February 20, 2014: Ronald Silley joins the editorial board of the ERLE and will support publication of the new issue.

December 10, 2012: The European Review of Law and Economics publishes its second issue. It is available for free download on this page.

October 10, 2011: Dr. Louis Visscher from the Rotterdam Institute of Law and Economics ( joined the editorial board of ERLE. We are happy to strengthen our connection to the EMLE program by him joining our editorial team!

August 31st, 2011: The European Review of Law and Economics,
the biannual Journal of the EMLE Alumni Organization, publishes
its inaugural issue.

I want to thank all authors and contributors at the Universities of
Rotterdam and Hamburg for their support in founding the journal.

Vol. 1, Iss. 1 is available for free download on this page. Older items
will be available in the archive in the future.

Current Issue

Editorial Vol. 1, Iss. 1 - Spreading the Word: Broadening the Appeal of Law and Economics in the European Legal Community

Thomas S. Ulen[*]

Congratulations on this initial volume of the European Review of Law and Economics. The creation of a vibrant new periodical of scholarship in law and economics is an occasion for celebration of the considerable efforts undertaken by the editors, the founding staff, and the contributors to the inaugural issue. But it is also an occasion to celebrate the area of scholarship that prompted the founding of this new periodical, to speculate on the future of that area of scholarship, and to ask how we might interest a wider audience in the legal community in law and economics.

The impact of law and economics on legal scholarship has been remarked upon repeatedly and wonderingly. Until relatively recently that impact has been most forcefully felt in North America, particularly in the United States.[1] It is almost impossible for a law student there to emerge from her three years of legal education without hearing something about law and economics – for example, about the notion of transaction costs, the implications of the Coase Theorem, or the “least-cost avoider” in tort liability. And the typical U.S. law student, much of whose legal education comes from reading and parsing appellate court opinions, will have read more opinions by Judges Posner and Easterbrook than by any other judges.[2]

True, what U.S. law students may hear in their traditional first-year courses about the tenets of law and economics and its practitioners may be negative. They may be told, for instance, that law-and-economics always seems to reach very conservative (or neo-liberal) conclusions; that it pays insufficient (or very little) attention to matters of justice and fairness; that it is a disruptive institutional influence; and that it offers no particular help to practitioners, to lawmakers, or to judges.

None of these criticisms is, in my view, true or, more cautiously put, necessarily true. In large part, the kulturkampf between traditional legal education and law and economics is simply what happens in many academic disciplines whenever a scholarly innovation upsets or threatens a settled orthodoxy.[3] Either the orthodoxy or the innovation prevails or an accommodation is reached between the two. I am hoping for an accommodation because I see much of value in traditional doctrinal scholarship and even more value in scientific legal inquiry.

I believe that two possible steps in reaching that accommodation, disarming the critics, and making a wider group of lawyers and law professors appreciate law and economics is, first, to be less apocalyptic in how one presents the field and its innovations, and second, to present particularly meaningful examples of the power of law and economics in legal inquiry.

So, the first step is to avoid describing law and economics as a revelation, a transformative understanding, or a movement with a body of tenets and theories that one must swallow whole but not in small tastes. Rather, we might instead describe the field as simply a collection of tools that are useful in anyone’s understanding of law. So, take as an example the idea of transaction costs – the costs of identifying someone with whom to bargain, the costs of negotiating with them, and the costs of monitoring and enforcing whatever terms have been agreed to. This is a useful idea in almost any legal inquiry, particularly for practitioners. And it is an idea that is applicable independently from all the rest of law and economics.

Suppose that a lawyer is engaged in settlement negotiations between his client and others. The notion that the success of those negotiations may turn, in part, on the number of parties involved, the time frame over which the agreement is to run, the complexity of the terms to be agreed to, the assiduity with which each party must monitor the other’s behavior, and so on – all factors in determining the level of transaction costs – seems obviously important. Of course, any experienced lawyer will have intuited the relationships among these various elements of the negotiations, their costs of clarification and agreement, and the likelihood of success. One might say that all that law and economics has added to that intuition is some systematic thinking about the elements of transaction costs and methods by which reliably to reduce them (and thereby increase the probability of successfully concluding negotiations). But that systematization of this extremely useful concept is a significant achievement.[4]

Let me illustrate the second step – powerful examples of the results of law-and-economics scholarship – by focusing on two recent developments in the field that should be of broad interest: first, behavioral considerations in criminal law, and second, empirical considerations about contract law.

