicitly redistributional nature of many decisions. Finally, the difference in law among various countries is considered. The example of recent developments in product-liability law in the U.S. is used to illustrate all these phenomena.

4.1. Rent-seeking and vertical differences in the law

The analysis in Section 3 provides a list of variables that may explain legal evolution over time within a country, which I term vertical differences in the law. Changes in the law in a pure rent-seeking environment must he related to changes in the model's parameters. The analysis developed here can shed light on why product-liability law looks as it does.

Modemrn U.S. products-liability has been revolutionized in the last sixty years, and many of these revisions are controversial among economists as



407

well as other legal scholars.4 From the dawn of the Industrial Revolution until the early decades of the twentieth century, contract law governed damages from manufactured products. In particular, privity of contract and (express or implied) warranties were requirements for plaintiff recovery. In other words, the terms of the contract between several groups, manufacturers, their employees and consumers, governed the allocation of damage costs. The idea of product liability as a tort took hold with the application of a negligence standard in MacPherson v. Buick Motor Co.." The requirements of privity and warranty were expressly jettisoned with Henningsen v. Bloomfield Motors, lnc.,6 and strict liability, i.e. the doctrine that manufacturers are liable for all damages resulting from accidents that occur during reasonable uses of the product, quickly prevailed with Greenman v. Yuba Power Products, Inc.7 By the time of the Second Restatement of Torts in 1965, the transformation from contract law to strict liability in tort was complete.

Landes and Posner (1985) contend that the American transformation of product-liability law is efficient because mass production has generated a substantial information asymmetry in favor of manufacturers. Accidents are low-probability events, and given plausibly high transaction costs consumers have inadequate incentives to acquire information about the probabilities and costs of accidents and the costs of accident prevention. The lower product price that results if accidents are still governed by the previous doctrines of contract law is thus outweighed by higher accident costs. This justifies a shift from contracts to torts in governing product mishaps, and the resort to strict liability (instead of a "negligence" standard in which the manufacturer's actions must be shown to be specifically deficient) is justified because manufacturers can obtain the relevant information at lower cost.

However, a redistributive explanation is also consistent with twentieth- century product-liability law. If the standard changes from negligence to strict liability, every manufacturer incurs increased costs, their workers collectively receive less compensation, and consumers face a lower burden of care but higher product prices. It is thus very much in the self-interest of businesses and workers, to the extent they do not consume the output they produce, to have a legal standard for defective products that is as generous to them as possible. Consumers must weigh higher product prices versus manufacturers and workers bearing more safety costs in deciding whether to litigate for a stricter standard on manufacturers. It will certainly be true that consumers and some businesses have incentives to spend resources to change or preserve current law. Taking account of the Becker (1983) insight that small groups have a comparative advantage in applying political pressure generally, consumers who have a very great interest in, for example, safety but who are not sufficiently numerous to satisfy these preferences through voluntary exchange



408

will disproportionately resort to both types of appropriation. This is how so- called "consumer" groups that lobby and litigate for greater regulation of product safety are translated into the model.

Although efficiency-theory advocates have depicted an inefficient doctrine as simply something to be contracted around, it can also be thought of as an entitlement to a rent handed down from a binding authority. Thus, when some groups receive such rents from others, and when exerting resources on legal conflict means that this transfer is greater (because of group size, resources, or technology) than what could he obtained by agreeing with the taxed group to contract around the law, there is no reason to suppose that the first party will agree to engage in such an end run. The law becomes an arena for struggle rather than a facilitator of wealth creation.

The theory of economic development can be combined with this insight to cast a different light on the evolution of product-liability law, which in adjustment from privity to negligence in tort to strict liability in tort has been progressively more beneficial to consumers. In the early stages of economic development, the distribution of income in most market societies favors the owners of capital and other scarce factors.8 The theory thus predicts that as one side does relatively worse over time in voluntary exchange, there is a trend toward product-liability law that is less favorable to manufacturers. Such an outcome can even contribute, along with scarcity of previously abundant factors, to the eventual upturn in the Kuznets U. The evolution of product-liability law may well have occurred in response to entrepreneurs' early advantage in production income.9

