Gillian K Hadfield

Scaffolding: Using Formal Contracts to Build Informal Relations to Support Innovation

Gillian K. Hadfield et al. — Tue, 14 Feb 2012 05:49:21 PST

Is it still the case that formal contracts are largely remote from day-to-day management of transactional relationships? Using a preliminary series of 30 interviews we find that in traditional stable industries, much like Stewart Macaulay suggested, little is invested in detailed contracting and unexpected contingencies are handled with little reference to contract language. Contracting partners in these relationships do not resort to formal court enforcement, relying instead on informal mechanisms such as reputation, repeat business, and norms to secure their agreements. We also found evidence, in contrast, that in industries with high rates of innovation, even though contracting partners continue to rely on informal rather than formal enforcement mechanisms, they make substantial use of formal documents and legal advice to plan and manage their relationships. To understand this twist on Macaulay's results, we develop a model that shows the relationship between formal contracting and informal enforcement mechanisms. We show that formal contracts and contract doctrine can serve as a mechanism by which, as the relationship evolves, classification of conduct as breach or not can be reached. With this common classification scheme, parties can use the simple set of strategies and a simple belief system to support an equilibrium in which breach is deterred through informal enforcement. We call this role for formal contracting scaffolding and claim that it provides a support system for the efficacy of informal enforcement mechanisms, including the endogenous development of trust, on which the relationship depends, precisely in settings subject to significant ambiguity and unpredictable change.

Attorney-Client Confidentiality

Gillian K. Hadfield et al. — Fri, 20 Jan 2012 17:06:40 PST

The protection of information generated and shared in attorney-client relationships is a fundamental attribute of Anglo-American legal systems. Protection of attorney-client confidentiality is the core traditional rationale for several distinctive and arguably non-competitive features of legal markets (Hadfield 2008). This chapter reviews the literature relevant to economic analysis of attorney-client confidentiality, a topic that has not come garnered sustained attention from law and economics scholars. We review the literature on legal advice and strategic revelation and then consider how the disparate threads in the literature might be connected and what unanswered questions remain if we are to reach a better understanding of the welfare implications of attorney-client confidentiality.

Endogenous Institutions: Law as a Coordinating Device

Gillian K. Hadfield et al. — Tue, 22 Nov 2011 14:56:50 PST

Scholars widely agree that long-term economic growth requires a legal system providing for rule of law, contract enforcement and impersonal exchange. In this paper, we address a piece of this broad issue by studying the question, what is law? Drawing on other work (Hadfield & Weingast 2011), we argue that law has developed its distinctive structure, at least in part, to coordinate beliefs among diverse individuals and thus improve the efficacy of decentralized rule enforcement systems. In this paper we apply the framework of this coordination account of law to the emergence of medieval contract law and to constitutional law.

Sample Problem-Based Teaching Materials: Advanced Contracts

Gillian K. Hadfield — Fri, 08 Apr 2011 18:36:11 PDT

Sample Problem-Based Teaching Materials: First Year Contracts

Gillian K. Hadfield — Fri, 08 Apr 2011 18:34:38 PDT

Equipping the Garage Guys in Law

Gillian K. Hadfield — Mon, 04 Apr 2011 16:02:23 PDT

The twin structural changes of the last few decades—globalization and the emergence of a web-based platform for economic activity--have transformed the economic demand for law. The market for law, however, has struggled to keep up with these changes, showing few signs of the kind of innovation that we see in many other sectors of the new economy. Even our most sophisticated and innovative corporations report difficulty in finding lawyers with the kinds of risk-attuned and creative problem-solving skills that they need (Hadfield 2011). Some large corporate clients have gone so far as to refuse to hire new law firm associates, finding the value they deliver too far below the hourly rate they are charged for their services. There are many causes of the growing mismatch between what clients want from law and what law delivers, and no silver bullet to solve the growing discontent in the market. But the stagnant nature of legal education clearly plays a role. In this paper, I discuss my experiences with problem-based teaching methods in a mainstay of the traditional law school curriculum: contracts. These experiences both demonstrate how much we need to do to bring legal education into the 21st century, and suggest some concrete changes we can make in how we teach to nurture the development of a new generation of innovators in law.

