Category Archives: Privatization

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You Asked For Research? You Got It! Now What Are You Going to Do With It?

The last post described recent (and still evolving) research by NYU PhD candidate Hannah Simpson. Her empirical research focuses on how the fees that a state (that is, a country’s national and/or local government) charges to access its legal systems (courts as well as other agencies such as those for property registration and licensure – which collectively Simpson refers to as a state’s “property rights institutions”) interact with other institutional and economic conditions, and what the effect of that interaction is upon access to justice in that state. In a nutshell, her models demonstrate that the effect upon access to justice is as follows: in wealthy countries economic growth increases demand for access to the state’s legal system but decreases supply. This is because wealth and economic development in a wealthy country are liable to motivate the state to increase fees, on the grounds that the wealthy can and will pay them. However, those same fee increases are usually substantial enough to dissuade the poor from using the state’s system and thus there is an overall decrease in access to justice. In contrast, in poor countries, economic growth increases not only demand for access to the state’s legal system but also supply. This is particularly the case when the state’s system is institutionally biased in favor of the wealthy, even though, Simpson observes, such a conclusion appears counterintuitive. This is because economic growth motivates elites to buy into an otherwise fragile and unappealing institutional framework. This participation increases the system’s effectiveness and thus its appeal, and also leads to reduced administrative costs, enabling the state to reduce its fees, thus increasing accessibility.

Simpson’s research goes further, to also seek to understand: when a state uses its “property rights institutions” to generate revenue, what effect does it have upon competition from private legal services providers? Her conclusion in this regard is in two parts:

On the one hand, when a poor group exits a state system in favor of a private system, the remaining population is unequivocally worse off because the state system becomes both less effective and more expensive. It’s not clear that the exiting group becomes better off either, given that, Simpson observes, when a poor group exits a state system in favor of a private one, the poor group is generally moving from a system based upon procedural safeguards to one based upon “cheaper” methods of enforcement, notably peer pressure and violence. On the other hand, if the poor group’s access to the state system was more theoretical than real because of the system’s bias against the poor, then the poor group can understandably perceive itself to be better off with real peer pressure and violence as opposed to nothing more than theoretical procedural safeguards.

When a wealthy group exits a state system, the state system also becomes less effective, because of the reduction in the number of participants. On the other hand, the additional consequences for the remaining population are equivocal—indeed, they are paradoxal. In theory, the remaining population should benefit from lower fees, but only under certain conditions, namely that the country is experiencing low economic growth and income inequality is increasing, because under these conditions the state will likely lower its fees in response to the exit of the wealthy group. However, Simpson explains, those are not the conditions under which wealthy groups are motivated to exit a state system. Instead, they are motivated to leave when economic growth is high and income inequality is decreasing, because those are the conditions under which a wealthy group is more likely to benefit from participation in a private system rather than a public one. Further, under those conditions, wealthy groups are willing to pay a higher premium to access a private system. In sum, it appears that if a wealthy group does choose to opt out of a state system in favor of a private one, it is more likely than not to do so under conditions that will result in negative effects for the remaining population.

Simpson’s research is complex. It requires significant intellectual investment. But those facts do not make her research less compelling, or less deserving of attention. Again, you can read about her research in more detail here.

What are the implications of Simpson’s research? I suspect there are many—in this post I’d like to consider two of them.

Implication N° 1: We Can Predict the Consequences of Privatization

Let’s start with Gillian Hadfield’s 2016 book Rules for a Flat World: Why Humans Invented Law and How to Reinvent It for a Complex Global Economy. In this book, Hadfield deplores the “abysmal” state of “our knowledge about legal infrastructure.” She continues: “there is next to no research on the fundamental questions of how most effectively to provide legal infrastructure in different environments.” She deplores that “legal infrastructure is simply not on the research agenda in our universities.” She bemoans that “research on how to build legal infrastructure in the face of mounting costs, with the dramatic upheavals of the complex global economy, or in places where legal order is absent or broken” is barely on the radar. Hadfield further laments the lack of research in this post.

Of course Simpson’s research does not respond in full to Hadfield’s lamentations, but it is a beginning of a response, and a highly significant one. It exposes the consequences for access to justice of an important element of legal infrastructure—the use of legal institutions to generate revenue—an element that Simpson persuasively argues has not received sufficient attention to date.

