Legal Bubbles: A Primer in the Economics of 'Legal Creative Destruction

A legal bubble is a notion that applies to the making of the legal foundations of innovative services. There is a legal bubble when economic agents plan their economic actions with respect to a new resource, in the light of property rights solutions provisionally backed by courts, in the belief they are stable. That gives rise to a period of accumulation of expectations about the possibility to secure robust property rights over the newly discovered resource, which in turn fuel further investments. In fact, courts' backing is only temporary and economic agents' expectations turn to be wrong, because early property rights have been supplied by courts out of haste and ignorance as to the implications of the new activities in terms of hierarchically superior rights – e.g. fundamental rights. Once courts learn about the actual implications of the newly emerged activity they start revising the balance between commodification claims and competing hierarchically superior rights. The burst of legal bubbles comes as a result of courts' hindsight attempt to re-adapt the legal foundations to the actual legal implications that previously were ignored. The economic fallout of the revision of early property rights solutions can generate investment debasement and economic disarray in ways similar to speculative bubbles. In fact, entrepreneurs discover their investments have been made in the light of still in-adapted property rights solutions doomed to be – often retroactively – reversed with potential demise of an whole industry.