A New Angle on Rules versus Standards

Abstract

The debate over standards versus rules has traditionally been framed as a trade-off between the certainty and lower administrative costs of rules versus standards' flexibility to consider case-specific information. We argue that even if judges have no ability to directly assess case-specific information, using standards creates a sorting effect that favors ex-post efficient decisions. When judges are not bound by rules, their decision is more likely to be sensitive to the quality of legal representation. In the absence of externalities, the party that desires the ex-post efficient decision has the most to gain, and, thus, a greater incentive to invest in high-quality representation. While the higher litigation costs under standards can easily outweigh the increased likelihood of an efficient decision, bargaining in the shadow of standards can preserve their sorting benefit while ameliorating the increase in legal costs.