Uncertainty of Law and the Legal Process

There is extensive literature on whether courts or legislators produce efficient rules, but which of them produces rules efficiently? Is there an optimal mix of litigation and legislation? The law is inevitably subject to a certain degree of uncertainty ex ante; uncertainty makes the outcomes of trials difficult to predict and, hence, prevents parties from settling disputes out of court. Conversely, the law is necessarily certain ex post: litigation fosters the creation of precedents that reduce uncertainty. We postulate that there is a natural balance between the degree of uncertainty of a legal system (kept under control by litigation) and its litigation rate (sustained by uncertainty). We describe such equilibrium rates of litigation and uncertainty in a formal model, study how they are affected by two different policies -litigation fees/subsidies and legislation - and compare the costs and benefits of the legislative and the judicial process of lawmaking. We then extend the analysis to explore the implications of this approach.