Collective Punishment: A Coordination Account of Legal Order

Gillian K. Hadfield et al. — Tue, 15 Mar 2011 10:36:36 PDT

Although most economic and positive political theory presumes the existence of an effective legal regime (protecting property rights or implementing legislative or judicial choices, for example), behavioral social science has devoted little systematic attention to the question of what constitutes distinctively legal order. Most social scientists take for granted that law is defined by the presence of a centralized authority capable of exacting coercive penalties for violations of legal rules. This unexamined presumption, however, leaves us with few tools in social science to answer key questions about the emergence and maintenance of legal order. A focus on centralized coercion fails to distinguish between spontaneous social order based on social norms and deliberate order structured by organized efforts to create and enforce rules in the absence of centralized coercion. In this paper we discuss several settings in which centralized coercive force is absent and yet social order relies on distinctively legal attributes and institutions. Drawing on a model developed in Hadfield & Weingast (2011), we use these settings to show how distinctively legal attributes and institutions work to coordinate decentralized collective punishment. We focus in particular on how legal institutions reduce ambiguity and solve incentive problems to support a decentralized equilibrium characterized by compliance with deliberately chosen rules. We thus sketch out how a social scientific account of law can help distinguish social norms from legal rules and identify the institutions that support legal order in a wide range of settings that do not presume the existence of centralized coercion.

Rational Reasonableness: Toward a Positive Theory of Public Reason

Gillian K. Hadfield et al. — Mon, 14 Mar 2011 18:45:49 PDT

Why is it important for people to agree on and articulate shared reasons for just laws, rather than whatever reasons they personally find compelling? What, if any, practical role does public reason play in liberal democratic politics? We argue that the practical role of public reason can be better appreciated by examining the structural similarities in normative and positive political theory. Specifically, we consider the analytical parallels between Rawls’ account of political liberalism and a rational choice model of legal order recently proposed by Hadfield & Weingast (2011). The positive model proposes that a shared system of reasoning—a common logic—plays a key role in coordinating a stable equilibrium when legal rules depend on decentralized collective enforcement efforts by individual agents. The common logic enables individuals to predict how others will behave in the face of wrongful conduct and incentivizes participation in costly collective punishments by reassuring agents that their personal concerns will be taken into account in the resulting equilibrium. Rawls’s theory of political liberalism, we argue, is based on a comparable recognition that citizens in a pluralistic society face a practical as well as a moral problem in sustaining a stable political conception of justice. How can individual citizens have confidence that others will reciprocate their commitment to support fair and reasonable governing principles that depart from their own ideal conceptions of truth and value? Citizens face a practical problem of mutual assurance that public reason helps them solve by making individual ongoing commitments to a political conception of justice a matter of common knowledge. The solution, on both views, requires citizens’ reciprocal commitment to basing law on a system of shared public reasons. Both views thus place public reason at the core of liberal democratic politics in conditions of diversity, and for quite similar reasons. Our argument illustrates the (often) complementary roles of positive and values-based analysis in constitutional (in the broadest sense) design.

Their Day in Court

Gillian K. Hadfield — Fri, 26 Nov 2010 10:48:00 PST

Making Legal Aid More Affordable and Accessible

Gillian K. Hadfield — Fri, 26 Nov 2010 10:44:47 PST

Producing Law for Innovation

Gillian K. Hadfield — Wed, 10 Nov 2010 15:01:40 PST

In this contribution to the forthcoming Rules for Growth prepared by the Kauffman Task Force on Law, Innovation and Growth, I first discuss why we need to think of legal infrastructure as economic infrastructure requiring focused economic policymaking, what is wrong with our existing legal infrastructure and why we need to change our modes of legal production. I then set out a vision of what greater reliance on market-based production of legal infrastructure could look like. Finally, I suggest some concrete steps that policymakers can take to move us toward a more open, competitive system of legal production. These include 1) opening up access to the provision of legal services, such as by establishing a federal licensing regime that exempts providers from state-based regulation by the bar and state supreme courts and reduces restrictions on the ownership and management of legal providers; 2) establishing the public law framework necessary to enable competitive private legal entities supplying legal rules (for corporate governance and commercial contracting, for example) to emerge; and 3) reducing barriers to international trade in legal services.

