Shleifer's Failure

Shleifer's Failure THE FAILURE OF JUDGES AND THE RISE OF REGULATORS. By Andrei Shleifer. Cambridge, Massachusetts: MIT Press, 2012. 352 pages. $40.00.I. IntroductionAndrei Shleifer is undoubtedly among the world's most important economists. By standard citation measures, no one else is anywhere close. For example, his nearly 19,000 citations in the RePEc rankings1 as of October 2012 place him ahead of Nobel Prize2 winners such as James Heckman (12,212),3 Joseph Stiglitz (11,431),4 and Robert Lucas (9,314).5 His work on corporate finance, behavioral finance, and transition economics earned him the American Economic Association's prestigious John Bates Clark medal in 1999.6 Perhaps not even international scandal will keep Shleifer from taking his place among the Nobelists.7Shleifer's influence in legal scholarship is almost as large. With more than 1,000 Westlaw citations,8 Shleifer would compare favorably to most law and economics specialists in top U.S. law schools.9 Given all of this, the publication of Shleifer's book The Failure of Judges and the Rise of Regulators10 as part of the MIT Press's Walras-Pareto Lecture series is sure to be of interest to a wide range of legal scholars, students, and policy makers-and especially to those who do not have access to JSTOR11 and a printer,12 since all but the introductory chapter previously appeared in academic journals.In the introductory chapter, Shleifer lays out a connection among these papers that might not have been apparent to people who read them when they first appeared. Although many readers, viewing his papers individually, would have guessed that Shleifer is pessimistic about the ability of courts to resolve disputes in an efficient manner, his optimistic view of regulation as a substitute mechanism is less clear than the claims he makes in this book, such as his statement, "In this book, I argue that the superiority of courts is far from clear cut. And when courts fail, regulation emerges as the more efficient approach."13The sources of court failure, according to Shleifer, are many. As a consequence of judicial discretion, Shleifer suggests that litigation is "expensive and unpredictable, leading [parties] to bear unnecessary risks."14 This conclusion holds, according to the author, even in the best of circumstances, but Shleifer goes on to list problems endemic to courts such as "weak incentives" due to the job security judges enjoy and the low probability that good performance will be rewarded,15 the knowledge deficit that arises given the general educations and limited training judges receive in substantive areas,16 judicial bias,17 and the asymmetry of resources that often exists between the parties in court.18While I would be the last one to argue that judges have good incentives,19 it is not all that clear why regulators are preferable along these dimensions. At the end of the introduction, Shleifer appears to hedge somewhat in his language when he presents all this as some kind of possibility theorem,20 stating, "With all the faults of regulation recognized by a generation of scholars, it can emerge as the more efficient form of social control. Regulators rise when judges fail."21 Presumably, Shleifer believes the chapters that follow lay out the case for the superiority of regulators relative to judges. These chapters fall short of this ambition. Instead, the chapters largely focus on problems with courts and some of the correlates of increases in the level of regulation.Shleifer does little to make the direct case for this argument regarding substitution between litigation and regulation in dispute resolution. The systematic empirical work on this issue in the U.S. context does not support the substitution hypothesis. For example, in work using data on state insurance regulation and class actions involving the same kinds of conduct that fall under the regulations, Eric Helland and I found no evidence of substitution between regulation and litigation on the margin. …