Economic Analysis Definition Example Essay

1. Claims and Projects within Economic

1.1 Rationality in Economic Analysis of Law

Economic analysis of law deploys the tools of micro-economic theory to study legal rules and institutions. The various approaches and projects within economic analysis of law thus share a common core. That core consists of the conception of rational action at the center of micro-economic theory.[1]

Rational action in economics means that each agent acts to maximize her “preferences” in whatever environment she finds herself. A preference is a ranking of the elements in her domain of preference. The agent’s domain of preference consists of the things that fundamentally matter to her. In standard models of consumer behavior, for example, the agent has fundamental preferences over consumption bundles. Her decision problem consists of choosing a consumption bundle from the set of feasible consumption bundles, where feasibility is defined by the prices of goods and the agent’s income.

In most economic analyses of law, the situation is more complex. The agent has preferences over some set of consequences—her income or wealth, her state of health, etc.—and she chooses some action that in part determines which consequence is realized. Typically, her domain of preference differs from her domain of choice, often because she chooses a strategy that, in conjunction with the strategy choices of other agents, jointly determines the consequence.

At its most abstract level, this conception of rationality is very flexible as the constraints on preferences are almost purely formal. (The discussion in section 4 essentially investigates the extent of this flexibility.)

Basically, the agent’s ranking of elements of her domain of preference must be complete and transitive. Completeness means only that the agent, when presented with any pair A and B of elements in her domain of preference can rank A and B. That is, the agent either prefers A to B, prefers B to A, or is indifferent between A and B. Some, but not all, relations are complete. The relation “pareto superior to,” discussed at length in section 6.2, for example, is not complete.

Transitivity means that if the agent prefers an element A to an element B and she prefers the element B to a third element C, then she prefers element A to element C. Many, but not all, relations are transitive. The relation “friends with,” for example, is not transitive as A may be friends with B and B may be friends with C while A and C mutually detest each other. The two conditions are thus minimal though not empty.

Every economic analysis of law provides some substantive content to each agent’s preference ranking. Typically, the analyst attributes self-interested preferences to each agent. The agent ranks consequences solely on the basis of their effect on her. In the standard market model, for example, the agent cares only about her own consumption not the consumption of others. In the standard economic model of accident law, she cares only about injuries to herself and costs that she must incur; she pays no attention to injuries to others or costs that others incur.

Of course, one might define “self-interested” in a broad way to include anything that motivates the agent. Typically, however, the analysts assumes that the agent’s preferences are narrowly self-interested; she cares only about her own economic advantage or her own health and safety. The assumption of narrowly self-interested preferences is very restrictive. An agent with narrowly self-interested preferences seems to be incapable of following a rule or having anything other than a prudential reason for action. The assumption of narrow self-interest thus seems to limit the conception of the normativity of law to a bare sanction theory of duty. I discuss this issue in section 4 below.

1.2 The Basic Claims Underlying Economic Analysis of Law

Posner [1973] made two claims that have usually defined the debate around the philosophical foundations of economic analysis of law. The first claim, often called the positive claim, asserts that common law legal rules are, in fact, efficient. The second claim, often called the normative claim, asserts that common law legal rules ought to be efficient. In both claims, Posner understood “efficiency” to mean the maximization of the social willingness-to-pay but subsequent authors have sometimes used the term in its more conventional economic sense of Pareto efficiency.

Each claim is ambiguous. Consider the first claim, the positive claim. On the one hand, it might mean that common law legal rules induce efficient behavior. On the other hand, it might mean that the law is efficient; that is, that the content of the law is identified by its efficiency. Or the claim might mean that efficiency provides the best rationale of the “law” in some doctrinal area.

The second of Posner’s claims, that the common law ought to be efficient, also presents multiple ambiguities. Do we interpret the claim as a theory of adjudication (i.e., as a theory of how common law judges ought to decide cases)? Or should we understand the claim as asserting that efficiency is the appropriate criterion against which to assess judicial performance? Or should we understand the claim as asserting that law makers, whether judges, legislators, or administrators, should choose efficient rules?

This disambiguation of Posner’s claims yields six distinct claims about law that fall into a positive and a normative cluster. A third set of two claims follows from the methodology of economic analysis of law—the application of the tools of micro-economic theory to the study of legal rules and institutions.

I begin with the three positive claims that correspond to the disambiguation of Posner’s positive claim and the two claims that flow from economic methodology. Claim (I), the explanatory claim, asserts that common law legal rules induce efficient behavior. Claim (II), the content claim, asserts that the criterion of efficiency determines the content of the law. A positivist might understand this claim as a claim about the content of the rule of recognition. Claim (III), the doctrinal claim states that the criterion of efficiency rationalizes prevailing legal rules and institutions. This doctrinal claim is weaker than the content claim; the latter asserts either that efficiency causes the content of the law or that it justifies it. The doctrinal claim, by contrast, asserts only that efficiency makes sense of the legal materials.

For clarity, note the ambiguity in the sense in which a legal rule is “efficient” in claims (II) and (III). In the most straightforward, economic interpretation, claims (II) and (III) refer to the efficiency of the behavior induced by the legal rule. Claims (II) and (III) therefore seem to presuppose claim (I). Many, if not most, economic analyses of law, however, assert only that the legal rule is efficient within some model.[2] A judge, policymaker, or analyst might believe, on the basis of the efficiency of a rule in a model, that the rule induces efficient behavior in the world but the efficiency of the rule in the model does not logically entail efficiency in the world.

I now turn to the two claims that derive from the methodological commitments of economic analysis of law. These two claims are also explanatory claims. Claim (IV), the behavioral claim, asserts that economic rationality explains how individuals respond to legal rules and institutions. Claim (V), the causal claim, asserts that economically rational action by both public officials and private citizens, explains the content of legal rules and the structure of legal institutions.

Claim (I) differs from claim (IV). The explanatory claim asserts that (some) legal rules and institutions induce efficient behavior but does not identify the mechanism through which this efficient behavior results. The behavioral claim, by contrast, identifies the mechanisms through which legal rules and institutions influence behavior but it does not assert that the resulting behavior is efficient.[3] Claims (II) and (III) are equally silent about the mechanisms that yield efficiency though one might think that claim (II) asserts that judges and other public officials intentionally pursue efficient rules.

Note also that claim (II) differs from Claim (V) for similar reasons. Claim (II) states that efficiency is one of the grounds of law. Many legal rules should thus be efficient. Claim (V), by contrast, asserts only that law results from the self-interested behavior of individual citizens and public officials. This behavior does not necessarily yield efficient rules or institutions.

Finally, note that the methodological claims (IV) and (V) apparently reject standard accounts of the normativity of law, an issue addressed more fully in section 4.

Consider now the three normative claims that follow from the disambiguation of Posner’s initial normative claim. Claim (VI), the adjudicatory claim asserts that judges ought, in their decision of cases, to promote efficiency. This claim understands Posner’s claim as a theory of adjudication. Claim (VII), the evaluative claim, asserts that the primary criterion against which to assess legal rules and institutions is efficiency. Claim (VIII), the design claim, asserts that policymakers should design legal rules and institutions to promote efficiency. Note that claims (VII) and (VIII) are independent. Designing efficient legal rules and institutions might be desirable for non-efficiency reasons. Conversely, efficiency might dictate the design of inefficient institutions.

In the late 1970s and early 80s, controversy raged primarily over the evaluative claim. This debate largely recapitulated the debate over the “new welfare economics” that occurred in economics in the late 1930s and early 1940s. Debate over this claim briefly resurged with the publication of Kaplow and Shavell [2004]. More recently, however, claim (III), the doctrinal claim has received the most philosophical attention.

The philosophy of law has traditionally focused on a limited set of questions centered around the “concept of law” and the existence or non-existence of an obligation to oby the law. Thus, philosophers of law have investigated the nature of law, its relation to coercion and morality, how judges ought to decide cases, and whether, to what extent, and how law gives agents reasons for action.

The eight claims identified above do not correspond directly to these traditional questions in the philosophy of law. As already noted claim (II) at least implicitly adopts a legal positivist understanding of law. Claim (VI) offers an explicit normative theory of adjudication, though one apparently at odds with how judges in fact decide cases. Central philosophic questions concerning the concept of law, of its normativity, and the obligation to obey the law, however, are not directly addressed. The behavioral claim (IV) as well as the causal claim (V) and the explanatory claim (I), by contrast, concern empirical issues that philosophers of law generally neglect. Nevertheless, the controversy within the legal academy has generally regarded economic analysis of law as providing a comprehensive theory of law that challenges traditional approaches to law. Indeed, an explanation of the vehemence of the controversy should identify differences in fundamental views concerning law.

1.3 Three Strands of Thought within Economic Analysis of Law

The vast literature of economic analysis of law is not easily characterized. As the set of distinct claims suggests, the literature contains a large number of different projects. For purposes of this essay, I identify three distinct strands of thought within economic analysis of law. A large percentage, but not all, of the literature in economic analysis of law falls within one of these three strands. I shall call one strand policy analysis, the second strand political economy and the third strand doctrinal analysis.[4]

Policy analysis generally focuses on the analysis of the effects of legal rules and institutions on outcomes. An outcome usually consists of the “objective” effects of the rule or institution on the behavior of “private” individuals. Policy analysis then typically evaluates the rule or institution under study against some social objective function. Often policy analysis adopts “efficiency” as the evaluative criterion.

Policy analysis is thus linked both to the behavioral claim (Claim IV) and the design claim (Claim VIII). Neither of these links is logical or conceptual. The behavioral claim concerns the causal mechanism that determines how individuals respond to legal rules and institutions; these rules have effects through standard economic processes. The design aspect of policy analysis, however, requires not that the policymaker explain the effects of legal rules on behavior but that the policymaker predict the behavior the rules will induce. Prediction does not necessarily require the identification of a causal mechanism. Correlation suffices.

A gap also exists between the design aim of policy analysis and the design claim. The policy analyst may choose to assess the predicted behavior against any criterion she deems relevant; she may thus, contrary to the design claim, adopt non-efficiency criteria to select a legal rule.

Political economy, by contrast, investigates the operation of political institutions such as electoral systems, courts, legislatures, the executive and administrative agencies. These institutions make policy or determine which people make policy. Political economy thus seeks to explain how the content of the law is determined. In some instances we might understand political economy simply as the application of the behavioral claim to the constitutional and legal rules and practices that structure legislation, administrative action, and adjudication.

