Methodology of Law and Economics

Introduction A chapter on the methodology of law and economics, i.e. the economic analysis of law, concerns the methodology of economics. The above quote (Becker 1976, 5) shows that economics should not be defined by its subject, but by its method (also Veljanovski 2007, 19). This method forms the core of our contribution. We discuss several related issues. In his entry on methodology in the Encyclopedia of Law and Economics, Kerkmeester (2000) states that most legal economists follow a pragmatic, eclectic approach and that it is hard to fit them in a particular school. A review of the methodology of law and economics must therefore concentrate on the ideas which are shared by the vast majority of legal economists (Kerkmeester 2000, 383). De Geest defines the use of elements from different schools as the ‘integrated paradigm’, and the predominant approach to law and economics as the ‘mainstream approach’ (De Geest 1994, 459ff, Mackaay 1991, p. 1509). In law and economics, the economic approach operates on two distinct levels. First, human choice is analyzed from an economic point of view. The predominant approach here is the rational choice theory, which we discuss in Section 2. The basic idea of this theory is that human behaviour is analyzed as if people are seeking to maximize their expected utility. The second level of the economic approach is the goals which are attributed to the legal system. In Section 3, we discuss the concept of market failure, which in law and economics is regarded as the primary raison d’être of law. Legal rules are analyzed as instruments to correct market failure, or at least to reduce its adverse consequences. We will briefly illustrate this idea by discussing, among others, competition law, tort law, patent law and consumer law as instruments to counter market power, negative externalities, collective goods and information asymmetry. In Section 4, we discuss the Coase Theorem, which states that the allocation of legal entitlements between market players is irrelevant for efficiency when the parties can transact these entitlements costlessly. Given that transaction costs are positive in the real world, we also pay attention to their implications for regulation. In Section 5, we discuss ‘behavioural law and economics.’ This relatively recent approach is based on insights from cognitive psychology, suggesting that people do not always act rationally. After reviewing the major findings in this field, we elaborate on the consequences for the more traditional approach of the rational choice theory. In Section 6 we conclude.