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

Much of the existing literature investigating the relationship between legal regimes and economic growth focuses on the agency problem of aligning judicial incentives with social welfare and is relatively free of institutional detail beyond abstractions about common law and civil code regimes. In this paper I look instead at the detailed institutional factors that influence the quality of law when judges have incentives to promote social welfare but they have limited knowledge about the environment in which law is to be applied. The key insight is that the capacity for a legal regime to generate value-enhancing legal adaptation to local and changing conditions depends on its capacity to generate and implement adequate expertise about the environment in which law is applied. The central mechanism of adaptation is the interaction among three factors: 1) judicial incentives for rule-following and rule-adaptation, 2) litigant incentives for investing in costly evidence and innovative legal argument and 3) the accumulation of shared legal human capital - defined as the sum of litigant investments in evidence and argument - which determines the systemic likelihood of judicial error.