Precedent Externality, Network Effect, and the Possible Inefficiency of the Evolution of Laws

Using the traditional scenario of tort conflict as an example, I argue that the marginal precautionary costs of injurers and victims are not constant, as was assumed by most previous researchers. The precedent of a liability rule has some natural externality on the precaution technology, and hence marginal cost, faced by future agents involved in torts. The adoption of legal rules therefore has a network effect, meaning that the present prevalent adoption of one rule increases the probability of its future adoption. Treating the dynamic evolution of legal rules as a random process, we are able to apply an established result in the literature of network economies to conclude the path-dependence, non-predictability, and potential inefficiency concerning the final legal rule to which the dynamics converge.