In addition, efficiency theory becomes more tenuous when applied to recent developments in product-liability law. Even conceding that manufacturers can acquire accident-prevention information at lower cost, the decay of manufacturers' defenses based on consumers' voluntary assumption of risk for inherently dangerous products and on product misuse is generally agreed to be inefficient, and the explanation fur these recent developments must lie elsewhere. While Posner (1998) has argued that efficiency theory explains only the broad sweep of the law rather than every doctrine at every moment, this necessarily leaves much to account for. The developments of product-liability law in recent years may in large measure be a function of increased effort by some consumers, and these efforts in turn are undoubtedly an optimizing choice made in response to the cost of litigation, including the cost of organizing judicial conflict and of market production. Since the costs of monitoring free-riding and other organizational costs are more of an obstacle for consumers than producers, improvements in information technology, among others, have undoubtedly lowered the cost of such organizing relative to similar costs for producers. If so, it is unsurprising that such groups



409

have flourished and succeeded in recent decades, with dramatic changes in product-liability law following closely behind.

Finally, note that attorneys are one of the m groups as well. Their contribution to production (a)

is surely not zero, as contract, property and other forms of law contribute to higher productivity. However, some attorneys can be plausibly said to benefit both from making litigation easier and increasing its rewards (Rubin and Bailey, 1994). There thus may be a convergence of interests between consumers who earn a greater share of the productive surplus after product-liability law is altered and attorneys who benefit from the increase in litigation necessary to achieve that alteration.

4.2. Rent-seeking and horizontal differences in the law

Efficiency theory treats the evolution of product-liability law as an inev- itable response to a dramatic change in the production environment: the introduction of mass production and standardized consumer products. Rent- seeking theory when applied to the United States provides a theory that is equally consistent with the shape of that law, and more consistent with recent developments, but this alone does not provide adequate justification for significantly displacing the efficiency explanation. However, examination of product-liability law in other common-law countries does provide reasons for preferring a significant if not dominant role for a rent-seeking hypothesis.

The U.S. has been unique among the common-law countries in adopting strict liability for defective products. While the U.K., in order to meet the European Union's product-liability standards, has legislatively enacted strict liability, the common law prior to that - despite ample opportunity and agita- tion - had not moved beyond the negligence rule of Donoghue v. Stevenson.'l The contrast of U.S. common law with the common-law provinces of Canada, whose economic fundamentals presumably differ little in any meaningful way from the U.S., is particularly instructive. Courts have conspicuously refrained from importing U.S.-style strict liability, despite periodic recommendations to do so."

The economic environment of every country is of course unique in various ways, but the overarching characteristics of modern manufacturing - mass production and standardized output - are not appreciably different in the U.S. from the U.K. or Canada. If the proper division of information costs is the explanation for the shift from contracts to strict liability in tort, it is puzzling that the U.S. has been alone in shifting the liability standard so dramatically away from consumers and toward producers. In fact, the only way to account for that difference is to adopt a theory of far lower predictive power, that the common law is only approximately efficient over the long haul, and that inefficient diversions are not ruled out from time to time. Several aspects of



410

litigation in the U.S. provide a more plausible explanation of changing legal rules that is rooted in rent-seeking activity.

The U.S. is alone among common-law countries in allowing plaintiffs to finance litigation on a contingent-fee basis.12 The voluminous literature on such fees indicates that they enable litigation that would otherwise be severely handicapped by both plaintiff risk aversion and agency problems in the attorney-client relationship.13 Such fees stretch the productivity of a given amount of plaintiff resources in litigation, i.e., they increase a, and thus encourage more tort litigation, including product-liability suits. It would be quite surprising if the greater ability of plaintiffs (here, consumers) to trans- late a given amount of resources into litigation effort in one common-law country than another did not yield a standard more favorable to plaintiffs in the former country.

In addition, British courts conduct civil litigation according to what is known as the "English rule", in which the losing side pays all litigation costs in the event of a trial. Since product-liability litigation must be initiated by consumers, and since such consumers are presumably often significantly risk- averse, the English rule lowers the expected utility of any lawsuit, ceteris paribus. Since by definition product-liability suits, and thus the changes in law that they engender, do not occur until plaintiffs bring them, increasing the risk of such suits via the English rule should contribute to a legal standard more friendly to manufacturers.

