The evolution of the common law with strategic litigants

The common law is shaped by the cases that are litigated in court. We study the incentives for litigants to influence legal evolution by strategically choosing which disputes to litigate. In our framework, clarifying the law typically benefits defendants. This creates a strict incentive for plaintiffs to settle cases, or to abandon legal claims even when litigation is costless. When plaintiffs are regulators, we associate this scenario with ‘regulator capture’. By contrast, defendants may generate ‘test cases’ to force litigation which clarifies the law, in instances where plaintiffs would ordinarily not litigate. We predict that settlement and this form of regulatory capture is most likely when regulators are sufficiently long-run oriented, whilst test cases arise when defendants are long-run oriented. We analyze the welfare consequences arising from these dynamic incentives.