Both policy analysis and political economy examine behavior. The policy analyst focuses on the behavior induced by legal rules and institutions. Political economy concentrates on behavior that causes legal rules and institutions. Doctrinal analysis, by contrast, focuses on the content of the legal doctrine developed by courts in adjudication. It asserts that efficiency rationalizes the content of the law. We might understand “the content of the law” in at least three ways. First, it might, as the behavioral claim does, refer to the behavior induced by the legal rules announced in judicial opinions. Alternatively, the analyst interprets these opinions and other texts to extract an economic model that underlies the decision’s legal view of the world. On this interpretation, claims (II) and (III) might be true even though legal rules induced inefficient behavior in the real world because the announced legal rule might be efficient within the implicit model used by judges but inefficient in the world as it actually is.

The first understanding of doctrinal analysis suggests a connection to the behavioral claim (claim (IV)). It would also suggest that doctrinal analysis would have developed a substantial empirical component that investigated what behavior doctrine actually induced. As this empirical component is largely absent, I shall understand doctrinal analysis in the second, alternative way. The next section examines the philosophical debates that have emerged from this alternative, non-behavioral understanding of doctrinal analysis.

These three strands may be differentiated in a number of ways. First, each strand makes different motivational assumptions about public officials. Policy analysis generally assumes that public officials in general and judges in particular, are conscientious. Judges thus enforce the legal rules as they are announced, regardless of the judge’s own view of the desirability of the legal rule or its impact on her personally. Political economy assumes that public officials have the same motivation as private individuals; they are self-interested. In the context of adjudication, as will be elaborated below, the political economist interprets self-interested judicial behavior as decisions that promote the policy preferences of the judge. Doctrinal analysis does not analyze the behavior of public officials; it rationalizes the decisions of judges without necessarily imputing motivations to them.

Second, policy analysis and doctrinal analysis generally adopt a welfarist stance towards evaluation of legal rules while political economy has evolved from a more contractarian tradition. Policy analysts, when evaluating legal rules ask whether that legal rule induces behavior that satisfies some welfarist criterion, usually either Pareto efficiency or (constrained) social welfare maximization.[5] Political economy, however, has to a large extent emerged from an economic tradition, exemplified by James Buchanan,[6] that rejects the maximization of social welfare as a criterion and seeks to evaluate political institutions on grounds of (actual or hypothetical) consent. The political economist often asks not whether the rule induces pareto efficiency but whether the parties have acted voluntarily, consented to the rule, or would have (rationally)consented to the rule.

Finally, we might understand the distinction among the three strands as a difference in the view each adopts about the instrumentalism of law. “Instrumentalism” here means that an agent designs the law to promote some collective goal. Kornhauser [2000, 2010] discuss this idea at length. For our purposes, we need only note several ambiguities in the brief definition just given. A more careful definition would specify the agent who designs, the meaning of design, what counts as “law,” and what is a collective purpose. Right now, I note only that instrumentalism may occur at the level of the rule, the institution or the legal system as a whole.

Policy analysis tends to proceed legal rule by legal rule. It asks, for example, how does a change in the standard of care affect the behavior of tortfeasors and tort victims? Or how does contracting behavior differ if the measure of damages shifts from expectation damages to reliance damages? The analyst thus imputes a purpose (usually, but not necessarily, the maximization of social welfare) to the promulgator of the legal rule. The analyst then assumes that the policymaker has chosen the legal rule that best promotes her (imputed) objective. Legal rules are then instrumental to the achievement of the posited goal; call this approach rule instrumentalism.

The political economist, by contrast, generally denies that any purpose can be attributed to the promulgator of a legal rule largely because legal rules are not promulgated by a single individual with power to control unilaterally the content of the rule. Certainly, from the perspective of political economy, legislators have no common purpose and one should not assume or expect that any statute maximizes social welfare. Legislation results from the interplay of interest groups that do not reflect all interests within society. Even if the legislature did reflect all interests within society, each interest does not have an equal (or proportionate) say in the formulation of the statute.[7] Finally, even if each interest did play a “proportionate” role in the formulation of the statute, Arrow’s General Possibility Theorem teaches that the aggregation of interests might still not yield a coherent purpose. Political economy thus rejects rule instrumentalism.

Further understanding of the approach of political economy requires acknowledgment of divergent views within political economy. I distinguish two such views: constitutional political economy and radical political economy. Each rejects rule instrumentalism but only the latter rejects instrumentalism altogether.

One might attribute the rejection of rule instrumentalism within political economy to a commitment to an explanatory rather than a normative project. At the level of constitutional political economy, however, the research program usually adopts the perspective of a constitutional designer and this designer arguably has a view of law that includes institutional instrumentalism: i.e., legal institutions, rather than specific legal rules, promote the specific goals of the constitutional designer.[8] The constitutional designer seeks a political structure that promotes her goals. The project of constitutional political economy is thus normative in nature. Indeed the normative nature of the project dominates any explanatory aim. Many within the project — see Brennan and Buchanan [1981, 1985] — argue that one ought to adopt an economic theory of behavior of public officials and private individuals even if that theory is not the best explanatory theory.

Radical political economists reject this reasoning. They carry the logic of the argument about the incoherence of legislative behavior through to the level of institutional and constitutional design. Constitutions are drafted by agents with political and economic interests that they seek to forward when they create the basic social, economic and political institutions of the society. Incoherence may thus infect these institutions as well. The compromises over slavery in the US Constitution, for example, illustrate, when viewed against the democratic and equality elements of the document, such incoherence. Radical political economists thus reject the claim that the law is designed and hence reject instrumentalism altogether.

The relation of doctrinal analysis to instrumentalism depends on our understanding of the project of doctrinal analysis. If we understand doctrinal analysis simply as a rationalization of doctrine, it would appear to make no assumptions about the instrumental nature of law. The fact that doctrine is efficient might result from intentional behavior on the part of agents or might simply emerge from the structure of the institutions within which public officials work. On the other hand, if we understand doctrinal analysis as a theory of adjudication, then it clearly adopts a rule instrumental view of law. The project of doctrinal analysis is discussed at greater length in the next section.

These differences in the level at which law is instrumental, if the law is instrumental at all, suggest that the three strands of economic analysis of law will adopt different approaches to the study of adjudication. These theories are sketched and discussed in section 5 below.

More significant for purposes of this entry, however, is the basic similarity between policy analysis and political economy. Both of these strands adopt the standard assumption of neo-classical economics that each individual seeks to maximize the satisfaction of her preferences. Moreover, they generally assume that each individual acts in her own self-interest, narrowly defined. This approach presents the single, greatest obstacle to the articulation of a general theory of law that confronts economic analysis: it has no room for the normative aspect of law. It is this denial of the normativity of law that accounts for the vehement resistance that economic analysis provoked within the legal academy.

2. Doctrinal Analysis

Doctrine organizes the vast legal materials of advanced societies as well as legal education and much of legal scholarship. First year law students study basic common law courses such as tort and contract; upper year courses address subjects such as antitrust, business organizations, and administrative law. The casebooks in these courses are organized doctrinally. Similarly, legal scholars typically specialize in the study of one or two doctrinal areas.

Posner was trained as a lawyer. Posner [1973] was organized doctrinally. Leff [1973] described Posner [1973] as a picaresque novel in which the eponymous protagonist Economic Analysis traveled down the river of doctrinal subjects, offering insight into each set of legal rules. Most current work in the field still analyzes some doctrinal rule, typically assessing its efficiency.

2.1 Doctrinal Analysis as a Rationalization of Private Law

Scholars thus generally consider doctrinal analysis the core project within economic analysis of law.[9] Certainly, legal scholars who work in the central private law areas of tort, contract, and property typically understand economic analysis of law as doctrinal analysis. This doctrinal analysis has provoked substantial philosophical attention and critique.

Critiques fall roughly into two groups. The first accepts the instrumentalism of law, at one level or another. It rejects, however, either efficiency as the aim of the designer or the assumption of rationality underlying any behavioral claim that may be implicated in a rationalization of doctrine. Issues related to the efficiency criterion are discussed below in section 6. The rejection of economic rationality generally rests on its failure to accommodate normativity, an issue I discuss in section 4.

The second set of critics have offered a panoply of alternative explanations of the relevant area of law. These alternative explanations share two features. First, they all take the language of “obligation” seriously. Second, and related, they all reject the view of doctrine as instrumental. Following Ripstein [2016], I shall call these alternative theories deontic theories.

To assess the debate, however, one must first determine how each side in the controversy understands the nature of doctrine and what counts as an explanation of it. Phrased differently, we must answer a substantive and a methodological question: what is private law theory (or doctrinal analysis of private law) a theory of? and against what criteria do we assess such theories?

To begin, consider the substantive question. This question has two aspects: a jurisdictional aspect and a “textual” aspect. Consider the textual aspect first. In doctrinal analysis, economic analysts of law seek to explain the outcomes of cases. An “outcome” here means the disposition of the case; the disposition of a case identifies the party that prevailed in the litigation; i.e, on the facts of the case, whether defendant was responsible or not.[10]. The critics of economic analysis of law understand the task of doctrinal analysis differently. Explaining doctrine requires an explanation not of the dispositions of decided cases but of the reasoning of those cases and, often, structural and procedural features of the litigation that gives rise to the reasons.[11]

The position of the critics is at least perplexing and arguably problematic. They apparently regard dispositions as mere applications of law to fact. Yet the practice of common law adjudication arguably treats the disposition as fundamental, i.e., as the aspect of the decision that requires respect. The priority of the disposition over the rule fits the English practice of seriatim opinions well. In such a practice, each judge offers her reasons for the disposition and may articulate rules. There are no reasons for dispositions or rules announced by the court. The court, however, does announce a disposition.

Similarly, it is not clear why an account of doctrine requires a rationalization of the bilateral nature of private law litigation. Critics (such as Coleman (2001), Ripstein (2016) and Weinrib (1995)) of the doctrinal analysis project in economic analysis of law consider this bilateral nature—the fact that this plaintiff sues that defendant and not someone else—essential. They point to the doctrinal analysts’ failure to provide an essential explanation as an important aspect of the superiority of their account of private law.

Though the critics are correct that doctrinal analysis does not consider the bilateral structure of private law as essential, it nonetheless can account both for how it emerged and why it persists. At the time of the emergence of private law, states were relatively small and had little capacity to monitor and enforce rules and regulations. Indeed, Henry II arguably introduced the common law courts to exert his power more broadly within England. At the time of the emergence of these private law institutions, there were no alternative institutions available to induce the desired behavior.

