Common law efficiency when joinder and class actions fail as aggregation devices

Abstract

We develop a litigant-based model of rule selection where parties choose to litigate rules that are efficient between two parties, but inefficient as between a potential class or potentially joined litigants and a counter-party. Collective action problems lead to incomplete party formation, which generates continuous litigation of seemingly efficient rules. By accounting for externalities borne by non-parties, we show that rules which are allocatively efficient across both parties and non-parties are evolutionary stable for any given judicial ideology or judicial preference for prestige, thus preserving the explanatory power of the Efficiency of Common Law Hypothesis.

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Fig. 1

Notes

  1. 1.

    See Epstein et al. (2013) for an overview of that literature and a book-length treatment of the empirical evidence. Diana Richards and Alessandro Melcarne, in Volume 43 of this journal, provide two separate reviews of the book (Richards 2017; Melcarne 2017).

  2. 2.

    Posner’s original hypothesis put forward in Posner (1998) [1973] has sparked an enormous amount of theory conjecturing that the common law converges toward efficiency. Zywicki and Stringham (2010) surveys the literature.

  3. 3.

    See Miller v. United States Steel Corp., 902 F.2d 573, 574 (7th Cir. 1990) (Posner, J.).

  4. 4.

    26 N.Y.2d 219 (N.Y. 1970).

  5. 5.

    26 N.Y.2d at 219 n. 1

  6. 6.

    Id. at 226

  7. 7.

    In some cases, law may compel persons or entities to join if they are, for instance, “necessary and indispensable” to the litigation (see Fed. R. Civ. Pro. 19). In our framework, compulsory joinder simply lowers the costs of party formation since it eliminates the need for agreement, and its attendant transaction costs, to jointly assert a claim or mount a defense.

  8. 8.

    We disregard combinations of parameter values such that these numbers compute to be negative. Without loss of generality, we can treat such steady-state levels to be zero for our purpose.

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Correspondence to Frank Fagan.

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Fagan, F., Khan, U. Common law efficiency when joinder and class actions fail as aggregation devices. Eur J Law Econ 47, 1–14 (2019). https://doi.org/10.1007/s10657-018-9604-9

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Keywords

  • Efficient common law hypothesis
  • Joinder
  • Class actions
  • Baconian judges

JEL classifications

  • K13
  • K15
  • K41