The continued difference in product-liability litigation standards across nations with substantially equivalent production environments is a mystery if such standards exist because they are efficient. Given similar production technology and preferences, then a legal doctrine whose purpose is to maximize opportunities for the creation of value should look similar across common- law societies. The fact that there are exceptions to this doctrine, such as product-liability law, forces the consideration of the hypothesis that these differences may result from differences in the possibilities for altering the law through resource investment. The greater opportunity in the U.S. for some consumers and their attorneys to achieve preferred legal arrangements for the reasons outlined above must surely be a contributing factor to these horizontal differences.

4.3. The proof of the pudding: Distributional considerations and judicial opinions

One of the most striking features of the revolution in U.S. product-liability law is the explicitly distributional character of the opinions in the landmark cases. Efficiency scholars have not included the opinions themselves among the useful data in examining the hypothesis. This is a puzzling omission,



411

provided that the reasoning in the opinion is some function, as it surely is, of the information produced by competing litigants. Posner (1998) has asserted that the rhetoric of opinions is not suitable as data for hypothesis-testing and actually muddies rather than illuminates the motivation for changes in legal doctrine. However, it seems unwise to ignore any data that are available, and it is reasonable to suppose that judges' willingness to act in the name of distributive justice when asked to do so provides a mechanism (though of course not the only plausible one) for resources to be translated into favorable legal outcomes.

In Henningsen, Justice Francis' opinion asserted that standardized contracts gave manufacturers a bargaining advantage over consumers that the court could rectify: "The gross inequality of bargaining occupied by the consumer in the automobile industry is thus apparent. There is no competition among the car makers in the area of express warranty" (p. 391). The purchase of a car, with its predetermined safety features, is a "take it or leave it" pro- position due to the manufacturer's "strong bargaining power" (p. 389). In the end, holding that the standardized contract causes the plaintiff to relinquish all liability claims would require "abandonment of all sense of justice" (p. 389).

The tack taken in Greenman was similar. Justice Traynor held for a unanimous California Supreme Court that

We need not recanvass the reasons for imposing strict liability on the manufacturer. The purpose of such liability is to insure that the costs of injuries resulting from defective products are borne by the manufacturers rather than by the injured persons who are powerless to protect themselves (p. 63).

The wording of both decisions, which is consistent with many others in the history of expanding manufacturers' liability, assumes market transactions between consumers and mass-production firms are not the result of a compet- itive process. Instead, such transactions are almost a zero-sum game in which the manufacturer achieves revenue, through such tactics as the standardized contract, at the explicit expense of consumer welfare, In such an environment, altering the law is simply a matter of redistribution, and the principles of distributive justice then govern. The redistributional nature of the landmark opinions in U.S. product-liability law is evidence for a pressure-group role in legal evolution.14



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5. Rent-seeking and critical legal theory

Ever since the path-breaking work of Horwitz (1977), the assessment of law and legal institutions by critical legal theorists has implicitly assumed the key premise of this paper: the law is the result of struggles between various pressure groups. However, it has used this theoretical insight to reach a much more sweeping conclusion: that the result of this struggle is the protection (or the strengthening) of the most powerful groups in society, and the oppression (or weakening) of the least powerful. The most important insight to emerge from this paper is that although resource disparities matter, they do so only as a component of overall comparative advantage in litigation.

The importance of other factors beyond resource endowments can be illus- trated by considering the possibilities when the relative productivity of legal conflict to its alternatives, given by a/b and a/aj, varies. An appropriate test of whether a group benefits on balance from litigation is to compare its income to what its members would earn if redistributive technology in general and litigation technology in particular did not exist. The model indicates that if a or b is high enough relative to aj, some groups may do better with redistribution when the alternative is to be paid marginal product in production, This may be true even with significant disparities in resources, which is the way the CLS hypothesis manifests itself in the model.

Assuming that litigation technology does not disproportionately favor those groups with the highest rj, and assuming the initial resource disparity is not too great, CLS theory may if anything be turned on its head. Over time, the law can be used to redistribute from those who reap greater rewards from market exchange to those who benefit less. CLS theory is correct to assert that investments in changing the law to extract rents are important, but is remiss in neglecting the mechanics of such struggles. To the extent that law is politics, it must be politics governed by empirically verifiable principles, and the rules of constrained optimization provide an analytical framework that has been absent from critical legal studies.