Moreover, the bilateral structure of private law exploits the private information of injured plaintiffs in enforcing the law. It is costly for the state to monitor everyone’s behavior; it is difficult to observe behavior that does not comply with announced norms. Injured victims, however, are well-placed—and, when the law enforces monetary claims for non-compliant behavior, injured victims have the incentive—to observe non-compliant behavior. The state frequently exploits this informational advantage of victims by creating private actions as in the antitrust and employment discrimination regimes in the United States.

The systematic use of these “private attorneys general” to promote public interests points to a deeper reason why the critics err when they treat the bilateral nature of private litigation as essential. This “bilateral nature” is a feature of adjudication generally not simply of private law adjudication. Its explanation should therefore not rest on features peculiar to private law but on something fundamental to adjudication generally.

Turn now to the jurisdictional aspect of the substantive question. Which outcomes do doctrinal analysts rationalize? The reasoning of which opinions do the critics analyze? For a practicing lawyer, these questions have an obvious answer: analyze the outcomes or reasoning of the cases in the jurisdiction the law of which applies to the dispute. On this account, we would have a doctrinal analysis of, say, the contract law of New Jersey or the libel law of Montana. Private law theorists, however, have broader ambitions; they seek a more general theory though it is unclear how to generalize from the doctrine of jurisdiction J to doctrine in the abstract.

Doctrinal analysts within economic analysis of law face a somewhat lesser difficulty. Their project simply asks whether a legal rule that rationalizes a pattern of outcomes induces efficient behavior (perhaps within some model). One can pursue this task rule-by-rule and independently of the jurisdiction. The general claim then states simply that the doctrine in most jurisdictions is by-and-large rationalized by rules that induce efficient behavior. As more than one rule governing the same conduct may induce efficient behavior, there is no implication that rules are identical in different jurisdictions.[12]

For the critics, however, the problem seems deeper. Some structural features of private law may not vary across jurisdictions but the rules and the reasons for them do. It is less clear how one explains a mass of reasons and rules from different jurisdictions. The difficulty increases the more diverse the set of jurisdictions is. We might expect tort law in the United States to be relatively uniform across the fifty states. After all, the states largely share an approach to opinion writing and judges of one state may refer to the decisions of another. We would expect courts from different states to offer similar types of reasons. That unity might decrease if we consider all common law jurisdictions. After all, the conventions of opinion writing vary across these jurisdictions. Opinions issued from the judges of the Queen’s Bench do not obviously offer similar types of reasons as those issued by the California Supreme Court. An expansion to civil law jurisdictions increases the range of styles. Opinions of the French Cour de Cassation look nothing like the opinions of the two previously mentioned common law courts.

Though doctrinal analysts have not been methodologically self-conscious, several private law theorists—e.g., Coleman [2001], Kraus [2002], Smith [2006], Ripstein [2016]—have outlined the requirements that a theory of private law must satisfy. These authors have articulated at least three criteria that apply to the evaluation of theories of private law: fit, transparency, and determinancy.

“Fit,” of course, refers to the extent to which the theory accounts for the observed phenomena—for the doctrinal economic analysts, the extent to which it accounts for the observed outcomes and for the deontic critics the extent to which it accounts for the reasoning of the courts and the relevant structural features. Though comparing degrees of fit across interpretations may be difficult, fit is uncontroversial as a criterion.

“Transparency” requires that the explanation be internal rather than external in the sense that the explanation relies on concepts deployed by judges and other actors producing the outcomes and reasoning to be explained. Doctrinal analysis, according to the critics, fails as an explanation of private law because it is opaque rather than transparent. Indeed, most of the criticisms of doctrinal analysis reduce, in one way or another, either to a claim that it fails to satisfy transparency or that, as discussed above, it fails to account for the bilateral nature of private law.

Transparency, however, seems an important theoretical ambition only for some accounts of doctrinal analysis. Most obviously, the content claim (claim II) that holds that efficiency determines the content of the law requires transparency when we interpret it as part of the rule of recognition. But neither the explanatory claim (claim I) nor the doctrinal claim (claim III) presuppose transparency. The content of a legal rule may be efficient even if judges do not aim at efficiency. An external account of the explanatory claim, however, provides an incomplete explanation until it identifies some mechanism that explains how judges, unconcerned about efficiency, nevertheless generally announce efficient rules.[13] Similarly, the doctrinal claim (claim III) that efficiency rationalizes the outcomes reached by the common law does not necessarily require transparency.

“Determinacy” requires an explanation to make a clear prediction of the application of legal rules to facts. Doctrinal analysis often satisfies this criterion; indeed, to the extent it seeks to rationalize dispositions, any successful doctrinal analysis must make such predictions. An explanation in doctrinal analysis identifies some “efficient” rule and this rule is determinate in the sense that it dictates a precise outcome or disposition in specific cases. On the other hand, efficient rules are often not unique; more than one rule will induce efficient behavior and these rules will not necessarily dictate the same disposition of a case.[14]

Deontic theories, by contrast, fare badly under the determinacy criterion. This lack of success may follow from the choice of subject matter to explain. These theories focus on the rules not the dispositions.

Deontic critics also reject the instrumentalism of doctrinal analysis. Doctrinal analysis treats the law as a means to the end of inducing efficient behavior. The value of legal rules derives solely from the value of the goal sought. On the deontic accounts, by contrast, the point of the law is to do justice between the parties.

2.2 Doctrinal Analysis as a Concept of Law?

Does doctrinal analysis implicitly or explicitly rely on some theory of law? It might be understood in a number of ways. It might be understood as the content claim (claim II) that holds that an efficiency criterion identifies the content of the law. The literature contains arguments that virtually every (common law) legal rule is efficient. This claim has both an empirical interpretation that each legal rule induces efficient behavior and a doctrinal interpretation that the prevailing legal rule is identified by its efficiency. The literature, however, has offered scant explanation or justification for the underlying theoretical claim that efficiency identifies the content of these legal norms. On what theory of law does efficiency become a ground of law?

One might justify the content in a variety of ways. A legal positivist might argue that the rule of recognition identifies efficiency as an appropriate ground of judge-made law. Or one might argue, as Dworkin has suggested, that efficiency provides the best interpretation of the practice governing the law of accidents. On either account, the claim that efficiency identifies the content of the law is a contingent claim. For the positivist, the content of the rule of recognition is contingent on the social practice of the relevant public officials; they may, but they need not, adopt an efficiency criterion.[15] Similarly, for Dworkin, the law derives from the best interpretation of the past political decisions of the community. These decisions are of course contingent; a different history of decisions might yield a different account of law. Claim (II) thus does not constitute a competing concept of law.

3. The Nature of Law

Philosophical inquiries into the nature of law have generally gone under the rubric “the concept of law.” Unfortunately, as multiple projects and questions fall under this single rubric, the debate has generated more confusion than clarity. This section seeks first to disentangle the various questions that have been conflated within a single concept of law.

The section then focuses on two of those concepts, identified in the next subsection as the doctrinal and sociological (or social scientific) concepts of law. I argue first that economic analysis of law is not committed to any specific doctrinal concept. Second, and finally, I argue that economic methodology does suggest how to define a sociological concept of law that is parasitic on a concept of governance and on the value of legality.

3.1 Concepts of Law

Since Dworkin’s initial challenge to Hart’s positivism in the mid-1960s, a robust but unresolved debate over the concept of law has riven the philosophy of law. Hart [1994] viewed this debate with some perplexity as he thought the two sides had not engaged. More pointedly, he thought there was nothing to argue about as he felt that he and Dworkin asked two different questions; and, consequently, explicated two distinct concepts of law.

Dworkin [1986] considered identification of the grounds of law the central question for the philosophy of law. The grounds of law identify the truth conditions of propositions of law. The doctrinal concept of law answered this question. For him, then the jurisprudential debate thus focused on whether the grounds of law included moral principles or not. Implicitly, then, Dworkin interpreted Hart [1961] as centrally addressing this doctrinal question.

Hart, by contrast, did not understand his project as centrally focused on the grounds of law. Hart [1961] offered various, non-equivalent characterizations of his central task. In the first chapter, he suggests as a central aim the differentiation of law from a variety of other phenomena, specifically morality, religion, and coercion. In the preface, however, Hart suggests that his study might be regarded as an essay in “descriptive sociology.” The answer to the former question would rely on what Dworkin [2006] called a taxonomic concept of law that distinguished law from other social phenomena; the latter question, by contrast, demands what Dworkin [2006] called a sociological concept of law that furthers the aims of social science.

Before identifying further concepts of law, it is important to understand how the taxonomic and the sociological concepts of law differ. A taxonomic concept of law has two functions. As noted, it distinguishes legal norms in society S from other norms in that society. Second, and derivatively, it makes comparative law possible. Comparative law must identify which rules and institutions to compare across societies. A comparative study of tort law, for instance, must be able to identify which norms in country X are legal norms governing accidents between strangers in order to compare them to the legal norms governing accident between strangers in country Y.

The sociological concept, by contrast, must serve the needs of social theorists who seek to understand society and social behavior. It will be a technical concept that emerges from the theory or theories that best explain the phenomena the social theorist studies. Note, moreover, that a social scientist might require more than one concept of law. Hart’s descriptive sociology might be interpreted as offering a functional concept of law. Anthropologists, by contrast, often seem more interested in an expressive concept of law. [See Pirie [2010] for a discussion that suggests an expressive account of the concept of law.)

The doctrinal, taxonomic and (various) sociological concepts of law do not exhaust the possible concepts that might be useful. Obviously, we require, for instance, an evaluative concept of law that identifies the value of legality. Similarly, some legal philosophers, such as Raz and Coleman, understand the inquiry as an investigation of a folk concept of law that underlies ordinary usage of the term. This folk concept will differ from the other concepts of law but it may be influenced (or perhaps tainted) by the others, particularly the doctrinal and evaluative concepts.

A complex web of relations might connect these various concepts. Hart’s theory does yield a ground of law, and hence a doctrinal concept, from his sociological or taxonomic concept. What makes a proposition of law true, for Hart, is its pedigree which must trace back ultimately to the rule of recognition in the community. Similarly, we might create a taxonomy by considering how the grounds of law differ from the grounds of morality or religion. A taxonomy, that is, follows directly from comparing truth conditions for propositions of law to truth conditions for propositions of morality.

No necessary relation, however, holds among the concepts. One might have a sociological concept of law that does not rely on the doctrinal concept of law as their grounds are very different. What makes a proposition of law true bears no obvious relation to what concepts will shed light on questions of interest to social theorists.

3.2 The Doctrinal Concept of Law in Economic Analysis of Law

The prior section identified a plethora of concepts of law. On which of these concepts does economic analysis of law rely? On which of these concepts does it shed light? This section addresses these question with respect to the doctrinal concept of law that lies at the center of legal practice. The next section addresses these questions with respect to sociological concept of law that might play a role in the development of social theory.