More than that, Simpson’s research speaks directly to the principal argumentation of Rules for a Flat World: that regulation should be privatized. More specifically, the book argues that “markets” (private enterprise) should be allowed to compete with state (public) agencies as well as with each other for the provision of regulatory services. An important element of Hadfield’s proposal is that private regulators would be allowed to charge fees to generate not just revenue, but profit (“dangling the prospect of profit”).

Simpson’s research indicates that if the proposal of Rules for a Flat World were to be implemented, certain groups would likely benefit, while certain others would likely suffer. The beneficiaries would be what Simpson terms “wealthy groups,” that is, it would be the “companies” and “businesses” (that is who Hadfield depicts as the customers of private regulators) who can afford the fees of a private regulator. Those who would not benefit would essentially be everyone else (individuals, businesses and other organizations unable to afford the private fees). They would, Simpson’s research demonstrates, be left with a state legal system that is necessarily less effective (because of reduced usage) but no less expensive (because it would be unlikely that the state would be motivated to lower its fees in response to the exit of the wealthy groups). The remaining users would have the right, like the wealthy groups, to also exit the state system for a private one, but Simpson’s research suggests that such a right would be little more than theoretical. If they were to exit the state system, the remaining users would end up in private systems inferior to the state’s, because they would not be able to pay the fees required to establish and maintain a system approaching the state’s. So, instead of having recourse to (expensive) procedural safeguards to protect their rights, they’d have little more than (cheap) peer pressure, if not violence.

Implication N° 2: A Stark Reality and a Stark Choice

Recall Simpson’s finding that in wealthy countries economic growth increases demand for access to the state’s legal system but decreases supply. Again, this is because wealth and economic development in a wealthy country are liable to motivate the state to increase fees, on the grounds that the wealthy can and will pay them. However, those same fee increases are usually substantial enough to dissuade the poor from using the state’s system and thus there is an overall decrease in access to justice.

This finding places us before a stark reality. In a wealthy country like the United States, we can use our courts and other “property rights institutions” (without forgetting that our courts are intended to protect not just property but also civil—human—rights) as a means of generating revenue for the state, or we can use them as a means to disseminate access to justice on as wide a basis as possible. They cannot be used for both because, based upon Simpson’s research, in wealthy countries one of these objectives is mutually exclusive of the other. If we choose to use our courts and other state legal institutions as a source of revenue, then at the same time, we are choosing—deliberately and with full knowledge—to limit if not entirely block access to justice for a certain portion of the American population, and the more we rely upon those institutions for revenue (that is, the greater the fees we charge), the larger will grow that portion of the American population with limited to no access to justice.

This stark reality leaves us with an equally stark, three-option choice:

  • Do we continue to accept that our courts and other legal institutions may be used as a means for generating revenue for the state, with the consequence of denying to a significant portion of the population access to state (public) legal institutions, and thus continue to deny them access to justice?
  • Do we move in the direction proposed by Hadfield? That is, do we open a regulatory “market” and allow private regulators to compete for regulatory “customers,” including competition with state (public) courts and other property rights institutions, with the consequences described above? Or,
  • Do we recognize that courts and other state legal institutions provide a public service—that they provide something that we as a society need and value because it brings economic as well as social value to everyone? And at the same time do we recognize that in order to disseminate this public service—access to justice—on as wide a basis as possible, that our courts and other state legal institutions must be financed publicly not with user fees but through equitable, progressive revenue sources?

As I’ve already noted, Simpson’s research is new and, as yet, exists only in the form of an evolving working paper. Nevertheless, her work is highly intriguing, it has multiple implications, and it already merits attention.

It’s a beginning of a response to Hadfield’s call for more research. The question is: now that we have it, what will we do with it?

If you’d like to subscribe in order to receive notices of new posts, you can do so by scrolling to the bottom of this page — you’ll see the place in the bottom left corner. Thanks for subscribing!

Related posts on this site:

Chapter 27: Rules for a Flat World (Or Regulatory Dystopia)

Access to Justice vs. Revenue: A Zero-Sum Game?

Blog, Privatization, World Justice Project Rule of Law Index

Access to Justice vs. Revenue: A Zero-Sum Game?

The last post talked about the World Justice Project Rule of Law Index. It focused, among other elements, upon the Index’s sub-factor 7.1, “people can access and afford civil justice.” The Rule of Law Index reveals an apparent paradox: some wealthy countries perform poorly with respect to this sub-factor, while at the same time some poor countries perform if not well then at least better than certain wealthy countries. An obvious example is the United States, which the Index classifies as a “high income” country, but which ranks 94th out of 113 countries with respect to accessible and affordable access to justice. A contrasting example is Kyrgyzstan, which the Index classifies as a “lower middle income” country, but which ranks 36th out of 113 countries for the same sub-factor. Consider also Hungary, which the Index classifies as a “high income” country, but which ranks 71st out of 113 countries, as compared to Malawi, classified as a “low income” country, but which ranks higher than Hungary at 66th.