In its early days, law and economics followed the standard assumption in economics that decisionmakers were rationally self-interested – that is, they applied rational choice theory to legal decisionmaking. While that assumption felt natural and comfortable to those familiar with economics and undoubtedly generated fascinating hypotheses about legal issues, it was an assumption that non-economists (the vast majority of lawyers and law professors) found difficult to accept and adopt.[5]

Law and economics has moved beyond the rational choice assumption of human behavior. Many law-and-economics scholars recognized the power of the empirical results of investigators like Kahneman and Tversky, who showed, in a series of experiments in the 1970s and 1980s, that people did not behave as rational choice theory predicted that they would. Those scholars then applied those results to legal issues and showed that the conclusions of earlier law-and-economic analysis, which had relied on rational choice theory, might have to be amended in light of these behavioral results.[6]

Here’s a radical example from criminal law that ought to catch the attention of those who are not yet convinced of the importance of law and economics. But first, the conventional law and economic analysis. The central focus of the typical law-and-economics analysis of criminal law is on the deterrent aspect of punitive sanctions. The insight is that criminals, like everyone else, “respond to incentives,” as a central tenet of microeconomics has it. If society raises the sanction on a particular crime – by, say, increasing the monetary fine for committing that crime, then potential criminals may respond by “consuming” less of that now-more-costly crime and shifting either to less punitive but equally rewarding crimes or to legitimate pursuits. This theoretical prediction is clear. And, moreover, there is considerable empirical evidence to support the theory.[7]

Theoretical clarity and some empirical evidence notwithstanding, there is increasing reason to question whether potential criminals really are deterred by the threat of criminal sanctions.[8] Numerous experiments and surveys have shown that criminals who have been incarcerated were either unaware of the sanctions that they might face for committing crimes, were mistaken about the extent of those sanctions, or significantly underestimated the likelihood of their being detected, arrested, and convicted.[9] While it is true that the amount of crime has varied over time and place, it may not be the case that those variations are principally attributable, as the standard theory would suggest, to fluctuations in the level of punitive sanctions or the probability of criminal enforcement. While we are still not entirely sure what might explain those significant fluctuations in the amount of crime, there is increasing skepticism that it is the criminal justice system that is solely or even principally responsible.

Additionally, evidence about “affective forecasting” – how we predict our emotional (affective) responses to future events, good and bad – and adaptation – the process by which we all accommodate to good and bad things that happen to us – suggests that we systematically mispredict how we will feel about being incarcerated. Those of us who have not been in prison predict that incarceration will be a very unhappy experience. However, our knowledge of adaptation should suggest that we will find the experience to be more tolerable than we predict. And, indeed, there is evidence that incarcerated prisoners are typically back to their pre-incarceration level of subjective well-being within six months of beginning a sentence of imprisonment.[10] But typically we are not aware of our adaptability and, therefore, do not expect it in ourselves or in others.

An implication of these observations is that the threat of incarceration may deter those who have never been in prison but may not be a significant deterrent to those who have already experienced incarceration. It is also possible that in communities in which there are those who have already been imprisoned, the communication from those who have been imprisoned to those who have not that the experience is not as bad as one might think serves to undermine the deterrent effect of imprisonment even among those who have never been incarcerated.[11]

As a second example of a recent development in law and economics that ought to appeal to a wide audience of those interested in the law, consider a result from the field of empirical legal studies. Whereas the early phase of law and economics was principally a theoretical contribution (showing how legal rules and standards created price-like incentives and hypothesizing how rational decisionmakers might respond to those incentives), there was always a sense – at least among economists – that these hypotheses needed to be confronted with data to see if they explain and predict events in the world.[12] For various reasons – a paucity of data, ignorance of empirical methods, and more – this empirical work was slow to develop. But once it began, as it did in earnest in the 1990s, it produced some fascinating results, results of interest not just to law-and-economics scholars but to anyone interested in the law.

Consider a recent article about the effects of liquidated- or stipulated-damages clauses in contracts. Professor Tess Wilkinson-Ryan of the University of Pennsylvania School of Law found that when there were no liquidation clauses in hypothetical contracts, participants in her experiments were more reluctant to breach a contractual promise than they were when such clauses were present, all other things equal.[13] That greater reluctance was apparently due to the fact that, in the absence of any other consideration, the participants felt that morality should guide them to do what they had promised to do. As a result, there was “too little breach” – that is, participants were reluctant to breach and pay damages even when, according to the notion of “efficient breach of contract,” everyone would have been better off from non-performance and a payment of expectation damages.

Professor Wilkinson-Ryan found, however, that when a hypothetical contract had a liquidation clause, participants were far more likely to breach and pay damages where that was more efficient than performance. The implication is that monetizing the costs of breach in a liquidation clause “primes” contract participants to think of performance and non-performance in terms of money and efficiency and downplays the considerations of morality. This implication ought to commend itself as an important tool to practitioners who want their clients and their clients’ contractual partners to think in terms of efficient breach: In those circumstances, insist on a liquidation clause.

