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?

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Related posts on this site:

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

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

2 thoughts on “You Asked For Research? You Got It! Now What Are You Going to Do With It?”

  1. Hi Laura–Thanks for responding to my work–and for bringing Hannah Simpson’s paper to my attention–looks like very interesting research. Two thoughts. First, Hannah’s paper is not empirical–she’s doing (very nice) theory and I hope she’s either working on the empirical tests of her findings or someone soon will be. The fact that she is making predictions that could be tested across countries with data like that from the World Justice Project is promising. Second, I think you’ve misunderstood the scope of the role for markets that I’m advocating. I’m emphasizing opening the markets for lawyers and exploring the use of private regulators subject to public regulation to regulate corporations, not people. I am not in any sense proposing that we should privatize courts that are handling issues faced by people and small businesses. I completely agree with you and Simpson that revenue-generation through public courts (and prisons and probation systems–a major problem in this country) is a terrible idea and that public courts are essential and perform much greater functions than economic ones that can be distributed through a market system. I’ve written lots on this topic, specifically challenging efforts to divert people out of public courts and into private dispute resolution (see Framing the Choice Between Cash and the Courthouse , Democracy, Courts, and the Information Order , and Life in the Law-Thick World). The real objective should be to fund public courts for free access by ordinary people and for matters of political and democratic importance with revenues/taxes generated from the use of public resources as an economic input in business-to-business matters and/or to divert those B2B matters into private systems they have to pay for so as to relieve congestion in publicly-funded courts and make them more available to ordinary people struggling with family, immigration, housing, consumer debt, and other matters. Simpson’s interesting observation as a political scientist seems to be to pointing to the politics of that solution–if wealthy people don’t need the public system, they won’t contribute to the taxes needed to build it and make it available to poor people. I think that’s a good critique of the problem facing poor countries; not sure we are stuck with that in wealthy countries, but definitely something to think about. Thanks for the post.

    1. Hi Gillian
      Thanks for your comment. I’m glad that you found it, and Simpson’s research, interesting.

      In Chapter 10 of your book, you hold up contract law as an “easy case” for regulatory privatization and you hold up business organizations, employment and consumer law as “harder cases.”

      As regards the “easy case,” you hold up the example of a start-up, and in particular you ask how the shareholders to a start-up will agree upon and enforce their rules for how they will build and operate the new business. In this “easy case,” who would be the customers of a private regulator – the start-up company itself or its individual shareholders? Who would approach the regulator and ask for a resolution to a disagreement among the shareholders – the start-up company itself or one or more of its individual shareholders? Would all of the shareholders necessarily be other corporations, under this scenario?

      As regards the “harder cases,” you describe the reasons why we wouldn’t want those areas subject to private regulation, but then you finish that description by pointing out examples in which public regulation appears to be ineffective for those “harder cases,” and you ask the question “Is it possible to take advantage of markets to find better ways to regulate?” You then spend the rest of that chapter explaining what I understand to be your proposal for what that better way is – what you refer to as “superregulation.” In your proposal for superregulation, you do not make an identifiable distinction between the easy and the hard cases, nor between the regulation of corporations as opposed to “businesses” in general. While corporations may indeed be the only targeted clients of the private regulators that you describe (under your “easy case,” it’s not at all clear that they would be), this does not mean that people and small businesses would be entirely unconcerned and unaffected by the private regulation.

      The examples of private regulation that you propose concern issues of workplace health and safety, as well as employee selection, compensation and promotion, and data security. You also complain that “it’s the law that is “slowing down progress on things like climate change and global financial stability.“ Those are all issues that are fundamental to the well-being of people and their basic rights, and regulation by private regulators in those areas (as well as in a host of others) would necessarily concern and affect people and small businesses, whether they were the targeted clients of the private regulators or not. And if people are not the customers of the private regulators, they’ve entirely lost their voice in how those rules are developed and applied. Your Chapter 10 argues that “superregulation” by the state will be enough to protect people – that by judging how well the “superregulators” are regulating the private regulators, the people will have an indirect voice – but “superregulation” requires the development of “a slew of laws,” as well as their effective enforcement. Where will the resources for the development and enforcement of those laws come, if, as you point out, the state already does not have the resources it needs to regulate effectively? And if the state can acquire the resources for effective superregulation, then why can’t those same resources be used to directly support effective democratic regulation?

      How it is possible to make a clean and clear division among issues that affect only corporations (and, for that matter, only the corporations subject to a particular dispute) and issues that are “matters of political and democratic importance?” Legal issues among corporations often raise issues of concern to citizens: the rights of minority shareholders, the application of the business judgement rule, the duties of a corporation towards different stakeholders (shareholders, employees, communities, larger public), the use of real and of intellectual property, the use and disposal of hazardous materials, competition in the marketplace,…

      In his book “Civil Justice, Privatization and Democracy,” Trevor Farrow, making specific reference to your work, observes: “what I fail to see…is how many disputes – specially including commercial disputes – only engage a ‘public interest in efficiency’ that involves ‘creating wealth and maximizing the value of resources,’ while not at the same time engaging other ‘democratic’ values that include ‘redistribution, equality, autonomy, environmental preservation, public safety, human flourishing, participation’ and the like.” In the same book, Farrow makes a number of arguments against what he refers to as the privatization of civil justice, such as the impoverishment of common law when cases are removed from the public system (this dovetails with Simpson’s work), the use of a private (thus, confidential) system to circumvent public policies, public accountability, and basic notions of procedural fairness, and the shielding from the public of transactions that would not withstand public scrutiny. Fallow compellingly argues that privatizing civil justice has “profound implications for how we govern ourselves in a free and democratic society. Put simply, to the extent that we are privatizing public civil dispute resolution systems, we are essentially privatizing, and in the process largely eliminating, a significant part of the way democracy is realized.”

      Open markets for lawyers is a different issue – the market for lawyers is one that has long been privatized. Opening that market means opening it up to greater variety of also private actors. These two separate issues (the privatization of regulation and the regulation of legal services) intersect at the question of whether the regulation of legal services should be privatized. My book, “Modernizing Legal Services in Common Law Countries,” argues that how legal services are regulated has a direct bearing upon whether and how people and small businesses as well as corporations can access legal services. In that context, the privatization of the regulation of legal services could not benefit the public. Further, it’s not clear who the private regulators would regulate. Would it only be corporations that provide legal services, with individual lawyers and traditional law firms being subject to a different (public?) regulatory regime under different regulatory bodies?

      Your statement that “the real objective should be to fund public courts for free access by ordinary people and for matters of political and democratic importance” raises an additional question, which is how to make that free access meaningful and effective. Would it mean also making access to lawyers and to legal services free? A kind of “universal legal care” system akin to one for universal health care? Or would new court systems be organized in such a manner that legal assistance would no longer be necessary?

      Thanks again for your highly thought-provoking comment, Gillian.

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