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inexpensive in comparison to the alternative it has of improving the accuracy of the trial process
(by investing in the length and quality of trial court adjudication). Under that alternative
approach, extra expenditure would be required in all cases rather than only in the subset of cases
that are appealed. The appeals process, in other words, may be an economical way of correcting
error by taking advantage of litigants information that it has occurred.
5.7. Alternative Dispute Resolution
When parties need to resolve a dispute, they may turn not only to the state-sanctioned
method of dispute resolution, namely, trial before a court, but also to arbitration and other forms
of alternative dispute resolution (ADR).154 In examining ADR, it is helpful to distinguish between
ex ante agreements to employ ADR  arrangements made before disputes arise  and ex post
resort to ADR  use of ADR after disputes have arisen. See Shavell (1995a).155
5.7.1. Ex ante ADR agreements. Ex ante ADR agreements may be adopted because they
are to the mutual benefit of the parties to a contract.156 In particular, ADR may lower the cost of
resolving disputes or reduce risk. Second, ADR may engender superior incentives for the parties
153
In fact, however, public fees for appeal are nominal, although private costs may be nontrivial.
154
We focus on binding ADR; nonbinding ADR, such as mediation, is often used to foster settlement.
155
On other issues raised by ADR, see Landes and Posner (1979). It should also be mentioned that there is a
literature considering arbitration alone, not arbitration as an alternative to state-authorized litigation. See, for example,
Ashenfelter (1989, 1992), Ashenfelter and Bloom (1984), and Farber (1980).
156
We observe that to obtain many of the benefits noted in the text, the agreement to use ADR must be made ex
ante; if the parties wait until a dispute arises, it will often be in the interest of one of the parties to refuse to accept ADR.
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through greater accuracy of results. Suppose, for instance, that substandard performance of a
contract would be correctly assessed by expert arbitrators under ADR but not by courts. Then
the parties to the contract might well prefer to adopt ADR because it would induce good
performance, thereby raising the willingness of the promisee to pay for the contract. Third, ADR
may result in improved incentives to engage in disputes or to refrain from that. For example, it
may be that the number of disputes brought under the legal process would be excessive,
dissipating substantial resources of the parties without instigating mutually desirable changes in
behavior; thus an ADR agreement that would serve to limit the number of disputes would be
advantageous.
Because ex ante ADR agreements made by knowledgeable parties raise their well-being, it
seems that ex ante ADR agreements should ordinarily be enforced by the legal system, as they are
in fact. It is sometimes suggested that society should go further and subsidize ADR. A subsidy
might be justified on second-best grounds, because the state already subsidizes ordinary litigation
by not charging litigants for its full costs. It would seem, however, that the optimal solution is to
remove the latter subsidy, unless it is justified on the ground of inadequate private incentives to
sue.
5.7.2. Ex post ADR agreements. Parties will tend to make ex post ADR agreements in
order to reduce dispute resolution costs and risk. On this account, ex post ADR would also tend
to be socially desirable. A full evaluation of ex post ADR, however, must recognize other effects,
notably, how the prospect that parties would adopt ADR ex post would affect their ex ante
behavior. The proper analysis is similar to that bearing on the private versus the social value of
settlements, in section 5.2.3.157
5.8. Formulation of Legal Rules
Economic analysis of the operation of the legal system often takes the legal rules being
enforced as given. The formulation of legal rules itself, however, raises interesting economic
issues.158 One issue concerns the optimal level of detail of rules. On one hand, greater detail
allows better tailored control of behavior. On the other hand, greater detail involves higher
compliance and litigation costs. Moreover, it cannot be assumed that parties will become
informed of the precise content of more detailed rules. See Diver (1983), Ehrlich and Posner
(1974), and Kaplow (1995a).159
Another issue is whether rules should be formulated fully ex ante, or instead should be
incompletely specified initially and fully articulated only ex post, during adjudication of particular
disputes. Fuller ex ante specification is more costly for the state, but may provide greater
predictability for parties and hence induce better behavior, and it also may reduce adjudication
costs. See Diver (1983), Ehrlich and Posner (1974), and Kaplow (1992c). Full ex ante
specification of legal rules tends to be advantageous when the governed behavior is frequent and
has common characteristics, essentially because of economies of scale (the rule is formulated only
once). For infrequent, heterogeneous behavior, leaving the specification of details until the stage
of adjudication may save the state expense because many situations for which details may have
been provided will never arise. A closely related subject is the issuance of precedents by courts;
157
Indeed, parties adoption of ADR can be seen as a form of out-of-court settlement because use of ADR means
that there will be no trial and instead the parties will be bound by the alternative they have chosen.
158
For a survey of the literature, see Kaplow (1998).
159
The subject of legal complexity has received particular attention in the context of the income tax. See, for
example, Blumenthal and Slemrod (1992), and Kaplow (1996).
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for example, major disagreements about issuing precedents concern the degree to which details of
rulings beyond those necessary to decide the case before a court should be specified and when
courts should take the opportunity to announce new legal rules or modify existing ones.160
160
See also Landes and Posner (1976), who analyze the body of precedent as a capital stock that depreciates over
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time.
Additional issues are presented by the frequent need to modify legal rules. New rules, if fully [ Pobierz całość w formacie PDF ]