Tilburg University

Growing justice

Barendrecht, J.M.

Publication date:
2009

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Citation for published version (APA):
Barendrecht, J. M. (2009). Growing justice: Justice policies and transaction costs. (TISCO Working Paper
Series; Vol. 009/2009). Tilburg Institute for Interdisciplinary Studies of Civil Law and Conflict Resolution Systems
(TISCO). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1475201

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TISCO WORKING PAPER SERIES ON CIVIL 
LAW AND CONFLICT RESOLUTION SYSTEMS 

 
 

 
 
 

Growing Justice:  
Justice policies and Transaction Costs   

 
 

Maurits Barendrecht 
 

Tilburg University, Tilburg Institute for Interdisciplinary Studies of Civil Law and Conflict 
Resolution Systems (TISCO), International Victimology Institute Tilburg (Intervict), Tilburg 

Law and Economics Centre (Tilec); Hague Institute for the Internationalisation of Law 
(HiiL) 

j.m.barendrecht@uvt.nl 
 
 

TISCO Working Paper Series on Civil Law and 
Conflict Resolution Systems 

No. 009/2009 
September 18, 2009, Version: 1.0 

 
& 
 

Tilburg University Legal Studies Working Paper No. 013/2009 
 
 

This paper can be downloaded without charge from the 
Social Science Research Network Electronic Paper Collection 

http://ssrn.com/abstract=1475201    



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Maurits Barendrecht1 
 
 

Growing Justice: 
Justice Policies and Transaction Costs  

 
 

Abstract 
 
This paper reviews the literature on policies aiming to improve the rule of law and the 
operation of a legal system. It takes a bottom up perspective of clients seeking access to 
justice and uses transaction costs on the market for justice as a criterion to evaluate 
justice policies. Most justice is created through ‘justice transactions,’ including informal 
help from friends, legal advice, information about law, ADR services, other forms of 
informal justice, and adjudication. Such transactions are seriously hampered by three 
major transaction cost problems, however.  
 
Justice policies include codification, setting up courts and reforming them, financing of 
courts, legal aid, ADR, developing rules of procedure, and regulation of the legal 
profession. The transaction cost perspective explains why many traditional justice 
policies do a poor job to increase access to justice or to diminish the costs of civil justice. 
More promising justice policies enable justice to emerge bottom up, in the interactions 
between clients and providers of justice services (microjustice, legal empowerment). 
These policies focus on the information needs of disputants, low cost default procedures, 
choice for plaintiffs, accountability towards clients, gradual, needs-based formalization of 
legal relationships, and strengthening informal compliance mechanisms.   
 
 

                                                   
1 Helpful comments on an earlier version were provided by Martin Gramatikov, Machteld de Hoon, Jan Smits, Jin Ho 
Verdonschot, Ben Vollaard, and workshop participants at the Hague Institute for Internationalization of the Law (17 
april 2008) and Amsterdam Centre for Law and Economics (18 april 2008). 
 



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Table of Contents 
I. INTRODUCTION........................................................................................................................... 4 
II. APPROACH ................................................................................................................................ 5 

A. JUSTICE POLICIES ...................................................................................................................... 5 
B. JUSTICE NEEDS .......................................................................................................................... 6 
C. JUSTICE TRANSACTIONS ............................................................................................................ 7 
D. TRANSACTION COSTS OF JUSTICE SERVICES ............................................................................. 8 

III. LETTING DISPUTANTS ENTER A COOPERATIVE PROCEDURE ............................ 11 
A. MARKET ANALYSIS ................................................................................................................. 11 
B. CURRENT INTERVENTIONS BY STATES .................................................................................... 13 

1. Reducing the Rewards of Continued Conflict......................................................................... 13 
2. Judgments by Default ............................................................................................................. 13 
3. Stimulating Mediation and Conciliation ................................................................................ 14 

C. PROMISING POLICIES ............................................................................................................... 15 
1. Social Norms and Unilateral Pledges to Deal with Conflict Cooperatively.......................... 15 
2. Opening the Market for Neutral Dispute Resolution Services ............................................... 15 
3. Regulating Ex Ante Dispute Resolution Agreements.............................................................. 16 
4. Requiring Repeat-Players to Offer an Accessible Dispute System ........................................ 17 
5. Co-opting Powerful Defendants ............................................................................................. 17 

IV. THE MARKET FOR NEGOTIATION ASSISTANCE ....................................................... 18 
A. MARKET ANALYSIS ................................................................................................................. 18 
B. CURRENT INTERVENTIONS BY STATES .................................................................................... 19 

