Normative as positive theory (NPT) and the role of legal precedent

Some economists take the normative approach a step further and argue that the legal system (and, in particular, the common law system of rules) in fact evolves over time to produce efficient rules. The basic idea of this efficiency hypothesis is that legal rulings set precedents for possible future disputes between parties. If a court sets a precedent that leads to inefficient outcomes, then in certain circumstances there will be gains to parties if they contest that decision and attempt to get the inefficient decision overturned. Thus, the normative concept of efficiency leads to positive predictions regarding the behaviour of courts and the evolution of legal rules over time. This efficiency approach to the evolution of the common law is a version of the 'normative as positive' (NPT) theory of regulation,3 and has been proposed most forcefully by Posner (2007) and analysed in detail by Rubin (1977). The efficiency hypothesis will be examined in further detail in Chapter 11.

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