Section 2.2 argued that doctrinal analysis had not and can not be defended as doctrinal concept of law. Most doctrinal analyses take the “legal materials” as given. They seek to rationalize the decisions of some set of courts. Any—or no—concept of law that identifies the materials as the relevant ones to rationalize serves the doctrinal analysts’ purposes.

Policy analysis and political economy have also largely been silent about the doctrinal concept of law on which they rely or shed light. Each has largely put the questions that motivate the debates over the concept of law to one side.

An economic analysis of the behavioral effects of a legal rule generally begins with the assumption that the legal rule is clearly known not only to judges and other public officials but also to those subject to the legal rule. This knowledge of private citizens might amount simply to the knowledge of what consequences follow from each possible action the agent might take. Actions that provoke a response from public officials generally, or judges in particular, have no special character to them; the citizen in her deliberations treats the consequences of rule-following or rule-breaking as she treats any other price.

Similarly, investigations into the causes of legal rules and institutions typically take the background institutions and rules as given and, generally, known to all parties. It is not clear that the analysis attributes any special character to legal rules and institutions other than, perhaps, centralized legislation, adjudication, and enforcement.[16] Thus political economy, like policy analysis, seems agnostic about the central philosophical questions. Nothing in the analysis requires that legal rules be distinctive in any way. Indeed radical political economy holds that self-interest governs individual and institutional action all the way down. It leaves no room for any normative force to law.

This agnosticism about the doctrinal concept of law is harmless. Two arguments support this claim. First, as Murphy [2014] argues, competing positions on the role of morality in the truth conditions of propositions of law do not have many, if any, substantive consequences for the practice of law. Ignoring the doctrinal concept of law thus has no substantive consequence for economic analyses of these rules.

Second, as argued in Kornhauser [2015], a doctrinal concept of law is unnecessary for the practice of law. What legal theory requires is not a doctrinal concept of law but a set of theories of decision-making for various agents—judges, legislators, public officials, and citizens.

3.3 Towards a Social Scientific Concept of Law?

Both policy analysis and political economy pursue projects substantially different from the philosophical ones. Policy analysis seeks to understand how legal rules influence behavior; political economy seeks to understand the ways in which society structures its political, economic and legal institutions. These projects suggest a social scientific concept of law rather than a doctrinal or taxonomic one. A social-scientific concept of law would help us understand the social world in general, the emergence and persistence of social groups over time and the causes and consequences of different governmental structures. Political economy and policy analysis, or a general sociology, then seek to answer the question: How do we differentiate the structures of social governance in order to understand social phenomena?

An understanding of society and social phenomena, of course, may not require anything akin to the concept of law at issue in the philosophical debates. Two different reasons, however, suggest some relation between the philosophical debate and the social-scientific inquiry. One should recall that Hart [1961] characterized, perhaps off-handedly, his project as one in the descriptive sociology of law. Such a sociological project presumably requires a social scientific concept of law. Moreover, once one had articulated a viable and useful set of social scientific concepts, one might ask what relation they bear to the issues at the center of the philosophical inquiries of the value of legality and of articulating the criterion that distinguishes legal from other grounds of decision.

Adopting Hart’s discussion as a starting point, I shall in the rest of this subsection, sketch a social-scientific concept of a governance structure and suggest how it might relate both to the project of political economy and to the philosophical debate over the concept of law. (Kornhauser [2004, 2015] provides a more extended account.)

One of Hart’s rhetorical devices provides a useful starting point for the development of a social scientific (functional) concept of governance. To introduce the concept of a secondary rule, Hart [1961] recounts a fable concerning the emergence of a legal system in a small community. He suggests that a small, homogeneous, stable and closely knit society requires no differentiated structures of governance. These structures emerge to resolve problems that arise in societies that are large, heterogeneous, or subject to environmental uncertainty. Though Hart identifies only three such problems, we shall identify four distinct functions that might be distributed across societal structures: (1) the characterization of socially acceptable (or unacceptable) behavior, a task the importance of which grows as the rate of change in society increases;(2) Policing of behavior to identify likely instances of deviant behavior; more anonymous societies may require more institutionalized policing; (3) Definitive adjudication of non-conformity to social norms; again, when society is no longer face-to-face, such adjudication may be necessary to trigger sanctions; and (4) Sanctioning of deviant behavior; informal sanctions grow more difficult to impose when society is not face-to-face.

Governance within a society requires that the society somehow accomplish each of these four tasks. A society might do so in a number of different ways. A governance structure is the set of institutional structures within a society that address one or more of the four problems of adaptation, detection, application, and sanction that are the central elements of governance. An institutional structure is a decision-making protocol that specifies procedures relevant to the resolution of one or more of the problems of adaptation, detection, application, and sanction. Clear understanding requires a distinction here between institutional structures, realized institutions, and functioning institutions. This distinction parallels the distinction between game forms, games, and plays of a game in the theory of games. As noted before, an institutional structure is simply the basic rules or protocol for governance; a realized institution is an institutional structure situated in a given society and populated by particular individuals; a functioning institution is a realized institution as it operates in a society in actual conditions.

All societies have governance structures. The simplest, face-to-face societies have undifferentiated structures in which all of these functions are informal and diffused through the society. As social groups grow more numerous and their environment becomes more volatile, governance structures become more complex.

A crude taxonomy of governance structures might distinguish them along two dimensions: the degree of institutional differentiation in the structure and the mechanism of internal, “bureaucratic” control.

A governance structure may be more or less differentiated from other institutions (such as those governing exchange or reproduction) in a society. Hart considered two extremes: a simple society with no differentiation of governance from other institutions and modern, municipal legal systems that have distinct institutions for adaptation, policing, adjudication, and sanctioning. Indeed, a society such as the United States has multiple legislative, executive and judicial institutions that relate in complex ways.

We may follow Hart in elaborating the second dimension of the mechanism of internal bureaucratic control. Hart contrasted two motivations for compliance with law or legal obligations: incentives that rely on the self-interest of individuals and acceptance of rules as guides to action. For Hart, law required that a core set of public officials had to accept the rule of recognition as an authoritative guide to action.

Political economy, by contrast, aims to explain all legal phenomena in terms of the self-interest of agents. This analytic strategy precludes a Hartian account of law; legal rules cannot play any role in the explanation of behavior of either private individuals or public officials because no agent has the relevant internal attitude towards the rule. An individual faced with a choice considers the costs and benefits that each option presents to her. These costs and benefits will include “legal costs and benefits” but these costs and benefits are not determined by rules; they are the result of the incentives that private and public officials face. Rules are only rules of thumb that express the response of average individuals under normal circumstances to particular events. Which rules of thumb are used, of course, may greatly affect the social equilibrium achieved in a particular jurisdiction.

Political economy thus seeks a concept of governance that relies only on incentives; it consequently denies the existence of legal systems in Hart’s sense. It might nonetheless acknowledge a different concept of law. Some political economists, for example, suggest that legality in the sense of an impartial “rule of law” promotes economic growth. The political economist then might identify law or legal systems as those governance structures that realize such a rule of law (in given circumstances). The political economist, then, might adopt two related concepts. The first concept of a governance structure is an explanatory one; it characterizes the mechanisms of social governance in terms of the degree of institutional differentiation and the mechanism of bureaucratic control within these institutions. The second related concept is normative. It identifies a value that a governance structure might realize. Call this value legality. The concept of law is thus a normative one; that identifies the value of legality. The social scientist then seeks to identify conditions under which specific governance structures will realize the value of legality.

4. The Normativity of Law

Traditional approaches to law treat legal rules as normative, i.e., as giving citizens reasons for action. These approaches present two philosophical questions: what is the nature of the reasons for action that law gives? and do individuals have a general obligation to obey the law? The first question is generally understood as asking whether a legal rule provides a moral reason for action. The second question has been extensively examined in the legal and philosophical literature. Murphy (2014) provides a clear perspective on this literature.

Claims (IV) and (V) assert that individuals respond to legal rules in an economic way. On standard economic accounts, an economic response is a prudential rather than a moral response. Legal rules, on the economic account, thus do give individuals reasons to act but they are not regarded as moral reasons. A traffic sign designating a street as within a school zone both indicates that children may dart into the street and sets a reduced speed limit. Each of these indication provides the agent with reasons for action. The rule thus affects the agent’s behavior by affecting his beliefs about the likelihood of a causing an injury when traveling at various speeds and his beliefs about the expected costs of different courses of conduct. The sign and the legal rule give the agent prudential reasons for action. Economic analysis of law in its current form thus largely adopts the Holmesian “bad man” theory of law.

Critics of economic analysis of law contend that this failure to address the normativity of law provides ample grounds on which to reject it as an adequate theory of law. This argument, however, does not satisfactorily address two questions.

To understand the first question, recall that, in the projects of policy analysis and political economy, micro-economic theory serves as a positive theory of behavior. For the critics’ objection to apply, then, the normativity of law must have behavioral implications. Legal obligation thus must influence behavior. Whether the economic theory of behavior can accommodate legal normativity must depend on what behavior that normativity induces.

Philosophers, however, have not addressed this question. Their investigations of practical reason generally and of legal reasons in particular typically understand their inquiry as setting the requirements of practical rationality not as an actual theory of behavior.

The second question arises once the implications of legal normativity for behavior have been identified. Can the economic theory of behavior accommodate the requisite normative behavior? “Accommodation” in this context means that economic theory can generate models that predict the behavior that legal obligation induces. Clearly, standard economic models do not attempt to accommodate normativity. The economic theory of behavior, however, is very flexible. Section 4.3 suggests some basic strategies that economic theorists might adopt to accommodate normativity.

To set the stage for this analysis, I first set out a simple example of choice against which to assess different understandings of behavior. I then consider why philosophers of law and lawyers generally might think that law provides non-prudential reasons for action.

4.1 Interpreting Choice

Consider Liza who has gone to a restaurant with friends. The menu offers two main courses: beef and tofu. Liza must choose one. Suppose Liza chooses tofu. How can we understand or rationalize her choice?

A rational choice explanation will refer to her preferences, her beliefs, and the environment in which she chooses. Liza might choose tofu because she prefers tofu to meat. She might choose tofu because she prefers healthy meals to unhealthy meals and she believes that tofu is healthier than meat. Or she might choose tofu because she is budget-constrained and tofu is cheaper than meat. Or Liza might have more complex preferences. Perhaps all of Liza’s friends have chosen tofu and Liza has a taste for conformity.