1. Framing Disputes in Terms of Rights and Obligations.......................................................... 19 
2. Legal Aid................................................................................................................................. 20 
3. Mediation Aid ......................................................................................................................... 21 

C. PROMISING POLICIES ............................................................................................................... 21 
1. Education in Integrative Negotiations and Conflict Management......................................... 22 
2. Economies of Scale in Communication and Negotiation Advice ........................................... 22 
3. Structuring Settlement Negotiations ....................................................................................... 23 

V. SUPPLYING INFORMATION ABOUT FAIR SOLUTIONS ............................................ 24 
A. MARKET ANALYSIS ................................................................................................................. 24 
B. CURRENT INTERVENTIONS BY STATES .................................................................................... 25 

1. Codification ............................................................................................................................ 25 
2. Precedents............................................................................................................................... 27 
3. Supporting Law Faculties at Universities .............................................................................. 27 

C. PROMISING POLICIES ............................................................................................................... 28 
1. Improving Incentives to Generate Guidelines ........................................................................ 28 
2. Rulemaking through Intermediate Private Institutions .......................................................... 28 
3. Removing Restraints on Rulemaking for Distributive Issues ................................................. 29 
4. New Models for Sharing Rules ............................................................................................... 29 

VI. DELIVERING THE OPTION OF A NEUTRAL DECISION ............................................ 30 
A. MARKET ANALYSIS ................................................................................................................. 30 
B. CURRENT INTERVENTIONS BY STATES .................................................................................... 31 

1. Courts...................................................................................................................................... 31 
2. Extensive Rules of Procedure ................................................................................................. 32 
3. Protecting Clients and Monitoring Neutrals through Appeals .............................................. 33 
4. Independence of Courts .......................................................................................................... 33 

C. PROMISING POLICIES ............................................................................................................... 34 
1. Simple, Low-Cost Default Procedures ................................................................................... 35 
2. Accountability towards Clients............................................................................................... 36 
3. Giving Plaintiffs Choice ......................................................................................................... 37 
4. Terminating Unhelpful Approaches ....................................................................................... 38 

VII. MAKING ARRANGEMENTS EXPLICIT AND ENFORCEMENT ................................. 39 



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A. MARKET ANALYSIS ................................................................................................................. 39 
B. CURRENT INTERVENTIONS BY STATES .................................................................................... 41 

1. Registrations of Identity.......................................................................................................... 41 
2. Registrations of Property Rights ............................................................................................ 41 
3. Default Rules for Contractual Relationships.......................................................................... 42 
4. Enforcement by State .............................................................................................................. 42 

C. PROMISING POLICIES ............................................................................................................... 43 
1. Formalization As Is and Step by Step ..................................................................................... 43 
2. Menus for Making Relationships Explicit .............................................................................. 44 
3. Facilitating Compliance Mechanisms .................................................................................... 45 
4. What Works............................................................................................................................. 45 

VIII. COMPLEMENTARITIES .................................................................................................. 46 
A. MARKET ANALYSIS ................................................................................................................. 46 
B. CURRENT INTERVENTIONS BY STATES .................................................................................... 47 

1. Legal System Reform: Law and Development ........................................................................ 47 
2. Reforms in Developed Economies .......................................................................................... 47 

C. PROMISING POLICIES ............................................................................................................... 47 
1. Supply Chain Approach to Access .......................................................................................... 47 
2. Monitoring, Accountability and System Ownership ............................................................... 48 
3. Focus on Problem Categories ................................................................................................ 48 

IX. CONCLUSIONS ....................................................................................................................... 49 

 

I. Introduction 
One of the classical responsibilities of states towards their citizens is to establish the rule 
of law and to ensure access to justice. Governments do this by designing and enacting 
‘justice policies’. Courts are created and maintained, public prosecution is set up, and the 
legal profession is regulated. Procedures are defined in codes of civil procedure, criminal 
codes are enacted that make clear which conduct is a crime, and contract law facilitates  
private transactions between citizens. Governments also subsidize courts and legal aid. 
If their legal system is criticized, they may introduce  alternative dispute resolution, or 
reform legal aid, courts, civil procedure, and the tort system. This paper suggests a new 
way to evaluate such justice policies: by looking at their potential to reduce the 
transaction costs on what can be called the market for justice.  
 
Over the centuries, the actions taken by individuals to protect their rights have led to 
what we now identify as a legal system. Precedents, laws, contracts, property rights, and 
procedures were developed. It has become commonplace to expect the rule of law as 
something created and upheld by the state. If the justice is not accessible, or the rule of 
law is not established, it is the state that failed. But historically, it is not unrealistic to look 
at law as a by-product of people bringing their claims to advisers, lawyers, courts, kings, 
and politicians. The way people take action to protect their rights is therefore a good 
starting point for analyzing whether people get the legal protection they need.       
 