6. Conclusion

Economic analysis of the evolution of the common law has traditionally asserted that the law tends toward efficiency. However, the microfoundations of the various arguments have ignored the question of collective resource constraints faced by potential litigants, as well as the tradeoff between invest- ing in litigation, lobbying and cooperative production. Incorporating these ideas indicates that investment in litigation is a substitute for investment in productive activity and lobbying, and parties that find these activities rel-



413

atively unrewarding invest disproportionately in litigation, leading to legal rules that give them a comparatively large fraction of the income produced, and perhaps an improvement for them over the outcome in the absence of judicial redistribution.

Many adherents of critical legal studies view the law as an interest-group struggle, but one that has certain tendencies: the protection or enrichment of powerful groups in society. The economic literature on rent-seeking provides a way to test this belief to see if it is microeconomically reasonable. While resource disparities matter, there is no reason to suppose that they domin- ate other elements of comparative advantage in determining legal investment and the resulting shape of the law. Presumably critical legal scholars would quarrel with the legitimacy of imposing rigorous microeconomic structures on their view of the law.15 However, all testable hypotheses require assumptions about a system's behavior, and the economic model of constrained optimization provides one reasonable starting point for generating such hypotheses.

It should be emphasized that the results in this paper are a complement to, rather than a substitute for, existing theories of the formation of the common law. It seems difficult to construct a theory of the law of contracts, for example, that does not include a dominant role for encouraging the creation of value.16 However, although pressure-group activity may not be the single dominant force determining the common law's shape, it does help to explain a number of anomalies in legal rules both in the U.S. and in other common- law societies. It would be surprising if differential investment in litigation by one group or another did not have important effects on the development of the law, and if the economic environment did not in turn induce such differences in investment. Future research could be directed toward theoretical and empirical measurement of the relative effects of this tendency on legal evolution and economic efficiency.

Notes

1. Even if what is being allocated is the costs brought about by an accident or other loss, recall that the loss is a byproduct of a beneficial cooperative activity, whether that co- operation is explicit or implicit. Losses from product defects must be deducted from the welfare generated by consumption of products, defective and nondefective. Similarly, the losses resulting from the tort of libel must be deducted from the welfare generated when the public consumes the information output produced by the (media) defendant. While the intent of the model is to analyze the law in a pure rent-seeking context, Y can be thought of as this net social surplus from market exchange.

2. The qualifier "if" is necessary because of the assumption that the advent of mass production is best modeled as a change in general productivity. If mass production is simply a



414

change in the marginal rate of technical substitution, then the common law will change in the manner outlined in the previous section.

3. A recent example of this shift, describing how the expectations about the effect of the 2000 U.S. elections caused environmental groups to plan a shift in activity from lobbying to lawsuits, is described in Douglas Jehl, "Fearing Bush will win, groups plan pollution suits," The New York Times, 7 December 2000.

4. The transformation is skillfully and extensively sketched in Priest (1985). 5. 217 N.Y. 382, 111 N.E. 1050 (1916). 6. 32 N.J. 358, 161 A.2d 69 (1960). 7. 59 Cal. 2d 57, 377 P.2d 897, 27 Cal. Rptr. 697 (1963). 8. Often called the Kuznets "U", from Kuznets (1968). 9. It is interesting to note that in the U.S., inequality of both income and wealth peaked

in 1912, which was only four years before the issuance of the opinion in McPherson (Williamson and Lindert, 1980).

10. [1932] AC 562. In the U.K., remedies are also available in contract, if an express warranty or implied warranty of "description, merchantable quality and fitness for purpose exists" (emphasis in original) (Howells, 1993: 53).

11. See, for example, Ontario Law Reform Commission (1979). 12. In Canada they are permitted only in Ontario. In other common-law countries they are

banned. 13. For a model based on risk preference, see Danzon (1983). For agency models, see Miller

(1987) and Dana and Spier (1993). 14. Priest (1985) believes that this distributive-justice aspect of these rulings can be directly

traced to similar arguments made in legal scholarship in previous decades. 15. One such scholar has expressed profound skepticism about rent-seeking as a model of any

type of government behavior (Kelman, 1988). 16. Some have tried, though. See Hunt (1993).

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what's yours is mine: rent-seeking and the common law

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