01 - Law Economics - introduction(1)

Corporate and Insolvency Law for
Economics
Academic Year 2022-2023
kk
Prof. Maurizio Irrera
Prof.ssa Irene Pollastro
An introduction regarding
Law & Economics
- schemes -
Dipartimento di Scienze economico-

sociali e matematico-statistiche
What is Law & Economics?
Law & Economics is the application of i) economic theory and ii) economic methods to the
analysis of law.
Economic concepts are used to:

➢ explain the effects of laws;
➢ assess which legal rules are economically efficient;
➢ predict which legal rules will be promulgated and how people will respond to
them.
The most central assumption in economics is that: human beings are rational
maximizers of their individual satisfactions and, in turn, respond to incentives.
2
History
The origin of the School of Law and Economics can be traced back to the
University of Chicago in the 1940s and 1950s, when economic was first taught at
the Law School.
The origin of the contemporary Science of Law and Economics is officially

placed around 1960s, specifically dating back to the work of Ronald Coase (father
of the Positive Approach) and Guido Calabresi (father of the Normative Approach).
➢ Coase’s 1961 paper “The Problem of Social Cost” was “concerned with those actions
of business firms which have harmful effects on others”.
➢ In his fundamental article “Some Thoughts on Risk Distribution and the Law of Torts”,
Calabresi addressed the claim made by some leading scholars that the “central policy
issue in tort law is whether the principal criterion of liability is to be based on individual fault or
a wide distribution of risk and loss”.
3
Richard Posner
Richard Posner is known as a leading figure in the field of Law and Economics.
In 1972, Richard Posner published the first edition of Economic Analysis of Law and
founded the Journal of Legal Studies, both important events in the progress of the field
as an independent discipline.
Posner is considered to be the one who restated Coase’s conclusions in terms of

efficiency resulting from the minimization of transaction costs.
4
Positive and Normative analysis
Positive analysis asserts that legal rules tend to reflect economic reasoning; in other
words, efficiency is a social goal that is reflected in the law. The Positive law and
economics approach uses economic analysis to describe, explain and predict the
effects of various legal rules in terms of their economic efficiency through: i) predictive
analysis; ii) functional analysis; iii) conceptual analysis.
Normative analysis (Guido Calabresi) asks how the law can be improved to better
achieve the goal of efficiency. It makes policy recommendations based on the
economic consequences of the various issues.
The characteristic of law and economics is its emphasis on incentives and people’s
responses to these incentives.
5
Is Efficiency a valid norm for evaluating Law?
Critics argue that it is inappropriate to judge laws based economic efficiency. Instead,
they urge that the law should pursue goals like fairness and justice. But one meaning
of such terms has to do with the distribution of wealth in society (distributive
justice), and economics surely has something to say about how a just distribution can
be achieved with the least sacrifice in resources.
Kaplow and Shavell (2002) have recently argued that social welfare should be the
sole basis for evaluating legal policy. At the same time, they allow that narrow
concepts of efficiency are also inappropriate because they exclude factors that may
affect well-being.
Nevertheless, they suggest that, as a practical matter, efficiency may often be the best
proxy for welfare in evaluating specific legal rules.
6
What is efficiency?
We can point out at least four concepts of efficiency:
1. Productive efficiency;
2. Pareto optimality;
3. The Kaldor-Hicks criterion;
4. Wealth Maximization.
Economics provided a scientific theory to predict the effects of legal sanctions on

behavior. To economists, sanctions look like prices, and presumably, people respond
to these sanctions much as they respond to prices.
Economics has mathematically precise theories (price theory and game theory) and
empirically sound methods (statistics and econometrics) for analyzing the effects of
the implicit prices that laws attach to behavior.
7
Application of Law & Economics
In recent times the economic analysis of law has expanded from the traditional areas
of antitrust law and taxation to barely almost the branches of law, such as:
➢ criminal law (to determine the optimal deterrence threshold);

➢ contract law (focusing on the promotion of efficient exchanges);
➢ corporate law;
and has developed in a variety of directions, such as:
➢ the application of game theory to legal problems;

➢ the incorporation of behavioral economics into economic analysis of law;
➢ the integrated use of statistical and econometrics techniques.
8
Some final critical remarks
Law & Economics theories of course allow for better understanding the implications
regarding the impact of law on social organization, but we should not forget that:
➢ the idea that people and institutions think only in terms of efficiency dates back to
eighteenth century naturalistic conceptions of law → nowadays, we also think in
terms of social equity improvement;
➢ a strict application of economic theories cannot understand the complexity
stemming from the plurality of legal orders, private and public, that govern the
relationship between individuals and social groups and, in fact, cannot explain
several recent market failures;
➢ economic relationships must be, and actually are, governed by an effective and
authoritative public sector, granting equal opportunities and taking care of
imbalances of power.

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Corporate and Insolvency Law for

Dipartimento di Scienze economico-

Economic concepts are used to:

The origin of the contemporary Science of Law and Economics is officially

Posner is considered to be the one who restated Coase’s conclusions in terms of

We can point out at least four concepts of efficiency:

Economics provided a scientific theory to predict the effects of legal sanctions on

➢ criminal law (to determine the optimal deterrence threshold);

and has developed in a variety of directions, such as:

➢ the application of game theory to legal problems;

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