Suppose, however, that Liza believes that it is wrong to inflict pain on sensient creatures. She thus believes she has a moral obligation not to eat meat. She thus chooses tofu. How does the rational choice model accommodate this belief? It might accommodate this moral attitude by incorporating it into her preferences in one of two ways. Liza, that is, might internalize the norm in two distinct ways. Liza might develop a substantive preference for tofu over meat. She would internalize the content of the norm. On this account, if her moral view changed, Liza’s preference for tofu over meat would remain. The moral norm, or Liza’s endorsement of that norm, would not have had any (direct) influence on her behavior.

Or she might have a preference for norm compliance; that is, all other things equal, she prefers actions that conform to the norm to actions that violate it. One might say that Liza incurs a “cost” from non-compliance with a norm. Then, if she prefers meat to tofu, all else equal, she will choose tofu when the cost of norm violation is sufficiently high. And, if Liza’s moral views changed, she would revert to eating meat. The two forms of internalization thus yield different behavioral predictions. This account of normativity, however, has an ad hoc quality to it as the cost of norm violation is not directly observable.

4.2 Legal Form

Legal regulation takes a number of distinct legal forms to which legislators and judges pay strict attention. The state might impose, on the same conduct, one or more of the following forms of regulation: criminal penalties, a civil fine, an administrative fine, a tax, a license, or a private civil action. Different forms of regulation clearly have different expressive features. But typically the legal profession and the public may think the different forms have different behavioral consequences. These different behavioral consequences may suggest that the law, or at least the form the legal regulation takes, provides distinctive reasons for action.

Contrast, for example, enforcing an air pollution emission standard through a criminal penalty rather than a tax. The two regulatory regimes clearly express different attitudes towards emissions. The criminal penalty prohibits emissions (above the stated standard); the tax permits emissions (above the stated standard). Lawyers commonly believe, I think, that a criminal prohibition will reduce emissions more than the tax.

Similarly, a city might redesignate a section of the curb from “No parking,” enforced by an administrative fine (at least in New York City) to metered parking. The “no parking” designation prohibits parking in the identified zone while meters permit parking upon payment of the (licensing) fee. The city presumably expects that, under “no parking”, the stretch of curb will remain clear while it expects cars to use the same stretch when parking is metered. The distinction between a prohibition and a permission clearly has expressive content.[17]

These legal forms, of course, differ not only in their expressive content but also in their substantive features. Monitoring for criminal violations differs dramatically from monitoring for regulation through a private civil action. In the latter case, private citizens identify violations of the standard; in the former, government officials police the regulated conduct. Further, the fora in which violations are adjudicated may differ not only in the burdens and standard of proof but also in the identify of the fact-finder that might be an administrator, a judge or a jury (with varying decision rules from majority to unanimity). Finally, the size and nature of both the formal and informal sanction may vary. The policymaker sets the formal sanction but the informal sanction arises from the informal social response to violation of the norm. Violating a criminal law typically provokes more severe social sanctions than violating an administrative regulation or a norm enforced only through private civil actions.

These institutional variations suggest that the rational policymaker will determine that different forms, even if they impose identical sanctions, will create different expected penalties for violating the norm and give rise to different distributions of type 1 and type 2 errors, where a type 1 error incorrectly rejects plaintiff’s claim and a type 2 error incorrectly accepts it. The different legal forms will thus create different incentives and induce different behaviors, even when imposed sanctions are identical. Moreover, the policymaker might in fact choose among these forms on the basis of these different incentives and on the relative importance of errors that impose sanctions on those that in fact complied relative to errors that fail to impose sanctions on norm violators.

The elaborate differences among these legal forms thus make it difficult to isolate a distinctive account of legal normativity. The subtle variations in form have consequences for behavior on the economic account that might explain variations in responses to the various legal forms that we might initially attribute to normativity.

4.3 Strategies of Accommodation

As the last subsection noted, prudence can explain differences in behavior that result from the different legal forms. Each form creates a different expected sanction and an economically rational actor will respond differently to these different expected sanctions. Moreover, any differences in expected behavior might be attributable to differences in the policymaker’s objective function. Different burdens of proof generate different distributions of error types. A policymaker might tolerate more deviant behavior to insure that innocents do not suffer penalties.[18]

Nevertheless, intuitively one might expect greater compliance to emissions standards regulated through a criminal penalty than to emissions standards regulated by a tax, even if the expected payment for each available action were identical under the two regimes. This intuition runs counter to the rational choice explanation. Only if this intuition is correct could we say that the law provides non-prudential reasons for action.

The economic model of behavior, however, is extremely flexible. It requires careful consideration to conclude that the model cannot accommodate “normativity.” This section assesses the techniques available to the economic model of behavior to determine the extent to which ideas of normativity may be accommodated.

From the philosophical literature on obligation and the very limited economic literature on obligatory behavior, one may extract four possible mechanisms through which obligation influences individual action. The first mechanism simply reduces obligations to the standard model of (narrowly) self-interested rationality. The discussion of legal form above suggested how this reduction might proceed. Further methods of reduction are discussed below.

Second, one might weaken the assumption of full rationality. Boundedly rational agents may have reason to follow rules and these rules, though perhaps best treated as rules of thumb, might cause the agent to mimic normative behavior.

The third mechanism identifies preference as the pathway through which obligation operates; obligations motivate when they are “internalized.” Internalization may take at least two different forms. One form dissolves the normativity of law while the other has an ad hoc quality.

Finally, obligation may influence the agent’s deliberative or decision process. One might understand this mechanism as treating the agent’s preferences as context-dependent; how she ranks alternatives depends on whether (and which) obligations apply. I consider each of these mechanisms in turn.

4.3.1 Reduction

Economic analysis of law easily accommodates sanction theories of duty. The analyst here simply reduces the sanction theory to self-interested preference maximization. This approach, as noted above, adheres to the assumption that agents are (narrowly) self-interested. It recognizes, however, that a legal rule may either provide the agent with relevant information (and hence changer her beliefs) or place a price on certain actions. The price a legal rule places on conduct will depend on the legal form as the legal form determines the monitoring mechanism and the burdens of proof, both of which determine the probability that the legal sanction will be imposed.

It is also straightforward to see how a legal rule might provide information that alter the agent’s beliefs about the likely outcome of various courses of action. Consider, for example, a driver on a mountain road who encounters a sign that indicates an impending curve on which the speed limit has been lowered to 15 miles per hour. In light of this sign, the agent should adjust her beliefs about the highest safe speed at which she can negotiate the road. Regulations of health and safety may operate in a similar way.

A third way that obligation might be reduced to self-interest relies on repeated interaction. Agents with foresight understand that behavior that deviates from the legal norm today may have consequences for their subsequent dealings in the future. This harm arises even when the legal sanction is not imposed. The threat of future harm thus may induce compliance with a legal norm even in the absence of sanction.

Finally, in many instances, rational agents need to coordinate their actions. In coordination games, for example, each agent ranks the different possible outcomes identically; but, when multiple equilibria exist, the agents may fail to coordinate on a desirable equilibrium. A legal rule may publicly announce an equilibrium to play and that announcement may coordinate the agents’ actions.

Announcement of a legal rule in this context can can coordinate the players’ actions. It gives each agent a reason to choose as the rule dictates if it affects the individual’s beliefs concerning which strategy the other agents will adopt. On this account, the social fact that individuals accept the law provides each individual with a reason to act. This reason is independent of any sanction that the law might impose for non-compliance. Moreover this reason is prudential in that it best promotes the agents own welfare. Of course, one might say that the reason is also moral as it best promotes the well-being of all. This coincidence between the moral and prudential results from the coincidence of interests of all agents.

4.3.2 Bounded Rationality

A second route to the accommodation of normativity within the economic model acknowledges that individuals are boundedly rational. The assumption of bounded rationality admits the possibility that agents should follow rules. A legal rule would then be justified, in a manner consistent with Raz’s [1979, 1986] account of authority, when adherence to the rule improved the decision making of the agent.

In the simplest model in which such an account exists, agents face a cost of deliberation. The more complex the deliberative calculation, the higher the costs the agent incurs. When the marginal cost of deliberation is sufficiently high, the agent might do better to follow a rule that quickly, and cheaply, identifies a good but not optimal action.[19] If the expected benefit from choosing the optimal action (relative to the good action) is less than the cost, it is prudent for the agent to adopt the rule of thumb. More sophisticated accounts of an economic rationale for rule-following rely on more complex models of bounded rationality.

To complete an economic account account of the authority of law requires that one explain why the agent should consider legal rules as the relevant rules to which she should defer. One might argue that those who promulgate legal rules have special expertise that makes it likely that they will enact rules that are better than the rules that the agent herself would formulate. For some legal rules—technical rules concerning health and safety promulgated by administrative agencies—the argument may have merit. After all the decision at issue depends on a mass of technical data that is not easily assimbilable or manipulable. For many other legal rules promulgated by legislatures and courts, however, the argument may not apply.

Several other features of this argument merit attention. First, it parallels the argument for authority offered by Joseph Raz.[20] As in Raz’s argument, authority is specific to legal rules rather than to law in general. An agent might believe the law more expert than she with respect to some decisions but not with respect to other decisions. In fact, agents with different expertise themselves would find different legal rules authoritative.

Second, on this account of authority, the legal rule affects the agent’s deliberation not because of the sanction for non-compliance but because compliance with the legal rule, even in the absence of a sanction, is in the agent’s best interest. This feature of the account of authority conforms to notions, developed further below, of the way in which rules enter the deliberative process. But this feature also limits the applicability of the account to those legal rules that bear on the agent’s immediate interest. Many legal rules direct the agent to adopt actions that raise her own costs; in the absence of a sanction for non-compliance, her own interest would dictate non-compliance. So, for example, a rule requiring that an agent adopt due care in certain activities may raise the agent’s costs.[21]

The prudential account of authority outlined above primarily addresses private individuals. One might ask the parallel question concerning the obligation to obey the law of public officials. In some respects, this question has greater significance than the question concerning private individuals because many acknowledge that the motivation of private individuals to obey the law is usually prudential, the desire to avoid sanctions. Moreover, on some jurisprudential accounts, most notably the legal positivism of H.L.A. Hart, the attitudes and behavior of public officials determine the existence and nature of law.