Producing Law for Innovation

Gillian K. Hadfield — Wed, 10 Nov 2010 15:01:20 PST

In this chapter I first discuss why we need to think of legal infrastructure as economic infrastructure requiring focused economic policymaking, what is wrong with our existing legal infrastructure and why we need to change our modes of legal production. I then set out a vision of what greater reliance on market-based production of legal infrastructure could look like. Finally, I suggest some concrete steps that policymakers can take to move us toward a more open, competitive system of legal production. These include 1) opening up access to the provision of legal services, such as by establishing a federal licensing regime that exempts providers from state-based regulation by the bar and state supreme courts and reduces restrictions on the ownership and management of legal providers; 2) establishing the public law framework necessary to enable competitive private legal entities supplying legal rules (for corporate governance and commercial contracting, for example) to emerge; and 3) reducing barriers to international trade in legal services.

What is Law? A Coordination Account of the Characteristics of Legal Order

Gillian K. Hadfield et al. — Wed, 10 Nov 2010 14:28:04 PST

Legal philosophers have long debated the question, what is law? But few in social science have attempted to explain the phenomenon of legal order. In this paper we build a rational choice model of legal order in an environment that relies exclusively on decentralized enforcement, such as we find in human societies prior to the emergence of the nation state and in many modern settings. We begin with a simple set of axioms about what counts as legal order. We then demonstrate that we can support an equilibrium in which wrongful behavior is effectively deterred by exclusively decentralized enforcement, specifically collective punishment. Equilibrium is achieved by an institution that supplies a common logic for classifying behavior as wrongful or not. We demonstrate that several features ordinarily associated with legal order--such as generality, impersonality, open process and stability--can be explained by the incentive and coordination problems facing collective punishment. You can see a presentation of an earlier version of this paper at the Sackler Colloquium on Dynamics of Social, Political and Economic Institutions at the National Academy of Sciences, December 2010, here: http://sackler.nasmediaonline.org/2011/dynamics/gillian_hadfield/gillian_hadfield.html

Legal Infrastructure and the New Economy

Gillian K. Hadfield — Tue, 09 Mar 2010 13:41:37 PST

In the last two decades, the economy has undergone fundamental transformation with the twin structural changes of a great increase in the size of global markets and the internet-driven development of a platform for global exchange and work processes. These changes have transformed the economic demand for law: the demand for legal inputs that will support the creation of value in economic relationships. Not merely the quantity but the type of legal inputs required by the new economy is significantly different from those required by the old economy. The economic demand for law in the new economy requires support for the much higher rates at which economic relationships now cross both firm and jurisdictional boundaries, the more rapid depreciation of legal solutions, the increased differentiation of legal problems, the reduced tolerance for legal transaction costs created by high velocity and global competition, and a greater need for integration of business and legal expertise in order to engage in the relatively constant innovative problem-solving that the new economy requires. In this paper I argue that our legal infrastructure—the socially available set of legal materials that economic actors can use to help govern relationships—has not kept up with this transformation in the economic demand for law. Empirical evidence for this claim includes the increasing levels of dissatisfaction in even the most elite corporate legal markets, the unprecedented impact of the Great Recession of 2009 on large law firms, and surveys and interviews conducted with corporate counsel. The primary basis for the claim of a mismatch, however, is theoretical: the attributes of our existing legal infrastructure—a heavy reliance on densely-worded and complex statutes, regulations and contracts; human-capital-intensive craft production methods; undiversified legal business models; almost exclusive reliance on mandatory legal rules imposed by public actors—are poorly suited to the nature of economic activity in the new economy. The reason our legal infrastructure has not adapted, I argue, is attributable to an even deeper level of legal infrastructure: the severe limitations on who may produce legal rules and other legal inputs (such as advice, document templates, norms and practices) imposed by our continued reliance on publicly produced rules and the excessively closed nature of our lawyer- and judge-controlled legal markets.

The Public and the Private in the Provision of Law for Global Transactions

Gillian K. Hadfield — Fri, 15 May 2009 22:36:22 PDT

In this essay, I revisit the public/private divide in order to explore more fully the potential for private production of law in global exchange and also to clarify what I think are differences in the way common law and civil legal scholars think about the public and the private in law.

The Strategy of Methodology: The Virtues of Being Reductionist for Comparative Law

Gillian K. Hadfield — Fri, 15 May 2009 22:22:42 PDT

In this comment I respond to three comments by comparative legal scholars on my paper "Levers of Legal Design: Institutional Determinants of the Quality of Law." In this comment I respond to concerns about the potential for the reductionist methodology employed by economist to illuminate issues in comparative law, particularly in light of commitments in comparative legal scholarship to deep understanding of culture and respect for different legal systems.

