Economic efficiency and the common law

Do legal rules based on the common law in the U.S. result in economically efficient outcomes? Beginning with Posner and Rubin, a substantial amount of literature supports the hypothesis that there is a natural tendency for common law to evolve over time so as to yield economically efficient court rulings. According to this view, disputants will litigate whenever the existing rules are inefficient. If the rules are efficient then no such incentive exists, in which case the legal rules are affirmed. By respectifying the Rubin model as a two-person, non-cooperative, simultaneous-move game, the analysis presented in this paper appears to support the arguments put forth by Landes, Gould, Tullock, and others that there is a general tendency for the disputants to pursue an out-of-court settlement. The analysis also suggests that it may also be in the litigant's best interest to negotiate an out-of-court settlement when the legal rules are efficient if the expected net present value of accident and avoidance costs is less than the litigants' court costs. Finally, it may pay to litigate even when the legal rules are efficient if the expected net present value of accident and avoidance costs is greater than the sum of the litigants' court costs. Copyright International Atlantic Economic Society 2004