The economic account of authority, however, does not provide a compelling explanation of official behavior. Consider how the economic account applies to public officials. The relevant obligations here are the official obligations of the individual: the judicial obligation to decide cases according to the dictates of stare decisis and other obligatory practices; the executive official’s obligation to apply the law. Two difficulties arise immediately. How is compliance with these official obligations in the individual’s interest? Why must the agent follow a rule rather than optimize in each instance? This second difficulty is less troublesome than the first; Ronald Heiner [1986], for example, has offered a prudential account, grounded in bounded rationality, of the judicial obligation to adhere to stare decisis.[22]

One might attempt to resolve the first difficulty concerning the agent’s interest by arguing that compliance with official obligation is in the individual’s interest because she desires to maintain her employment. But this explanation rests on an incentive argument.The sanction of dismissal induces the compliance rather than normative motivation to comply with one’s obligation; it is another prudential account. The prudential account of authoritythus fails to overcome this first difficulty. It is not clear then that the prudential account of authority can ground the normativity of law.

4.3.3 Obligation within Preference

Economic theorists offer a highly abstract account of individual decision making. Its abstract nature renders the theory remarkably flexible. As it is an account of instrumental rationality, it can accommodate many different substantive accounts that differ in their specification of what ends are rational or more simply whatever ends the agent happens to have.

Briefly, the economic explanation of decisions states simply that the agent chooses the feasible option that she ranks most highly according to her “preferences.” “Preference” is a technical term, not a psychological concept. By definition, a preference is a linear order over some domain of objects. A linear order is complete, asymmetric, and transitive. Less formally, we may understand preference as a relation “at least as preferred as” over the relevant domain. Completeness requires that, for any two objects a, b, either a is at least as preferred as b or b is at least as preferred as a. Asymmetry states that if a at least as preferred as b and b at least as preferred as a then a indifferent to b. Finally transitivity requires that if a is at least as preferred as b and b is at least as preferred as c then a is at least as preferred as c.

An agent typically has a number of competing ends. One can interpret the agent’s preferences as her all things considered ranking of all possible outcomes. One might then consider the obligations under which the agent finds herself as among the agent’s competing “ends”. The question of compatibility between economic rationality as preference and obligation then reduces to the question of whether obligations may be integrated with the other concerns of the agent into an all-things-considered ranking that satisfies the preference axioms.

Integrability presents a serious challenge to the economic account of rationality. Nevertheless, the theory has substantial resources to meet this challenge. To illustrate, consider Neumann’s [2007] analysis of the famous example used by Anand [1993] and Sen [1993]. In this example, they consider an agent whom we shall call Freddie. Freddie is Liza’s guest for dinner and he has been offered a plate with three slices of cake on it. One slice is small, one medium, and one large. Freddie has two concerns: he wants the largest piece of cake available and he wants to conform to the social norm “never take the largest piece”. In Sen’s and Anand’s account, Freddie cannot integrate these two concerns into a preference because his choices violate a condition of contraction consistency which is necessary for transitivity. That is, from the pair (small slice, medium slice), Freddie chooses the small slice but from the triple (small slice, medium slice, large slice), Freddie chooses the medium slice. These choices, however, are inconsistent only under the description given.

Sen and Anand use the absolute size of the pieces of cake to describe Freddie’s options. As Neumann points out, this description ignores a decision relevant aspect of Freddie’s choice situation; Freddie cares about the relative size of the pieces of cake. Freddie’s choices under a description using relative sizes conform to the axioms defining a preference.

Will appropriate redescription resolve all conflicts between “preference” and “obligation”? A related approach to this problem suggests that the answer to this question depends on the structure of the norm. Baigent [2007] and Xu [2007] consider the rationalizability of choice when the agent faces normative constraints. In these situations, the agent, facing a set of feasible options, first eliminates those acts that are normatively prohibited. He then chooses the best available option from this restricted set of feasible options. Whether we can attribute an all-things-considered preference to the agent depends on the structure of the obligation and the detail of the agent’s preferences.

4.3.4 Deliberation.

Rationality in economics is instrumental; the agent’s ranking is taken as given and as fundamental. The agent does not deliberate about her ends.[23] Accounts of practical reason, however, often involve deliberation over ends. The economic account of rationality may have less success in accommodating these accounts of obligation.

Raz [1975] provides an account of practical reasoning in which obligation plays a central role. On this account, obligations are exclusionary reasons that provide the agent both with a first-order reason to take the obligatory act and a second-order reason not to consider some set of first-order reasons actions. This structure differentiates obligations (or prohibitions) from taxes (or permissions).

A simple example illustrates this logic. Consider a prohibition on emitting more than 75 parts per billion of sulfur dioxide per hour into the air. This prohibition gives a power-generating plant reason not to emit more than that amount of sulfur dioxide per hour. But it also excludes a variety of other first-order reasons for action from the plant’s consideration. On Raz’s account, the firm should not act on, for instance, the fact that emitting more than 75 parts per billion of sulfur dioxide per hour would increase its profits (or lower its costs). The obligation would not, presumably, exclude reasons that arose from a situation in which a temporary failure to exceed the emissions standard posed a substantial threat to the health and safety of employees.

A tax on sulfur dioxide emissions above 75 parts per billion per hour, by contrast, provides the firm with only a first-order reason for action. The firm regards the rate of taxation as a price on such emissions and can weigh that price against its other costs and benefits. On this account, then, a tax and a fine that create identical expected sanctions and the same distribution of type 1 and type 2 errors should induce different behaviors. The fine will never lead to higher emission rates and, under some circumstances, should induce lower emission rates.

Can the economic theory of rationality accommodate this understanding of normativity? Arguably, the ad hoc assumption that the agent incurs a cost when she fails to comply with a legal duty captures this idea. This ad hoc cost implies that ordinary costs and benefits must be sufficiently large to outweigh the cost imposed by the prohibition. But this approach fails to capture some of the potential subtleties of an exclusionary reason as the obligation may not depend on the size of the costs (or force of the reason) but on the nature of it. An obligation may exclude some types of costs, no matter how large, but not exclude other types of costs, no matter how small.

Alternatively, one might understand the agent’s preferences as context-dependent. The agent’s ranking of alternatives depends on which set of obligations apply to her. In each situation, she faces a different set of reasons for action and she must adjust her ranking of her options to reflect these different reasons.

5. Theories of Adjudication

Adjudication plays a central role in legal institutions and in legal philosophy. This centrality extends beyond the articulation of theories of adjudication. Debates about the concept of law, for instance, generally highlight the role of the judge. For Hart, judges are an important subset of those public officials whose social acceptance of a rule of recognition constitutes the communities legal system. For Dworkin, the theory of adjudication itself determines the content of the law.

Each strand of economic analysis of law has, at least implicitly, articulated a theory of adjudication. Doctrinal Analysis as a theory of adjudication was discussed in section 2.2. In this section, I consider the theory of adjudication implicit in each of the other two strands of economic analysis of law.

Each theory occurs at the level at which the strand finds the law instrumental. Policy analysis offers a normative theory of adjudication that addresses the judge; it specifies that she should decide cases to maximize social welfare. Constitutional political economy, by contrast, offers a normative theory of court structure. It specifies the design of adjudicatory structures within which judges will, of necessity, act in a self-interested fashion. We briefly discuss each theory in the following subsections.

5.1 Adjudication in Political Economy

As noted earlier the political economy strand of economic analysis of law itself contains two strands that are in tension with each other. On the one hand, the radical political economy strand seeks only to explain legal phenomena rather than to prescribe either the structure of legal institutions or the content of particular legal rules. One might find within this strand of political economy a positive theory of adjudication but not a normative theory. Indeed, the positive theory advanced argues that judges seek to promote their interests. Usually, these interests are defined as policy interests, that is, an interest to promote particular policies.

The second strand of political economy, constitutional political economy, does have normative aims. It assumes that political actors will act in a self-interested fashion within existing political institutions but that agents will act more impartially in the design of the political institutions within which they will work.[24] A normative theory of adjudication does emerge from this strand of political economy but it differs significantly from the normative theory endorsed by the policy analysis strand of economic analysis of law. For constitutional political economy, a normative theory of adjudication must be a structural one; it should describe the structure of adjudication. The theory thus cannot dictate directly judicial motivation because, according to political economy, judges will always act self-interestedly. Adjudicative institutions, however, can be designed to align better the interests of judges with the interests of the designer of the constitution.

In 1975, Landes and Posner offered a justification for the independence of the judiciary that is often understood as a normative theory of adjudication within the tradition of constitutional political economy. On the account of Landes and Posner, an independent judiciary serves the interest of legislators who seek to impose their policies on the jurisdiction for periods that exceed the length of their majority in the legislature. As a consequence, they find it in their interest to have the judiciary enforce the original bargain struck in all legislation.

This argument contains a normative theory of statutory interpretation. Judges ought to enforce the bargains reached by the legislature that enacted the statute. On this account, a judge ignores the views of the current legislative majority. She also eschews interpretation of the statute in terms of her own policy preferences.

One should note that, from the perspective of constitutional political economy, the argument of Landes and Posner is incomplete. They ground their theory of judicial independence in the interests of legislators. The interests of legislators within extant legislative institutions may not coincide with the interests of the constitutional designer.

5.2 Adjudication in Policy Analysis

The normative theory of adjudication implicit in both policy analysis and doctrinal analysis follow from Posner’s early claim that the common law ought to be efficient. The theories are essentially identical. The two projects differ only in the seriousness with which the take actual behavior. Policy analysis rests on the behavioral claim and hence must look to the actual behavior induced by legal rules while doctrinal analysis often seems to rely only on “efficiency” within some specified model.

A normative theory of adjudication was among the earliest claims advanced in the economic analysis of law. Posner [1973, 1979, 1980, 1985, 1990, 1995] asserted claim VI in the introduction: the common law ought to be efficient. He interpreted efficiency as “wealth maximization” but then interpreted wealth maximization as “willingness to pay.” This interpretive stance yielded an argument that judges in (common law) cases ought to choose the legal rule that maximized the ratio of benefits to costs as measured by the sum of individual willingnesses to pay.

Introduction

Some of the most important decisions that are made in health care are those concerning how services should be configured and delivered. These decisions include how resources should be distributed between areas, populations, programmes of care and settings; the location and accessibility of services; payment systems and incentives; the size, composition and skills of the workforce; methods to improve compliance with safety and effectiveness guidelines; and service specialisation, co-ordination and integration. Collectively, these decisions constitute ‘service and delivery interventions’. For brevity, we refer to these as ‘service interventions’ for the remainder of this essay.

