The Law and Economics of Norms

Article excerpt

SUMMARY

INTRODUCTION: THE EVOLUTION OF NORMS WITHIN ECONOMICS AND LAW: WHY NORMS WERE IGNORED AND WHY THEY MATTER UNDER REALISTIC MODELS OF BEHAVIOR IN WHICH NORMS EMERGE AS THE OUTCOME OF EXCHANGE TO REDUCE COSTS 467

I. NORMS DEFINED: NON-ADJUDICABLE INSTITUTIONS ADOPTED TO RESOLVE PREFERENCES IN ENCOUNTERS WITH OTHERS: TOWARDS COST MINIMIZATION 473

II. ORIGINS OF NORMS: NORMS AS SOLUTIONS OF THE COST MINIMIZATION FUNCTION: THE VIEW FROM INSIDE THE BRAIN 475

III. SEPARATION OF LAW AND NORMS: EVOLUTION OF NORMS WITHIN ECONOMICS AND LAW 479

IV. OVERALL NATURE, FUNCTIONS, AND CAUSES OF NORMS AND OTHER INSTITUTIONS: A TYPOLOGY OF NORMS 482

A. Nature and Functions of Norms 482

B. Typology: Norms That Are Inputs Versus Norms That Are Products of Governmental Intervention 485

C. Examples: Norms That Are Eligible Inputs and Originate in Non- governmental Actions and That Are Self-enforcing Without Legal Intervention 486

1. Example One: As a Supplement to Incomplete Contracts Where Law Declines to Intervene: Tipping: Self-enforcing Systems and Institutional Mechanisms 486

2. Example Two: Airport Queuing: Providing Flexibility to a Rule

in a Private Context: A Self-enforcing Norm with No Law Involved .......... 489

3. Example Three: The Maghribi Traders: Norms, Coalitions, and Networks as Private Enforcement Mechanisms for Contracts: Norms That Are Largely Self-enforcing but Have Some Limits on Self-governance .......... 491

4. Example Four: A Complete Private Ordering System That Shuns Outside Legal Enforcement: The Diamond Industry ..........494

5. Example Five: Signaling Communicative Norms with Private Promulgation and No Legal Implementation: Dressing for Success .......... 496

V. NORMS AS INPUTS THAT EVOLVE FROM SELF-ENFORCING TO INCORPORATED-INTO-LAW OR THAT FUNCTION AS A COMPLEMENT TO LAW IN EXCHANGE AND NON-EXCHANGE TRANSACTIONS .......... 497

A. Inputs (i.e., Norms) That Are Incorporated: The Migration to Law .......... 497

1. Example One: Function: Minimizing the Costs of Transacting with Others: Reducing Measurement Costs: Norms That Are Initially Self-enforcing and Then Incorporated into Law: Formal Weights and Measures .......... 497

2. Example Two: Solving Problems, such as the Principal-Agent Problem and Other Forms of Opportunism, with Norms That Are Incorporated by Law into Contracts: The Plastics Industry ...498

3. Example Three: Coordination Norms That Are Seemingly Self-enforcing but Co-exist with Organizations and Law: Driving on the Right .......... 499

4. Example Four: Neighborhood Norms Plus Law to Solve the Problem of Externalities: Lawn Care .......... 500

VI. NORMS THAT ARE THE PRODUCT OF A STATUTE OR A RULE AND MAKE ENFORCEMENT OF LAWS OR RULES POSSIBLE EVEN WITH NO OR MINIMAL SANCTIONS BY LAW: SOCIAL ENFORCEMENT NORMS .......... 500

A. Function One: Empowering Enforcement Norms with the Passage of a Law to Stimulate Secondary Enforcement Mechanisms ..........501

B. Function Two: Passage of a Law to Contribute to the Refining ofthe Content of a Norm ..........503

C. Function Three: Changing Norms: Dueling Norms, No Smoking Norms, and Racial Discrimination Norms ..........503

CONCLUSION ..........505

INTRODUCTION: THE EVOLUTION OF NORMS WITHIN ECONOMICS AND LAW: WHY NORMS WERE IGNORED, AND WHY THEY MATTER UNDER REALISTIC MODELS OF BEHAVIOR IN WHICH NORMS EMERGE AS THE OUTCOME OF EXCHANGE TO REDUCE COSTS

Both law and economics largely ignored norms until the 1990s.1 Norms remained the exclusive province of the social sciences.2 For the purposes of this Article, norms include patterns of behavior, impulses, and spontaneous ordering initially enforceable by non-legal sanctions (i.e., they are initially non-adjudicable) and promulgated by private parties.3

Classical economics ignored norms for several reasons.4 First, because economics used abstract models of behavior built on rational choice theory and the individual utility function,5 it did not study how people actually behaved and ignored the frictions of real exchange as well as norms-the self-imposed constraints that parties use to reduce such frictions. …