The WJP emphasizes that its Rule of Law Index is not intended to establish causation. This task is left to others.

I recently came across research that steps up to that challenge. It shines a fascinating light on the paradox of the Index’s sub-factor 7.1. More specifically, it proposes a novel and highly intriguing explanation, at least in part, for why some wealthy countries struggle to assure access to justice for a significant proportion of their populations (namely their poor), while some poor countries succeed in providing access to justice for the large majority of their populations, regardless of a person’s wealth or income.

The research is a working paper by New York University PhD candidate Hannah Simpson, entitled “Access to Justice in Revenue-Seeking Legal Institutions.” In this paper, Simpson builds on the work of Marc Galanter, among others, and notably upon Galanter’s seminal work “Why the ‘Haves’ Come Out Ahead: Speculations on the Limits of Legal Change.” In this article, which was published in 1974 and is today one of the most cited law review articles of all-time, Galanter demonstrates how with respect to litigation in the United States, “repeat players,” and especially those that have the resources necessary to pursue long-term interests, have significant and in most cases decisive advantages over “one shotters,” and especially those of limited resources. Since the publication of Galanter’s article, legal scholars have viewed access fees combined with legal-institutional bias as key impediments to access to the court system in the United States and, more generally speaking, as key impediments to access to justice and to large-scale social change. (“Bias” meaning the degree to which a legal institution’s procedural requirements privilege attributes of the wealthy, like the need for and ability to hire a lawyer).

Simpson takes this vision further. She does this in two manners: (1) by examining the specific question of access fees, and, in particular, the use of a state’s legal system to generate revenue for the state, and (2) by expanding the examination to be global in scope. On the basis of her research, Simpson argues that, in any country, the state’s (that is, government’s) use of the legal system to generate revenue, interacting with other institutional and economic conditions, has a profound effect upon access to justice in that country, but that this effect is different depending upon whether the country is wealthy or poor, and, in wealthy countries, the effect is different for wealthy persons as compared to poor persons in the same country.

For Simpson, we have not paid enough attention to how states use their legal systems—which she refers to as their “property rights institutions”—to generate income. She cites as examples England and the United States, both of which have sought to fix court fees not with the intention to simply cover costs, but, instead, to take advantage of an “untapped increased willingness to pay more,” and with the intention of using the fees to fund other functions of government. Further, states’ “property rights institutions” generate income not only for courts, but also for “other segments of the state legal apparatus,” such as land and other property registrars and licensing agencies. Simpson notes diverse examples, such as India where property registration fees and stamp duties are the third largest source of income for many states, and France and Nigeria, where stamp duties are regularly raised to address revenue deficiencies.

In her paper Simpson seeks to answer this question: when a state uses its “property rights institutions” to generate revenue, what effect does it have both upon access to justice as well as upon competition from private legal services providers? Notably, what effect does it have when the state’s system is institutionally biased in favor of wealthy participants? She seeks to answer this question by developing a series of formal models that capture the interaction between “rights protecting institutions” and a population of citizens.

Wealthy Countries vs Poor

On the basis of Simpson’s models, the effect upon access to justice is as follows: in wealthy countries economic growth increases demand for access to the state’s legal system but decreases supply. This is because wealth and economic development in a wealthy country are liable to motivate the state to increase fees, on the grounds that the wealthy can and will pay them. However, those same fee increases are usually substantial enough to dissuade the poor from using the state’s system and thus there is an overall decrease in access to justice. The greater the “opportunities for commerce” (that is, economic growth) in the wealth country, the more this effect is compounded, Simpson observes. In contrast, in poor countries, economic growth increases not only demand for access to the state’s legal system but also supply. This is particularly the case when the state’s system is institutionally biased in favor of the wealthy, even though such a conclusion may appear counterintuitive. The explanation is that economic growth motivates elites to buy into an otherwise fragile and unappealing institutional framework. This participation increases the system’s effectiveness and thus its appeal, and also leads to reduced administrative costs, enabling the state to reduce its fees, thus increasing accessibility. Further, Simpson observes, the strength of this effect increases the more the state prioritizes the legal system as a revenue-generating mechanism (another counterintuitive observation).