Recommended methods for the economic analysis of service interventions are less well articulated than for other types of interventions and there are no comprehensive guidelines. The National Institute for Health and Care Excellence (NICE) produced an interim methods guide for developing service guidance in 2014,1 which provided recommendations on how services should be organised around clinical interventions that have been deemed clinically effective and cost-effective. Existing Medical Research Council (MRC) guidance on complex interventions2 and natural experiments3 are primarily focused on evaluating effectiveness and pay relatively little attention to economic issues. Other guides to economic appraisal are focused on high-level policy evaluations.4,5

Several essays within this collection discuss pertinent issues for the economic analysis of service interventions. Watson and Lilford (Essay 1 from Raine et al.6) explain how multiple forms of evidence along proposed causal pathways can be synthesised to link service interventions to outcomes. Barratt et al. (Essay 2 from Raine et al.6) highlight how trial methods have been developed to facilitate evaluation of complex interventions and large-scale transformations of services. Gillies et al. (Essay 3 from Raine et al.6) describe the battery of methods that can be used to model causal effects and address bias in observational data, many of which emanate from econometrics.

In this essay, we focus on additional opportunities and challenges specifically for the economic analysis of service interventions. We begin by highlighting the distinctive issues involved in the economic analysis of service interventions. Many of these issues are also germane to economic analysis of diagnostics, clinical interventions and public health initiatives, but loom larger for service interventions. We then describe some challenges that these distinctive issues pose for economic analysis. Following this, using a range of examples, we highlight recent methodological developments in the economic analysis of service interventions. We conclude by identifying the key challenges and priorities for future research.

Scope and role for economic analysis

Health economics contains a wide range of topics. A recent classification of topics in health economics is provided by Wagstaff and Culyer,7 based on an analysis of the main content of four decades of health economics papers (Box 1). These include papers focusing primarily on the measurement and valuation of health, methods for the economic evaluation of interventions, defining and measuring efficiency and equity, demand for health care, supply of health services, human resources and equilibrating mechanisms such as market mechanisms and waiting times. Many papers, of course, consider more than one topic. In tackling each of these topics, health economists have developed a wide range of techniques that could be drawn on for the economic analyses of service interventions.

BOX 1

Twelve topics in health economics identified by Wagstaff and Culyer

Overall, the purpose of such analyses is to guide decisions regarding efficient and fair resource allocation to achieve social objectives, including enhancing overall population health and its distribution. Based on the MRC framework for complex interventions,3 we can envisage four stages at which economic analysis can support decision-making. These are the:

  1. design stage

  2. implementation stage

  3. evaluation stage

  4. translation stage.

These stages will not necessarily be sequential and will often interact. In some instances, the evaluation stage may be very broad and involve implementation and translation elements, alongside the more standard evaluation elements of effects estimation, evidence synthesis, assessment of trade-offs and analysis of uncertainty.

At the design stage, economics is one of the disciplines that can contribute to the development of service interventions. There are, for example, interventions that derive primarily from economic theory, such as the form of health care financing8 and the design of financial incentives for care providers.9 Economic analysis can contribute to the setting of prices in pay-for-performance systems.10 Financing and payment design requires an understanding of the motivations of agents in the health-care system and how these agents will respond to incentives and constraints. Payment design also requires an understanding of the production process in health care, specifically which inputs are required, in what combinations and to what scale, to produce desired outcomes. To put it more broadly, a deeper understanding of the production process and the behaviour of agents in the care system should feed into the design of service and delivery interventions.

At the implementation stage, the focus is on how the intervention will be introduced initially. Economic analysis can contribute to clarifying the expected costs and benefits of the chosen intervention, identifying where the key evidence gaps are and where prospective measurement should focus, and evaluating the cost-effectiveness of different implementation strategies.11,12 At this stage, the ‘headroom method’13 of economic analysis can be used to calculate the potential value of an intervention.14 In addition, there are other approaches to providing an ex ante evaluation of the option value of a proposed intervention.

At the evaluation stage, economic analysis can contribute to the specification and weighting of the elements that will determine the overall cost-effectiveness of the intervention and to the estimation of the cost and benefit consequences, and how these compare with opportunity costs (benefits that could be achieved through alternative uses of the same resources). This may involve translating impacts on intermediate end points into health gains [such as quality-adjusted life-years (QALYs)], incorporating other relevant consequences (e.g. for equity) and identifying and measuring cost consequences. It will also involve a formal assessment of uncertainty in the evidence and implications for decisions and the value of further research, to inform considerations of scaling up and rolling out.

At the translation stage, the focus is on the implications of study results identified in one context for service design in another context. The concern is with wider roll-out and embedding the intervention in other health systems. This will make use of evidence to assist in this extrapolation, such as baseline data and relative risks in the original and future context. It will also make use of information on the use of inputs in natural unit rather than resources used at the context-specific unit costs. More broadly, the purpose of economic analysis at this stage is to inform considerations of how the service intervention will affect, and be affected by, the wider care system in which it will be introduced when adopted by other sites or at different times. This will include considering resource constraints in practice, the unintended consequences, spillovers onto other services and people, and the effects of changes in the use of inputs in other contexts.

Distinctive issues in the economic analysis of service interventions

It is tempting to envisage a spectrum based on the level and scale of intervention from clinical interventions to service interventions to policy interventions. This may suggest that the well-developed methodological guidance on economic evaluation for clinical interventions could be carefully adapted for service interventions. Economic analyses within clinical studies, for example, have included many of the features pertinent to service interventions, including analysing the determinants of costs and outcomes using regression analyses, eliciting preferences using economic approaches (such as discrete choice experiments) and investigating economic issues affecting implementation.

Several papers have considered the extent to which economic evaluation of different forms of intervention differ from a ‘typical Health Technology Assessment (HTA)’. These include public health,15 social care,16 antimicrobials,17 diagnostics,18 medical devices19 and genetics.20 Together, these papers highlight that there is no typical HTA and, instead, there is a spectrum of challenges facing any form of evaluation. No challenge is unique to service interventions and there are lessons that can be learned across the spectrum of challenges facing analysts focusing in different areas.

This highlights that there is no clear demarcation between clinical interventions, service interventions and policy interventions. But there are differences in emphasis and the degree to which particular challenges are salient and have to be dealt with. There are a number of features that appear distinctive for service interventions (Box 2) and affect the focus of the analysis required. Lilford et al.21 emphasise that, although there are some service interventions that are focused on specific processes, more generic service interventions and policy interventions have the potential to have an impact on several processes and hence exhibit more diffuse effects across multiple outcomes. Watson and Lilford (Essay 1 from Raine et al.6) show how such causal chains can be modelled.

BOX 2

Distinctive features of service and delivery interventions

These more generic service interventions are likely to have multiple effects on large patient populations, which may each be small in size but aggregate to substantial effects. The difficulties of detecting and measuring multiple small effects pose even more of a challenge for service interventions that affect multiple providers, such as network or system interventions. The difficulty of detecting and measuring effects for large populations often makes primary data collection prohibitively costly. As a result, there is often a reliance on observational data sets with the concomitant challenges of attribution and causality and a need to synthesise multiple sources of evidence.

The consequences of service interventions at the level of the health-care provider are often more substantial than for clinical interventions. The associated changes in costs are therefore more complex. It is more frequently noted in the case of service interventions that they may free up resources for other use but do not reduce expenditure. This is exactly the rationale for considering opportunity costs in an economic evaluation rather than financial implications. Nonetheless, the usual assumption of using cost-weighted utilisation as a means of estimating relevant opportunity costs may be too simplistic for some service interventions. Average unit costs may not be accurate proxies for the implications of non-marginal changes in resource utilisation.

Any form of intervention is likely to have wider system impacts. They may divert resources away from other patients and/or free up resources for potential use by other patients. Beyond these direct effects on costs, interventions may affect costs and benefits indirectly. They may generate spillovers onto other people or other interventions if the tasks involved are substitutes or complements. They may also influence both the demand side and the supply side of the production process. On the demand side, it is necessary to understand patient preferences and how current and potential patients may respond to reconfigured services. On the supply side, it is necessary to consider the capacity of the system in terms of the availability of the required inputs. If it takes time for staff to be recruited or retained, there may be a period in which demand exceeds supply and a lag before the system comes to an equilibrium. We know relatively little about how different levels of labour input affect the capacity of the system in general. Moreover, the effects on some inputs, especially labour, are behavioural. Little is known about how staff will respond to increases or decreases for the demand for their input. There is substantial literature on the interaction between supply and demand, often known as ‘supplier-induced demand’.22

A further set of distinctive features for service interventions relate to the heterogeneity of implementation, context and impact between places and over time. Heterogeneity exists in the implementation and delivery of the intervention, what sort of care the intervention is designed to replace and in the context into which the service innovation is introduced. Although these heterogeneity issues are also relevant for clinical interventions, the narrower scope, tighter protocols and eligibility criteria for recruitment limit their pertinence. Service interventions are not always clearly defined, they often evolve over time, and they may not use strict criteria to define their target population. Consequently, the extent of variation between organisations in how they implement service interventions is more substantial than clinical interventions. Context is more important for service interventions as this affects impact. This may lead health-care organisations to negotiate a range of variations and prices with providers for a given type of intervention, such as was found in a recent study of electronic prescribing systems.23 The changing environment in which service interventions take place, the dynamic nature of service interventions and the less formalised decision-making process in service interventions are also distinctive features. The other essays in this collection6 (especially Essays 6–8 from Raine et al.6) have also highlighted these issues.

Challenges for economic analysis of service interventions

Although randomised controlled trial (RCT) designs have been developed to evaluate complex interventions and large-scale transformations of services (Essay 2 from Raine et al.6), economic analyses of service interventions have tended to rely on non-experimental designs and observational data for practical reasons of implementation and prohibitively high data collection costs. Gillies et al. (Essay 3 from Raine et al.6) emphasise the challenges involved, including the requirements for risk adjustment and matching in comparative evaluations. Nonetheless, these approaches based on observational data have advantages of generalisability, more accurate reflection of routine practice and more comprehensive coverage than many RCTs. It is likely that combinations of experimental and observational data will be the most informative.24 Irrespective of study design, it is important to seek a comprehensive understanding of how an intervention works. Theoretical understanding can aid judgements concerning both the internal validity of findings and their applicability to other contexts.21,25 In order to acquire or enhance such theoretical understanding, it is desirable to collect information across a causal chain linking an ‘upstream’ intervention to its effect at the patient level ‘downstream’ (Essay 1 from Raine et al.6).

The issue of how to allocate scarce resources and the notion of opportunity cost are ubiquitous to all forms of intervention. Therefore, economic evaluations should also be fundamental to economic analyses of service interventions. The fact that studies of clinical interventions are more often undertaken using study designs with greater internal validity (e.g. multicentre RCTs) has enabled economists to focus on the comparison of costs and benefits. Because evaluations of service interventions have tended to involve more challenging non-experimental designs, economists have tended to focus on attribution and causality and made important contributions to the robust estimation of impact. This is a matter of custom and practice, but also capacity. Nonetheless, the questions of how service changes affect costs and patient benefits remain important for service interventions and should be given more attention.

