Law and economics is an important, growing field of specialization for both legal scholars and economists. It applies efficiency analysis to property, contracts, torts, procedure, and many other areas of the law. The use of economics as a methodology for understanding law is not immune to criticism. The rationality assumption and the efficiency principle have been intensively debated. Overall, the field has advanced in recent years by incorporating insights from psychology and other social sciences. In that respect, many questions concerning the efficiency of legal rules and norms are still open and respond to a multifaceted balance among diverse costs and benefits. The role of courts in explaining economic performance is a more specific area of analysis that emerged in the late 1990s. The relationship between law and economic growth is complex and debatable. An important literature has pointed to significant differences at the macro-level between the Anglo-American common law family and the civil law families. Although these initial results have been heavily scrutinized, other important subjects have surfaced such as convergence of legal systems, transplants, infrastructure of legal systems, rule of law and development, among others.
Joni Hersch and Blair Druhan Bullock
The labor market is governed by a panoply of laws, regulating virtually all aspects of the employment relation, including hiring, firing, information exchange, privacy, workplace safety, work hours, minimum wages, and access to courts for redress of violations of rights. Antidiscrimination laws, especially Title VII, notably prohibit employment discrimination on the basis of race, color, religion, sex, and national origin. Court decisions and legislation have led to the extension of protection to a far wider range of classes and types of workplace behavior than Title VII originally covered. The workplace of the early 21st century is very different from the workplace when the major employment discrimination statutes were enacted, as these laws were conceived as regulating an employer–employee relationship in a predominantly white male labor market. Prior emphasis on employment discrimination on the basis of race and sex has been superseded by enhanced attention to sexual harassment and discrimination on the basis of disability, sexual orientation, gender identity, and religion. Concerns over the equity or efficiency of the employment-at-will doctrine recede in a workforce in which workers are increasingly categorized as independent contractors who are not covered by most equal employment laws. As the workplace has changed, the scholarship on the law and economics of employment law has been slow to follow.
Charles R. Korsmo
Law and economics has proved a particularly fruitful scholarly approach in the field of mergers and acquisitions. A huge law and economics literature has developed, providing critical insights into merger activity in general and the proper role of corporate and securities law in regulating this activity. Early economic research examined the motivations for merger activity and the antitrust implications of mergers. Later scholarship elucidated the important disciplining effects on management from merger activity and the market for corporate control. If management performs poorly, causing a firm to become undervalued relative to a well-managed firm, the firm becomes vulnerable to a takeover where management will be replaced. This prospect provides a powerful incentive for management to perform well. More recent work has revealed the limitations of market discipline on management actions in the merger context, and the corresponding role of corporate law in protecting stockholders. Because a merger is generally the final interaction between management and the other stakeholders in a firm, the typical constraints and mechanisms of accountability that otherwise constrain managerial opportunism may be rendered ineffective. This work has played a central role in informing modern jurisprudence. It has shaped the application of enhanced judicial scrutiny of management actions in the merger context, as embodied in the landmark Delaware cases Unocal and Revlon. The law and economics literature has also made important contribution to more recent developments in stockholder appraisal. The law and economics tradition has also provided a useful framework for evaluating the dynamics of merger litigation, including stockholder appraisal, and the extent to which such litigation can be made to serve a useful role in corporate governance.
Mark F. Grady
Tort law is part of the common law that originated in England after the Norman Conquest and spread throughout the world, including to the United States. It is judge-made law that allows people who have been injured by others to sue those who harmed them and collect damages in proper cases. Since its early origins, tort law has evolved considerably and has become a full-fledged “grown order,” like the economy, and can best be understood by positive theory, also like the economy. Economic theories of tort have developed since the early 1970s, and they too have evolved over time. Their objective is to generate fresh insight about the purposes and the workings of the tort system. The basic thesis of the economic theory is that tort law creates incentives for people to minimize social cost, which is comprised of the harm produced by torts and the cost of the precautions necessary to prevent torts. This thesis, intentionally simple, generates many fresh insights about the workings and effects of the tort system and even about the actual legal rules that judges have developed. In an evolved grown order, legal rules are far less concrete than most people would expect though often very clear in application. Beginning also in the 1970s, legal philosophers have objected to the economic theory of tort and have devised philosophical theories that compete. The competition, moreover, has been productive because it has spurred both sides to revise and improve their theories and to seek better to understand the law. Tort law is diverse, applicable to many different activities and situations, so developing a positive theory about it is both challenging and rewarding.