Working Paper No. 01-06:
The Formation of Customary Law

Author(s):

Francesco Parisi

Date Posted: 2001

Availability:
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Abstract:

A fundamental insight of the economic analysis of law is the notion that legal sanctions are "prices" set for given categories of legally relevant behavior. This idea develops around the positive conception of law as a command backed by an enforceable sanction. Law and economics uses the well-developed tools of price theory to predict the effect of changes in sanctions on individual behavior. One essential question, however, remains unanswered: How can the legal system set efficient prices if there is no market process that generates them? In other words, how can legal rules reflect the level of social undesirability of the conduct being sanctioned?

Although the legal system sometimes borrows a price from the actual market (e.g., when the sanction is linked to the compensatory function of the rule of law), there is a wide range of situations in which legislative and judicial bodies set prices in the absence of a proper market mechanism. In a law and economics perspective, customary law can be viewed as a process for generating legal rules that is analogous to a price mechanism in a partial equilibrium framework.

Here, I present the standard theory of customary law, discussing the domain of custom among the spontaneous sources of legal order. This study explores the formative elements of customary rules and their legal effects. The traditional theory is revisited with the aid of game-theoretic models to evaluate the possible role of constitutional rules in facilitating the emergence of customary law. This study attempts to characterize the institutional settings that remain outside the reach of spontaneous cooperation, and the situations under which inefficient customary rules may develop and persist. Further, this study will consider the public choice dimension of the process of customary law formation, considering the potential for norm manipulation. The conclusion will address whether an increased recognition and incorporation of customary norms by the legal system is desirable.