Let us thus look at the position of the client (plaintiff) who experiences a need for justice 
in a relationship to another person (defendant). Urgent justice needs may arise when 
crimes have been committed, or when problems arise in contractual relationships. Clients 
will then turn to friends, lawyers, or others for information and advice, and probably also 
to persons who can exert influence over their opponent. These people deliver a service  
to the client, which can be studied as a market transaction. Obviously, buying justice is 
not a straightforward transaction such as purchasing a car or obtaining a loan from a 
bank. Behind the need for justice, usually a conflict of interest with the defendant is 
looming. The defendant may not cooperate to delivery of a just outcome. What a just 
outcome is, may also be unknown. A lawyer, or even a judge, has interests that are not 
perfectly aligned with those of her clients. So clients have to monitor the performance of 
the lawyer and the judge, and should probably invest in means to ensure that they do 



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their job. These extra costs that a client faces on his way to justice can be studied as 
transaction costs.     
 
In this paper, I use this transaction cost analysis to evaluate justice policies. Section II 
explains the approach in more detail. In Section III to VII, we follow the plaintiff who tries 
to obtain a just outcome. We distinguish five main types of justice services that help him 
on the way. These services enable the plaintiff to (1) meet the defendant in order to seek 
a cooperative solution, (2) communicate and negotiate (talk), (3) distribute gains and 
losses fairly (share), (4) decide on outcomes, and (5) stabilize the relationship with the 
defendant. For each type of justice services, we identify the sources of transaction costs 
that make them difficult to deliver to clients in a sustainable and affordable way 
(Subsection A). After this ‘market analysis’, we identify the most common interventions of 
governments on this justice market and investigate whether these are likely to lower the 
transaction costs (B). Thereafter, we discuss some possible alternative justice policies 
that have more potential to lower transaction costs and thus to improve the rule of law 
and access to justice (Subsection C).  
 
Section VIII discusses the transaction costs that arise because a legal system has to be 
more than its five constituent parts. In economic terms, there are complementarities 
between the five types of justice services. Thus, we obtain a broad picture of the market 
for justice and the way governments intervene. This leads to an overview of helpful and 
less helpful policies (Section IX).  

II. Approach 

A. Justice Policies 
Governments all over the world struggle with their justice policies. Legal services tend to 
be expensive; courts slow and, occasionally, unpredictable, or downright corrupt. In 
developed economies, budgets for legal aid and courts are limited. Lawyers have 
obtained extensive powers to self-regulate their profession, but governments are 
increasingly asked to review this regulation, because it may have a negative impact on 
competition, harm the interests of clients, and slow down innovation of legal services 
(Hadfield 2008).  
 
Justice policies are also high on the international agenda. The international community 
faces the problem of failing states, unable to deliver the basic stability that is implied in 
the rule of law. Human rights are another item: they may be recognized by states in 
treaties, but should also be guaranteed in the practice of ordinary lives. There is also a 
growing understanding that effective justice policies are key to economic development. 
Although the precise links are disputed, both policy makers and researchers agree that 
enforceable property rights, labor rights, and business rights help economies to grow and 
to distribute the benefits of economic growth more evenly (Kaufmann 2003; Buscaglia 
and Stephan 2005; Commission on Legal Empowerment of the Poor 2008; Haggard, 
MacIntyre et al. 2008; Kaufmann, Kraay et al. 2008). Access to  justice is a precondition 
for this (Jensen 2002; Kaufmann 2003; Commission on Legal Empowerment of the Poor 
2008).  
 
Most justice policies have a top down orientation. Rules are written down in constitutions, 
codes, and legislation. Then courts are set up, public prosecutors are appointed, and the 
legal profession is stimulated to organize itself. Once this is done, governments should 
maintain the resulting ‘legal system’. The rule of law literature agrees that this top-down 
implementation has not been very successful (López de Silanes 2002; Botero, La Porta 
et al. 2003; Golub 2003; Carothers 2006; Dam 2006; Hammergren 2007; Davis and 
Trebilcock 2008; Haggard, MacIntyre et al. 2008). Investments in formal legislation and 
institutions like courts do hardly result in actual protection of the rights of ordinary citizens 
or small to medium sized companies. There is abundant evidence that access to justice, 
either through the norms, lawyers and court of a formal legal system, or through informal 



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arrangements, is insufficient in many places and in many situations (Rhode 2004; Yuille 
2004; Fitzpatrick 2005; Commission on Legal Empowerment of the Poor 2008).   
 