Competition from a Private System

Also on the basis of Simpson’s models, the effect upon competition from private legal services providers (without distinguishing between informal or formal providers) is as follows: In either type of country (wealthy or poor), wealthy social groups are willing to pay hefty premiums for access to private legal institutions, whereas poor or disadvantaged groups will prefer private legal systems only if they are cheaper to access than the state’s. Indeed, poor/disadvantaged groups that have low access to state legal protections would, if offered a private group alternative, pay a premium to be able to continue to access the state’s system. The reason for this is the following: private legal institutions constructed by and for poor groups (examples include Sharia Councils, tribal elders, religious militias and even the mafia) face challenges in achieving the level of effectiveness of state legal institutions. More specifically with respect to private legal institutions constructed by and for poor groups, Simpson notes that that such institutions (or mechanisms) often lack substantial procedural protections, and rely instead upon cheap methods of enforcement, such as the use of violence and/or the use of volunteers that exert peer pressure. In contrast, private institutions constructed for a wealthy/advantaged group (examples include members of a particular industry) can easily exceed the state’s effectiveness, making it worthwhile for a member of the group to opt in even if the fees are higher.

Theoretically, competition from a private system should motivate the state to lower its fees. However, Simpson explains, this does not necessarily occur. To begin, Simpson explains, the wealthier an advantaged group, the higher the premium it is willing to pay to opt out of the state institution and into a private one. In other words, the state would need to develop a system that competes with the private one not on fees but on some other factor valued by the advantaged group. If the state were to succeed in this, then it would, likely, need to increase its administrative costs, and consequently its fees, rather than lower them. As for the state going in the other direction, and lowering its fees to the extent it can in order to attract less wealthy groups, Simpson argues that if the state is concerned with generating revenue, then it may find this to be more trouble than it is worth, especially if that less wealthy (but still wealthy enough to pay something) group is not large as compared to the rest of the population. Finally, there is a point below which the state cannot reduce its administrative costs and thus is simply unable to compete with private institutions constructed for poor groups. In those cases, Simpson explains, the state will simply cede to those private institutions. In sum, in situations where a state is able or obliged to compete with a private system, it doesn’t mean that it will necessarily choose to do so, or that it will make sense for it to do so, especially if the state prioritizes the generation of revenue over assuring wide access to justice.

Simpson continues: when any group, wealthy or poor, opts out of the state system in favor of a private one, the state system suffers in effectiveness. This is because the effectiveness of a state legal institution depends in large part upon the number of citizens that have recourse to it. This negative effect is compounded when the exit is by a poor group, because in that case the state will also raise fees. Thus, when a poor group exits the state system, the remaining population is unequivocally worse off because the state system becomes both less effective and more expensive. In contrast, the exit by a wealthy group presents a paradox: the remaining population theoretically could benefit from the wealthy group’s exit, but only under certain conditions: when there is lower economic growth (that is, there are fewer economic opportunities in society or returns on investment are not increasing) and when income inequality is increasing. (This is because these are the conditions under which the state is most likely to lower its fees in response to the exit of the wealthy group). However, Simpson explains, wealthy groups are not motivated to exit the state system in favor of a private one under those conditions; they are motivated to do so under the opposite conditions, that is, when there is higher economic growth (that is, there are greater economic opportunities in society or returns on investment are increasing) and when income inequality is decreasing. (This is because these are the conditions under which a wealthy group is more likely to benefit from participation in a private system rather than a public one, and the group is willing to pay a higher premium to do so). Thus, if a wealthy group is motivated to exit the state system in favor of a private one, its exit is unlikely to benefit the remaining population because the same conditions that motivate the wealthy group to exit the state system are the same conditions that discourage the state from lowering its fees.

This is a complex discussion with many moving parts. On top of that, Simpson’s research is new and, as yet, exists only in the form of an evolving working paper. As she moves past her preliminary work towards something more definitive, her argumentation and her conclusions will in all likelihood continue to evolve. Nevertheless, her work thus far is highly intriguing and it already merits attention.

A future post will consider what some of the important implications of Simpson’s research may be.

If you’d like to subscribe in order to receive notices of new posts, you can do so by scrolling to the bottom of this page — you’ll see the place in the bottom left corner. Thanks for subscribing!

Related posts on this site:

Chapter 27: Rules for a Flat World (or Regulatory Dystopia)

WJP Rule of Law Index: Rankings for Four Sub-Factors

You Asked For Research? You Got It! Now What Are You Going to Do With It?