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DOI 10.4337/9781783471676
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Contents
List of contributors vi
Preface vii
1. Economic methods and legal reasoning 1
Niels Petersen and Emanuel V. Towfigh
2. The economic paradigm 18
Emanuel V. Towfigh
3. Demand, supply, and markets 32
Alexander Morell
4. Game theory and collective goods 61
Stefan Magen
5. Contract theory and the economics of contract law 96
Klaus Ulrich Schmolke
6. Public and social choice theory 121
Emanuel V. Towfigh and Niels Petersen
7. Empirical research and statistics 146
Sebastian J. Goerg and Niels Petersen
8. Behavioral law and economics 177
Markus Englerth
Index 205
v
Contributors
Markus Englerth, Attorney- at- law with Danckert Huber Bärlein, Berlin
Sebastian J. Goerg, Assistant Professor of Economics, Florida State
University
Stefan Magen, Professor of Public Law, Legal Philosophy, and Law and
Economics, University of Bochum
Alexander Morell, Senior Research Fellow, Max Planck Institute for
Research on Collective Goods
Niels Petersen, Professor of Public Law, International Law, and EU Law,
University of Münster
Klaus Ulrich Schmolke, Professor of Private Law, Commercial, Company
and Business Law, University of Erlangen- Nuremberg
Emanuel V. Towfigh, Senior Research Fellow, Max Planck Institute for
Research on Collective Goods
vi
Preface
Economic methodology has been gaining increasing attention in legal
studies over the last few decades – for a while now in the Anglo-A merican
discourse, and more recently also in continental Europe. Arguments based
on economic thinking were first advanced in private law and then in other
areas of law as well. Nowadays, nobody is surprised anymore to read of
‘incentives’ or ‘actors’ in a legal text, or – more recently – of ‘nudges’.
There is hardly a treatise on torts which does not contain reflections on the
best insurability; in the field of emissions trading law, EU law specialists
discuss the first allocation of certificates; and criminal law experts debate
whether increasing the chances of detecting crimes would have a stronger
deterrent effect than the mere increasing of sentences. Further prominent
examples could be named for a whole string of legal areas, ranging from
medical liability and intellectual property rights to tax and environmental
law as well as antitrust and consumer protection law. In comparative law,
economic theory is frequently used as a tertium comparationis, a standard
of comparison. While law and economics in the initial stages primarily
dealt with theoretical models, in recent times empirical findings have also
increasingly been making their way into legal studies.
There is also a growing demand for legal scholars to justify legislation
(already in force or about to be implemented) on the basis of evidence on
human behavior – for example, from politics or neighboring disciplines. Is
an intended legal measure really suited to fulfill its goal? Legal practition-
ers are thus increasingly compelled to assure themselves of the fundamen-
tals of their own discipline. In order not to lose their clout to have a strong
impact on society, they must become experts for behavioral interventions
through law. Law and economics provides a suitable framework for
this, in particular, if evidence from the behavioral sciences is taken into
account.
These developments also mean there is an increasing demand for
knowledge of social science methodology in general and of economics in
particular to be passed on. How does one find access to this mode of think-
ing? What limitations have to be taken into account when introducing an
economic argument into the legal discourse? How do we recognize a good,
economically sound argument, and how can we debunk a poor one? And
vii
viii Economic methods for lawyers
finally, how can we learn to make a valid economic argument ourselves?
This textbook is an attempt to answer these questions. It addresses readers
who are familiar with legal studies, yet have no previous knowledge of the
social sciences, and who wish to become familiar with economic methods
and to understand the appeal and the power of an economic argument in
select legal contexts. The major areas of economic theory are briefly intro-
duced, as far as they are relevant for legal studies. Furthermore, the book
will give an overview of the empirical fundamentals of the social sciences,
and of more recent approaches relating to behavioral theory.
Therefore, the book differs in its approach from conventional textbooks
on law and economics. The idea is not to study certain legal areas through
the lens of economic theory. First and foremost, it is about imparting
information on methods rather than certain content- related theories. The
book does not outline how specific economic insights should be under-
stood in a legal context. Rather, it intends to be an aid to understanding
economic arguments better and applying them to legal issues. Obviously,
this textbook cannot do entirely without content-r elated knowledge, so
that short introductions to some basic theoretical concepts of economics
are provided – from microeconomics to public goods and public choice.
Despite this emphasis on methods, the authors have gone to great lengths
to show the importance of their remarks for legal studies, using examples
from many of the different legal fields.
This textbook presents the basic economic models, since this project is
about introducing economic methods to legal experts. In economics, too,
as in jurisprudence, many of the assumptions and conclusions presented
here without second- guessing are the subject of heated debate. Every topic
presented in this volume is open to a host of theoretical and empirical vari-
ations and refinements – indeed, these are too numerous to reference them
in their entirety. Interested readers are advised to refer to more specialized
literature, which usually contains more refined models. References are
provided at the end of each chapter, and the footnotes contain further
references for specific questions.
