Rules versus Standards: An Economic Analysis

Abstract

This Article offers an economic analysis of the extent to which legal commands should be promulgated as rules or standards. Two dimensions of the problem are emphasized. First, the choice between rules and standards affects costs: Rules typically are more costly than standards to create, whereas standards tend to be more costly for individuals to interpret when deciding how to act and for an adjudicator to apply to past conduct. Second, when individuals can determine the application of rules to their contemplated acts more cheaply, conduct is more likely to reflect the content of previously promulgated rules than of standards that will be given content only after individuals act. The Article considers how these factors influence the manner in which rules and standards should be designed, and explores the circumstances in which rules or standards are likely to be preferable. The Article also addresses the level of detail with which laws should be formulated and applied, emphasizing how this question concerning the laws' relative simplicity or complexity can be distinguished from that of whether laws are given content ex ante (rules) or ex post (standards). In so doing, it illuminates concerns about the over-and underinclusiveness of rules relative to standards.

Informative Precedent and Intrajudicial Communication

“…They will either follow the old rule exactly or change it completely. Next, our model offers a new perspective on the long-standing debate about the relative merits of rules and standards (e.g., Kaplow 1992;Schlag 1985;Sullivan 1992). Typically, standards contain general principlesfor example, "due process" or "negligence"-whereas rules use more specific and precise language.…”

The Quality of Law: Judicial Incentives, Legal Human Capital and the Evolution of Law

“…Shavell (2005) analyzes the value of judicial discretion when judges have better (ex post) case-speci…c information than legislators or regulators but preferences that may diverge from social welfare. Although Shavell's work is framed as a choice between more and less detailed rules (and thus related to an earlier literature comparing the costs and bene…ts of regulation by rules versus regulation by standards (Diver 1983, Rose 1988, Kaplow 1992)), it is easily interpreted to address the institutional question of how the judicial role should be structured. Anderlini, Felli and Riboni (2006) engage in a similar type of analysis, supposing that judicial and legislative incentives diverge because although better informed, judges acting ex post face time-inconsistency in their preferences and cannot commit to implementing an ex ante e¢ cient rule.…”

Law Enforcement under Incomplete Law: Theory and Evidence from Financial Market Regulation

“…6 There is a substantial legal literature, which discusses norms and rules (e.g. Kaplow, 1992). Although these concepts share some properties of what we called Type I and Type II incomplete laws, the essence of the two theories are different: that literature focuses on the tradeoff between the two; while our theory focuses on alternative legal institutions to overcome problems caused by incomplete law.…”