Virginia Law Review, Vol. 77, No. 6 (September 1991), pp. 1127-1170

Abstract

No less an authority than Milton Friedman has argued that improving the realism of assumptions in economic theory, although hardly essential to establishing the absolute validity of the theory (purely an empirical question), may offer several benefits. First, a “restructuring” (to use Posner's term) of an assumption may help explain divergences between predicted and observed results. Second, an explanation of why a seemingly unrealistic assumption does not destroy the predictive value of a theory may strengthen the theory by connecting it to “a more general theory that applies to a wider variety of phenomena . . . and has failed to be contradicted under a wider variety of circumstances.” Also, a different and more “realistic” explanation of an assumption may facilitate an indirect test of the hypothesis by its implications.

We hope this Article will make economic theory more attractive in all three of the above ways and will constitute an effective response to critics of law and economics. Part I of this Article reviews several behavior-based criticisms of economic analysis of law. In order to answer the criticisms discussed in Part I, we have included an introduction to psychological “script theory” in Part II. A brief description of the theory might have sufficed, but we hope that a fuller exposition, including some reference to empirical data, may more effectively provoke investigation and application to legal scholarship. Thus, in Part II we examine relevant models of human decisionmaking developed recently in the fields of psychology and social science, and these models are based on evidence that unconscious information gathering and assessment play an important role in human decisionmaking.

Part III will use the models to suggest why economists' seemingly unrealistic notions concerning human behavior need not blunt the value of their insight into the efficient deterrence rationale of the tort system. Section A of Part III accepts the validity of the handful of empirical studies demonstrating that people react to legal rules in the manner predicted by law and economics. We use the models described in Part II to suggest the mechanism by which those rules affect behavior. We conclude by defusing potential attacks that could be made on our explanation by researchers who demonstrate the existence of “cognitive illusions.” In Section B, we relax the assumptions underlying the economic model and consider Robert Ellickson's claim that legal rules are frequently a less important determinant of behavior than cultural norms. We conclude that even if the assumptions underlying the economic model are faulty, law and economics remains a powerful tool for explaining the common law.

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