The authors of the individual chapters are experts in their respective
fields. However, the primary authors had the ambition to produce not an
anthology of economic methodology, but rather a self- contained textbook.
The concept and final harmonization are the work of the two primary
authors. They revised all contributions in order to avoid overlaps and to
ensure coherence and a consistent style. The book is based on the experi-
ence of a German language textbook; Stefan Voigt and Patrick Leyens
from the Institute of Law and Economics at Hamburg University urged
us to write an English language textbook according to the same concept,
bridging a gap for ‘black- letter law’ trained lawyers into social science
Preface ix
methods. Special thanks go to Brian Cooper for his thorough linguistic
review of the individual contributions, to Rebekka Herberg for the final
editing of the manuscript, and to Tara Gorvine, Erin McVicar, Claire
Greenwell and David Fairclough at Edward Elgar for the professional and
helpful handling of the publishing process.
We hope this book will be well received and are always grateful for ideas
for improvement.
Emanuel V. Towfigh and Niels Petersen
1. Economic methods and legal
reasoning
Niels Petersen and Emanuel V. Towfigh
I. DEVELOPMENT OF LAW AND ECONOMICS
The modern economic analysis of law was developed in the United
States in the second half of the 20th century.1 There are several factors
that contributed to this development. However, the main reason is
probably a cultural one. The critique of legal realism with regard to the
power of legal doctrine to determine the results of legal decisions has
had a much stronger influence on legal academia in the United States
than in continental Europe. With the disenchantment of legal doctrine,
US scholars had to look for different fields of research activity. The
economic analysis of law was one approach that tried to bridge this
gap.2
The emergence of the Law and Economics movement in the US is
often traced back to Ronald Coase’s article on ‘The Problem of Social
Cost’ in the Journal of Law and Economics in 1960. This article paved
the way for the economic analysis of tort and contract law. In the
1960s, Guido Calabresi advanced the economic analysis of tort law,
culminating in his book on accident law in 1970. Gary Becker then
applied economic principles to areas of law which had previously not
been susceptible to an economic analysis: to crime, racial discrimination
or family life. In 1973, Richard Posner published his seminal textbook
on the Economic Analysis of Law, in which he tried to present for the
first time a comprehensive analysis spanning several different fields of
law.
1 For a detailed account, see Kristoffel Grechenig and Martin Gelter,
History of Law and Economics (Working Paper, MPI Collective Goods, 2014).
2 See Grechenig and Gelter, The Transatlantic Divergence in Legal Thought,
31 Hastings Int’l and Comp. L. Rev. 295 (2008).
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2 Economic methods for lawyers
II. POSITIVE AND NORMATIVE ECONOMIC
THEORY
In the scholarly discourse, two approaches to economic analysis can be
distinguished. We will briefly touch upon this distinction again in Chapter
2. First, we can use economic theory as a descriptive tool (‘positive theory’).
Economics, then, is a perspective to look at the world and to make sense of
what we see. How do people behave – in terms of our theory? And why do
they behave this way – in light of our theory? To see how well our positive
theory reflects what we empirically observe, we derive hypotheses about
the behavior we would expect to see in certain situations: We make predic-
tions. We can then check in an empirical study (see Chapter 7) whether our
predictions are correct, and evaluate our theory accordingly, adapting it if
necessary. Second, we can use economic theory to postulate how the world
should be (‘normative theory’) or we can evaluate different states of the
world according to a normative standard. For example, welfare economics
(as we will see in greater detail in Chapter 2) posits that a condition A ‘is
better than’ a condition B if more people are better off materially under
condition A. It thereby assumes a normative standard (it is good if people
are prospering materially), and measured against this standard it makes
a normative judgment (‘is better than’). Of course, the line drawn between
positive and normative theory is not always that bright and clear. Positive
theory can carry implicit normative assumptions; and even the mere labe-
ling of a behavior as ‘rational’ may be understood to contain a judgment.
Moreover, positive theory may not only describe, but also affect behavior
if people informed by economic theory expect their environment to behave
in a certain way, and condition their own behavior on this expectation: If I
expect everyone else to behave selfishly, as positive economic theory seems
to imply, then my best reaction is to behave selfishly myself; my selfish
behavior may, in turn, induce my environment to behave selfishly, which
proves my suspicion that everyone else behaves selfishly (‘self-f ulfilling
prophecy’).3
The normative side of economic theory is the main reason why – despite
the success of law and economics in the US – there has long been a fierce
resistance against the economic analysis of law in other parts of the world,
especially in continental Europe. This resistance was primarily based
on the normative target that the economic analysis of law often had in
3 On this issue, see the very instructive study of Donald MacKenzie and
Yuval Millo, Constructing a Market, Performing Theory: The Historical Sociology of
a Financial Derivatives Exchange, 109 American Journal of Sociology 107 (2003).