The Dynamic Quality of Law: The Role of Judicial Incentives and Legal Human Capital in the Adaptation of Law

Gillian K. Hadfield — Fri, 15 May 2009 21:56:55 PDT

Much of the existing literature investigating the relationship between legal regimes and economic growth focuses on the agency problem of aligning judicial incentives with social welfare. In this paper I look instead at the factors that in‡fluence the quality of law when judges have incentives to promote social welfare but they have limited knowledge about the environment in which law is to be applied. The key insight is that the capacity for a legal regime to generate value-enhancing legal adaptation to local and changing conditions depends on its capacity to generate and implement adequate expertise about the environment in which law is applied. The central mechanism of adaptation is the interaction among three factors: 1) judicial incentives for rule-following and rule-adaptation, 2) litigant incentives for investing in costly evidence and innovative legal argument and 3) the accumulation of shared legal human capital– defi…ned as the sum of litigant investments in evidence and argument– which determines the systemic likelihood of judicial error.

Higher Demand, Lower Supply? A Comparative Assessment of the Legal Landscape for Ordinary Americans

Gillian K. Hadfield — Fri, 15 May 2009 21:50:28 PDT

In this paper I review the small amount of available data on the extent to which ordinary individuals in the U.S. have access to legal resources to navigate the law-thick world that Robert Kagan has famously called ‘adversarial legalism—the American way of law.’ I present this data in comparative context, relating what (little) we know about the availability of law in the U.S. to what (little) we know about the availability of law in other advanced societies and in countries transitioning to legally-mediated market democracy. I review first a set of ‘legal needs’ surveys that ask households about their experiences with difficult problems that are potentially subject to legal intervention or governance and their use of resources, including lawyers, to resolve those problems. The comparative analysis demonstrates that while the incidence of reported problems is relatively stable across countries (with the exception of Japan, which reports lower rates),and contact with lawyers is comparable, there are significant differences in the extent to which people in other countries are able to access other non-lawyer resources for help with a legal problem. Most strikingly, Americans appear significantly more likely to ‘lump’ their problems and do nothing as compared to people in other countries with arguably more robust delivery systems to provide individuals with access to legal resolutions. I then turn to macro indicators to shed light on the extent to which a country devotes resources to delivering the legal system in practice. Here I compare data on expenditure on courts and legal aid and numbers of judges, lawyers and cases in a set of European countries to the available US data. Here too we see that other countries, including those with still emerging legal systems, appear to expend considerably more resources than the US does on a per case. Together these ‘tidbits’ of data, which call for more careful empirical work, are suggestive of the conclusion that while the US system ostensibly relies heavily on law to mediate relationships among people and institutions, in practice there are few resources devoted to making law effective in practice, and apparently less so than in countries that are arguably less law-driven than our own.

Legal Barriers to Innovation: The Growing Economic Cost of Professional Control Over Corporate Legal Markets

Gillian K. Hadfield — Thu, 21 Feb 2008 17:48:24 PST

Markets for legal goods and services are among the most heavily regulated in the U.S. Between the profession and the judiciary, lawyers control not only who may sell legal products but who may invent them, through restrictions on licensing, organizational form and the sharing of revenues with non-lawyers. In this paper I argue that professional control over corporate legal markets in particular--with an imposed high degree of homogeneity on the pool of people who can respond creatively to the diverse and changing economic needs--poses a significant obstacle to innovation in markets more generally and control over spiraling legal costs.

Framing the Choice between Cash and Courthouse: Experiences with the 9/11 Victim Compensation Fund

Gillian K. Hadfield — Thu, 21 Feb 2008 17:34:26 PST

In this paper I report the results of a quantitative and qualitative empirical study of how those who were injured or lost a family member in the September 11, 2001 terrorist attacks evaluated the tradeoff between a cash payment--available through the Victim Compensation Fund--and the pursuit of litigation. Responses make it clear that potential plaintiffs saw much more at stake than monetary compensation and that the choice to forego litigation required the sacrifice of important non-monetary, civic, values: obtaining and publicizing information about what happened, prompting public findings of accountability for those responsible, and participating in the process of ensuring that there would be responsive change to what was learned about how the attacks and deaths happened. The results shed light on the framing component of the transformation of disputes, and in particular on how potential litigants see the decision to sue, or not, as a decision as much or more about how they understand their relationship to their community and their responsibilities as a citizen as how they evaluate monetary considerations.