I very much hope that the European Review of Law and Economics will serve to broaden the audience for the tools and conclusions of law and economics. Let us count the inauguration of this journal and the remarkable success of the EMLE and EDLE programs over the past 20 years as a prime indicator of the increasing success of the field in Europe.

Again, I congratulate the founding staff of the European Review of Law and Economics, all the contributors to this inaugural issue, and all the graduates of the EMLE and EDLE programs who are using law and economics in their scholarship and their practice. Ultimately, the success of any scholarly innovation depends on the contributions of those who espouse the innovation. This journal indicates that those contributions are, and will continue to be, significant.

[*] Swanlund Chair Emeritus, University of Illinois at Urbana-Champaign; Professor Emeritus of Law, University of Illinois College of Law. I would like to thank Santtu Pulli, my student, and Maria Pustlauk, the editor-in-chief of the EMLE Journal of Law and Economics, for their invitation to participate in this inaugural issue.

[1] See Nuno Garoupa & Thomas S. Ulen, “The Market for Legal Innovation: Law and Economics in Europe and the United States,” 59 Ala. L. Rev. 1555 (2008). Although there are law-and-economics associations throughout the world (and, indeed, the European Association is older than its North American equivalents), nowhere else has experienced the widespread enthusiasm for the field that characterizes North America and, especially, the United States.

[2] See Mitu Gulati & Veronica Sanchez, “Giants in a World of Pygmies?: Testing the Superstar Hypothesis with Judicial Opinions in Casebooks,” 87 Iowa L. Rev. 1141 (2002) (noting that Posner and Easterbrook are far and away the most frequently excerpted judges in prominent casebooks).

[3] The great German physicist Max Planck wrote, “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.” As a cynic once summarized this lesson to me, “Science advances funeral by funeral.” And yes, I am implying that the study of law is a scientific inquiry. See Ulen, “A Nobel Prize in Legal Science: Theory, Empirical Work, and the Scientific Method in the Study of Law,” 2002 U. Ill. L. Rev. 875.

[4] It is also significant to show, as has law and economics, that the notion of transaction costs is useful in explaining many of the core concepts of contract law and tort law.

[5] Some of this reluctance was, no doubt, due to unfamiliarity with the necessity, in hypothesis- or theory-formulation, of making simplifying assumptions. But a great deal of the reluctance had to do with making the particular assumption that people act rationally so as to maximize their own utility. Many non-economists do not find that that assumption comports with their intuitions about and observations of human behavior. I was once asked by a law faculty audience, “Who are these rational people you’re talking about?”

[6] For a summary of these results, see Russell B. Korobkin & Thomas S. Ulen, “Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics,” 88 Cal. L. Rev. 1051 (2000).

[7] See the survey in Chapter 13 of Robert D. Cooter & Thomas S. Ulen, Law and Economics (6th ed. 2011).

[8] See, for example, Paul H. Robinson & John M. Darley, “Does Criminal Law Deter?: A Behavioral Science Investigation,” 24 Oxford J. Legal Stud. 173 (2004), and Robinson & Darley, “The Role of Deterrence in the Formulation of Criminal Law Rules: At Its Worst When Doing Its Best,” 91 Geo. L.J. 941 (2004). See also Cooter & Ulen, supra n. 8.

[9] David A. Anderson, “The Deterrence Hypothesis and Picking Pockets at the Pickpocket’s Hanging,” 4 Am. Law & Econ. Rev. 295, 308 (2002) (reporting on a survey finding that, “[a]t the time of their offenses, 76 percent of the criminals in the sample and 89 percent of the most violent offenders were incognizant of either the possibility of apprehension or the likely punishments associated with the crime.”).

[10] See Shane Frederick & George Loewenstein, "Hedonic Adaptation," in
Daniel Kahneman, Ed Diener, & Norbert Schwarz, eds., Well-Being: The
Foundations of Hedonic Psychology (1999) at 302-29.

[11] For elaboration on this point and for additional examples of behavioral insights on criminal law, see Richard H. McAdams & Thomas S. Ulen, “Behavioral Criminal Law and Economics,” in Nuno Garoupa, ed., Criminal Law and Economics (2009), and Robinson & Darley, supra n. 10.

[12] Theories and hypotheses are always coherent, consistent, and plausible. That does not mean, however, that they are accurate predictors or explanations of real-world events. The world is, we must believe, understandable, but there are many possible explanations for the most events. The key to scientific inquiry is to find the explanation that is most consistent with the data.

[13] Tess Wilkinson-Ryan, “Do Liquidated Damages Encourage Breach?: A Psychological Experiment,” 108 Mich. L. Rev. 633 (2010).