Imperfect Alternatives , Imperfect Alternatives Choosing Institutions in Law, Economics, and Public Policy Neil K. Komesar The University Of Chicago Press Chicago & London NEIL KoMESAR is the James E. and Ruth B. Doyle Bascom Professor of Law at the University of Wisconsin, Madison. The University of Chicago Press, Chicago 60637 The University of Chicago Press, Ltd., London © 1994 by The University of Chicago All rights reserved. Published 1994 Printed in the United States ofA merica 03 02 01 00 99 98 97 96 95 94 5 4 3 2 1 ISBN (cloth): 0-226-45088-0 Library of Congress Cataloging-in-Publication Data Komesar, Neil K. Imperfect alternatives : choosing institutions in law, economics, and public policy I Neil K. Komesar. p. cm. Includes bibliographical references and index. ISBN 0-226-45088-0 (acid-free paper) 1. Law-Economic aspects. 2. Public policy (Law) 3. Judicial process. I. Title. K487.E3K66 1994 342'.041-dc20 93-49435 [342.241] CIP @)The paper used in this publication meets the minimum requirements of the American National Standard for Information Sciences -Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984. To the memory of my parents, and to the love and support of my wife Contents Preface ix PART I: DECIDING WHO DECIDES: THE COMPARATIVE ANALYSIS OF INSTITUTIONAL PERFORMANCE 1 Taking Institutional Choice Seriously 3 2 Social Goals and Public Policies: Bridging the Gap between Them 14 PART II: WHO PLAYS, WHO DOESN'T: THE PARTICIPATION CENTERED APPROACH TO THE POLITICAL PROCESS, THE MARKET, AND THE COURTS 3 The Political Process: The Power of th~ Few and the Power of the Many 53 4 The Market Process: Transaction Costs and Transaction Benefits 98 5 The Courts as an Institution: The Structure and Scale ofJ ustice 123 PART III: APPLICATIONS: WEIGHING THE RELATIVE MERITS OF INSTITUTIONS 6 Safety, Tort Law, and Tort Reform 153 7 Constitutional Law and Constitution Making 196 8 American Constitutional Law: The Contours ofJ udicial Review 232 vii viii CONTENTS 9 Summary and Conclusion: Propositions, Audiences, and Reformations 271 Author Index 277 Subject Index 281 Preface My aim in this book is to recast the analysis of law and public policy, both economic and non-economic analysis. Such temerity requires quali fication and explanation. I am certainly not the first to emphasize the central need for the analy sis of institutional choice-for comparative institutional analysis. As the body of the book indicates, Ronald Coase has long emphasized the im portance of institutional choice and comparison. Twenty-five years ago, Harold Demsetz criticized Nirvana solutions and called for comparative institutional analysis.1 Non-economists such as Richard Stewart, Kenneth Shepsle, and Barry Weingast have also called for comparative institutional analysis.2 As a general matter, the importance of institutional choice and the ne cessity of institutional comparison seem common sense. It is not odd, therefore, to find calls for institutional comparison or even instances of serious institutional comparison. What remains remarkable is the vast amount of law and public policy analysis that either ignores, trivializes, or poorly executes institutional comparison. In this book, I am attempting to answer the continuing calls for institutional comparison by extensively documenting the evils of failing to take it seriously and by offering an analytical framework with which to begin this difficult but necessary task. I must also offer a qualification of ignorance. My own background and experience do not-indeed could not - match the sweep of my claims. I am an American law professor with training in economics. I have taught a relatively wide variety of American legal subjects, including property law, 1. Harold Demsetz, Information and Efficiency: Another Viewpoint, 12 J L &. Econ 1 (1969). Indeed, an abiding concern with institutional comparison and institutional choice can be traced back to Adam Smith. James Buchanan makes such a connection in his summary of constitutional economics in The New Palgrave: A Dictionary ofE conomics (1987), 2: 585. 2. Richard Stewart, Crisis in Tort Law? The Institutional Perspective, 54 U Chi L Rev 184 (1987); Kenneth Shepsle and Barry Weingast, Political Solutions to Market Problems, 78 Am Pol Sci Rev 417 (1984). \ ix x PREFACE tort law, and constitutional law, and I have dabbled in contracts law. But the number of American law subjects that I have neither taught nor seri ously thought about outnumbersthose that I have. I also am largely igno rant about law and public policy outside the American context and have only touched upon disciplines other than economics and law. Notwith standing these significant qualifications, however, I remain confident of the universal importance of institutional comparison and of the need to seriously advance comparative institutional analysis on all fronts. Only the consideration of more knowledgeable minds can test these convictions. The breadth of this book also requires comment on my choice and treat ment of those works I discuss and critique. I chose many of these works because they are among the most generally discussed and noticed. I often use them to show that the failure to carefully consider institutional choice infects and handicaps even the most prominent works. Each of these works has received considerable critical attention. Unless the. criticism is pertinent to the points I am making, I have not made exhaustive reference to these critical literatures. I have been writing about comparative institutional analysis for almost fifteen years, and I derive several parts of this book from my earlier articles. Despite attempts to update the various collateral references, I am sure that I have failed to be encyclopedic. My objective in this book is to improve the conceptualization and, therefore, the analysis of institutional choice. Given the large range of subject matter and the significant number of dis ciplines engaged by this book, I can only hope that the book will be judged primarily on its conceptualization rather than its erudition. I am very grateful to the many colleagues and friends who contributed to this book. Many read and commented on various drafts of this book Peter Carstensen, Larry Church, Bill Clune, Howard Erlanger, Marc Galan- ·t er, Dirk Hartog, Willard Hurst, Len Kaplan, Beverly Moran, Tom Palay, Richard Posner, Joel Rogers, Vicki Schultz, Leon Trakman, and Bill Whit ford. Several were subjected to multiple drafts. Here I want to single out my old friend, David Goldberger, who diligently read, commented, and suffered through every draft and through drafts of virtually all the articles that foreshadowed this book. I owe special debts to Bob Wills and Richard Allen, who diligently and creatively edited this book, and to Theresa Dougherty, who by dint of extraordinary competence and effort turned chicken-scratchings and dictated i:nutterings into interminable typed drafts. I owe thanks to several anonymous readers and to one, Ronald Coase, who graciously waived his anonymit}r and whose supportive comments meant