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On Optimal Legal Change, Past Behavior, and Grandfathering

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Steven Shavell

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Abstract

When is it socially advantageous for legal rules to be changed in the light of altered circumstances? In answering this basic question here, a simple point is developed -- that past compliance with legal rules tends to reduce the social advantages of legal change. The reasons are twofold: adjusting to a new legal rule often involves costs; and the social benefits of change are frequently only incremental, only in addition to those of past compliance. The general implications are that legal rules should be more stable than would be appropriate were the relevance of past behavior not recognized, and that a policy of grandfathering, namely, of permitting noncompliance, should sometimes be employed. The analysis of these points has broad relevance, applying across legal fields, often explaining what we observe but also indicating possibilities for reform, such as in the regulation of air pollution. The analysis is related to the conventional reliance-based justification for the stability of the law, the literature on legal transitions, and economic writing on optimal legal standards.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13563.

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Date of creation: Oct 2007
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Handle: RePEc:nbr:nberwo:13563

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Find related papers by JEL classification:
K1 - Law and Economics - - Basic Areas of Law
K2 - Law and Economics - - Regulation and Business Law
K32 - Law and Economics - - Other Substantive Areas of Law - - - Environmental, Health, and Safety Law
L5 - Industrial Organization - - Regulation and Industrial Policy

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References listed on IDEAS
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  1. Steven Shavell, 2003. "Economic Analysis of Accident Law," NBER Working Papers 9694, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Randy Becker & Vernon Henderson, 2000. "Effects of Air Quality Regulations on Polluting Industries," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 379-421, April. [Downloadable!] (restricted)
  3. Gruenspecht, Howard K, 1982. "Differentiated Regulation: The Case of Auto Emissions Standards," American Economic Review, American Economic Association, vol. 72(2), pages 328-31, May. [Downloadable!] (restricted)
  4. Gollop, Frank M & Roberts, Mark J, 1983. "Environmental Regulations and Productivity Growth: The Case of Fossil-Fueled Electric Power Generation," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 654-74, August. [Downloadable!] (restricted)
  5. Kaplow, Louis & Shavell, Steven, 2002. "Economic analysis of law," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 25, pages 1661-1784 Elsevier. [Downloadable!] (restricted)
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  6. Stavins, Robert, 2005. "Vintage-Differentiated Environmental Regulation," Discussion Papers dp-05-59, Resources For the Future. [Downloadable!]
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  7. Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May. [Downloadable!] (restricted)
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