Evaluations of service delivery interventions often take place in a context where the service as a whole is taking measures to improve the relevant aspect of care. The result is a secular trend or ‘rising tide’ that might obscure the effects of an intervention in an evaluative study.26 Promising interventions that have produced null results in such circumstances for which the system as a whole was undergoing rapid improvement included the Safer Patient Initiative in the UK,27,28 the ‘Matching Michigan’ study to reduce bloodstream infections29 and the Medical Early Response, Intervention and Therapy (MERIT) study to improve recognition of deteriorating patients on the ward.30 In all these cases, there was evidence that the system on a whole was improving alongside the introduction of the service intervention.

Service interventions frequently have consequences for the demand side of the health-care system. Patient preferences, knowledge and constraints affect their choices and their behaviour. Service changes can affect what is offered to patients and the costs they incur in accessing care. These can have knock-on consequences for their use of services, for their families and carers31 and for their health behaviours.3234 All of these considerations contribute to the impact and the costs of service interventions and affect the generalisability of evidence from one setting to another.

In considering the total cost of the intervention, it is important to distinguish the set-up costs, that are incurred just once and may include research-only costs, from the running costs that would be expected in perpetuity. Many service interventions, especially at the organisational level, incur high upfront or set-up costs. These costs pose challenges for evaluation because they would ideally be shared over all users, which means making decisions about the lifetime of the intervention and the number of patients affected over the long term. They also pose a challenge for implementation because, even if the average cost per patient is acceptable, commissioners or providers might not have the resources to meet the high upfront costs.

There are also additional cost issues. The cost consequences may differ substantially between organisations, for example because different amounts of time from different types of staff may be devoted to the intervention. We may be interested in the impact that the scale of implementation has on costs. Finally, there are likely to be cost consequences across organisations (e.g. from secondary to primary care) and there may be differences between these organisations in their capacity to absorb additional costs.

Studies of service interventions often consider different study questions than whether or not the intervention is better than usual care. In many cases, there is a focus on whether or not an evaluation of a service intervention will provide generalisable evidence about whether or not a change to inputs or organisation causes changes in delivery and/or outcomes. Thus, there is less desire for evidence on ‘if it worked’ and more on the identification of causal relationships that can inform the design and implementation of future interventions, as policy and practice will have moved on. This is in part because there is no requirement prior to adoption to prove cost-effectiveness and less potential for roll-out of the same service in all contexts. Therefore, the focus is not about informing a discrete decision and providing evidence to support wider adoption, but on furthering understanding of the care system to inform future service changes.

As a consequence, there are two overall purposes for economic analysis of service interventions. As with other forms of intervention, economic analysis has an important role to play in providing a guide to decision-making by comparing costs and benefits and assessing relevant opportunity costs. But, in the case of service interventions, economic analysis also provides descriptive analysis alongside decision-making to help to understand processes rather than to evaluate decisions.

Recent developments

In this section we highlight some recent examples of methodological developments in the field of economic analyses of service interventions.

Ex ante modelling of expected costs and benefits is an important aid to decision-making,13 the design of service interventions and the design of future evaluations. Impact assessments were, for a period, routinely undertaken by the Department of Health.35 They were a useful part of the policy formation process but are, regrettably, no longer required. The analysis of the policy of introducing 7-day hospital services by Meacock et al.,36 Brown and Lilford’s37 evaluation of a government directive to wash hospital wards, and the evaluation of a proposed service to improve handover of patients between hospital and home by Yao et al.14 are examples of this approach. Such ex ante assessments should be more routinely produced for proposed service interventions.

Broadly speaking, there are two approaches to producing summative assessments of the costs and benefits of entire programmes. The first involves direct estimation of the summative impacts through exploitation of some experiment or other source of variation in implementation. The second involves modelling the causal chain through component processes to derive an aggregate measure where direct estimation is not feasible.

A recent example of the first, direct approach was undertaken for the reconfiguration of stroke services. Morris et al.38 used observational data and difference-in-differences techniques to examine the mortality and length-of-stay changes associated with reconfiguration of stroke services in London and Manchester. Hunter et al.39 constructed decision-analytic models using data from population-based stroke registers, audits and published sources to show the service intervention reduced mortality for a reduced cost per patient, predominantly as a result of reduced hospital length of stay. Meacock et al.40 showed how a similar approach could be taken for the Advancing Quality pay-for-performance programme41 adopted in the North West of England. They translated the mortality reductions identified by Sutton et al.41 into gains in QALYs using a discounted and quality-adjusted life-expectancy tariff, and compared these to the costs to reach conclusions on the scheme’s cost-effectiveness. This was later developed with survival analysis to obtain more accurate estimates of the QALY gains.42

Watson and Lilford (Essay 1 from Raine et al.6) explain how the second approach can be parameterised. This can involve evidence synthesis and analysis of large observational data sets to derive parameters to be plugged into economic models. As an example, Elliott et al.43 combined adherence improvement and intervention costs from a trial with Markov models for diseases targeted by the New Medicines Service tracking the effect of increased adherence on patient outcomes and health-care costs. Bayesian network approaches have also been developed.44 There is potential value in combining the direct and modelling method processes.21 Modelling outcomes of economic interest is a topic of increasing interest and lessons will be learned from the ongoing advances in decision-analytic modelling being developed by the International Society for Pharmacoeconomics and Outcomes Research.45

There have also been advances in the measurement of patient and professional preferences that can further our understanding of demand-side and supply-side responses to service interventions. Discrete choice experiments have risen in popularity in a variety of applications,46 including examining patient aspects, such as whether or not convenience matters,47 and professional preferences for location48 and other aspects.49 There is renewed focus on their external validity.5052 An alternative is to model revealed preferences when available.53 In an innovative combination of data on stated preference and revealed behaviour, Scott and Sivey54 have shown that a general practitioner’s strength of preference for income is correlated with their response to competition.

Recent work has begun to analyse how variations in historic data on care expenditure and population outcomes can help us to understand the value of resources that may be affected by service interventions. The recent work on the cost-effectiveness threshold by Claxton et al.,55 for example, has produced estimates of opportunity costs based on previous patterns of expenditure across the NHS in England. These supply-side estimates can be contrasted with the demand-side values proposed by NICE. Coupled with the analysis of variations in productivity across organisations by Castelli et al.,56 this has the potential to provide us with organisation-specific estimates of the opportunity costs of additional investments required for service interventions.

Another area in which there have been recent advances is in the economics of implementation in health care. This literature is relevant to all interventions, but especially service interventions, which often incur high upfront costs and may not be straightforward to implement, even if shown to be cost-effective. For example, the literature on ‘policy cost-effectiveness’ argues that decision-makers should consider both the costs and effectiveness of implementation as well as the cost-effectiveness of the innovation to be implemented.57,58 This was applied to the Quality and Outcomes Framework by Walker et al.59

Future challenges and priorities

In this section we highlight gaps in the current methods and suggest what we need to focus on in future research.

Economic evaluation is one of the key contributions of health economics to decision-making. Methods for the health economic evaluation of medical devices and technologies, including pharmaceutical products, are well developed and integrated into the process of clinical commissioning and decision-making through bodies such as NICE.60 However, economic evaluation has not been incorporated in such a way for other important questions concerning health service expenditure such as staffing policies, primary and secondary care organisation and integration, and patient safety interventions. It is debatable whether guidelines for economic analysis of service interventions are feasible or appropriate. Regardless, it will not be a simple issue of adapting the existing HTA methods to the evaluation of service interventions.

In Box 3, we set out an initial list of questions that analysts should consider when considering service interventions. These affect the analyses that can be performed and whether or not the nature of the service innovation suggests that special issues need to be considered. This list of questions could be developed into a more systematic list of considerations.

BOX 3

Questions for the economic analysis of service interventions

A challenge common to economic evaluation of all forms of interventions is whether or not we need to consider wider ‘outcomes’ beyond patient health, as captured by the QALY. Additional potential issues include access, quality, patient experience, sustainability, equity, capability and population engagement. It is widely accepted that these aspects are important, but it is less clear as to whether they are of value in themselves or because they affect patient outcomes, how they should be measured and how they should be traded off against health outcomes to derive a composite measure of programme benefit that can also be reflected in terms of opportunity cost.

Another common challenge is developing advanced methods for evaluating impacts in a non-experimental setting. This is the area of economic analysis of service interventions that is most advanced (Essay 3 from Raine et al.6), but there remains a need for a better understanding of the assignment mechanism for programme evaluation. We need to understand why some organisations and professionals tend to participate and others do not. This is key to developing robust comparators for non-experimental evaluations. Economists should be involved at the earliest stage of decisions about the implementation (such as phased roll-out) of service interventions to ensure that the important end points are collected.

The key components of an economic evaluation are identification, measurement and valuation of the costs and benefits. The identification stage is intended to produce a comprehensive list of potential costs and benefits, but this has tended not to be systematic, with economists focusing primarily on the challenging issues of measurement and valuation. There is potential for complementary, parallel investigations to identify (1) variables that are likely to be affected, (2) potential impacts elsewhere in a complex system, (3) proposed mechanisms that might, for example, support the robustness of the approach to identify causal effects, (4) heterogeneity in engagement by different groups of patients and professionals, and (5) the boundaries of generalisability for a particular analysis. These will be best achieved by more active engagement in interdisciplinary research.

There is a belief that the potential for financial profit has driven the faster development of guidelines for the economic evaluation of medical devices and pharmaceuticals. The guidelines have sought to safeguard the NHS from products that are not cost-effective. A similar impetus may emerge for the evaluation of service interventions as the provider sector becomes more diverse.

There is a more basic challenge of how to capture the opportunity costs of service interventions, which are likely to comprise the costs of implementing the service intervention, the costs of delivering the service intervention and the impact that the service intervention has on consequent care costs. Further challenges are that these costs may differ between organisations and over time, and that service interventions are sufficiently large to cause non-marginal changes in resource use. Therefore, there is scope for methodological work on evaluating the impact of service interventions on costs.

More fundamentally, there is a need for economic analysis of service interventions to further our understanding of (1) the production process and (2) the behaviour of agents in care systems. These considerations should feed into how evaluations are undertaken, future ex ante analyses and how service interventions should be co-designed in the future. Service interventions provide an opportunity to generate additional evidence on these issues by offering a purposive source of variation in care delivery. Through these ‘experiments’, there is scope to develop and collate generalisable knowledge on the mechanisms operating within the care system.

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