Although some institutional economists argue that, historically, the rule of law has been 
first implemented for elites (North, Wallis et al. 2009), most scholars and politicians now 
place their bets on bottom up approaches. Civil society can create informal ways of 
protection that are more effective than the formal legal system, so they argue (Davis and 
Trebilcock 2008; Tamanaha 2009). Citizens should become legally empowered, or 
facilitated through microjustice when they face justiciable legal problems (Golub 2003; 
Van Rooij 2007; Commission on Legal Empowerment of the Poor 2008). 
 
What lacks, however, is a theory that can explain why these bottom up approaches might 
work, and which policies are more likely to succeed than others. The rule of law literature 
has not yet delivered a consistent theory behind interventions. It shows much conceptual 
debate about what the rule of law is (Ringer 2007; Tamanaha 2008), but much less 
discussion about the ways to make it happen. The assumption seems to be that 
systematic institution building is possible, if governments only would be able to decide 
which institutions they want. A part of the literature mentions sequencing as a problem, 
but this suggests again that these writers know what should be done, the issue merely 
being where to start (Carothers 2007).   
 
Once the top down perspective is changed for bottom up approaches, the lack of theory 
behind justice policies becomes even more problematic. The focus of attention now shifts 
to creating access to justice. But what type of justice do people need, and how can 
access to it be created? The literature on access to justice tends to distinguish five 
waves of access to justice reforms, oriented at supplying legal aid, public interest 
litigation, alternative dispute resolution, opening up the market for legal services, and 
better regulation of the legal profession (Cappeletti and Garth 1978; Parker 1999). This 
gives some indication of the shifting beliefs in what works to create access to justice, but 
does not explain why such approaches might work, or why some of them have failed. 
There are two common threads, however, and these I will pick up in this paper.  
 
First, the basic idea of access to justice expressed here is one of services provided to 
clients. As Landes and Posner have showed, lawyers, mediators, and even adjudicators 
like courts can be considered to be providers on the market for justice (Landes and 
Posner 1979). They are the ones who try to deliver fair outcomes to clients. Second, the 
reforms all seem to be oriented towards making this market work in a better way: by 
subsidies, by stimulating certain types of justice services, or by (de)regulating the market. 
Combining these threads, and adding a theoretical perscpective, I propose to evaluate 
justice policies acccording to their potential to lower transaction costs on the market for 
justice services.   

B. Justice Needs 
Justice needs can be defined as a need for protection by outside norms or interventions 
that structure the conduct of other persons (Barendrecht, Kamminga et al. 2008). When 
does such a need arise? Legal needs studies, in which a sample of the population is 
interviewed by researchers about their legal problems and ways to cope with them, have 
been conducted throughout the world (Curran 1977; American Bar Association 1994; 
Genn and Beinart 1999; Genn and Paterson 2001; Dignan 2004; Van Velthoven and Ter 
Voert 2004; Currie 2005; Coumarelos, Wei et al. 2006; Michelson 2007; Gramatikov 
2008; Michelson 2008). These studies show consistent patterns of justice needs 
(Barendrecht 2008; Barendrecht, Kamminga et al. 2008). Demand for justice services is 
most urgent in three types of conflict, where the stakes are high and where people 
depend on others for their well-being.   
 
Personal security presents the most salient category of problems. People seek basic 
protection of their human rights, and try to protect themselves against violence, unlawful 



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taking of property, and unlawful detention. Secondly, they enter long term relationships 
with substantial specific investments, such as family, work, land use, neighbor, and 
business relationships. These relationships have to cope with change. Because changes 
in circumstances, preferences, and abilities are difficult to predict, rights and obligations 
cannot be determined at the moment the relationship starts (known as the issue of 
incomplete contracts). Adaptation to change through negotiation is a necessity, but the 
parties are dependent on each other, because they invested in the relationship, and 
cannot walk away from it without leaving these investments behind. So some sort of 
neutral dispute system is necessary (Williamson 1987; Nooteboom 1992; Barendrecht 
2008; Robson and Skaperdas 2008). Examples of conflicts in these long term 
relationships are inheritance issues, divorce, termination of employment, and problems 
regarding compensation for the use of land to be paid to owners. A third category of 
conflicts emerges from contracts between buyers and sellers, or from obligations of the 
bureaucracy to its citizens. Here, the issues are mostly what the plaintiff could expect 
(interpretation of contracts and of applicable regulation), how the defendant contributed 
to these expectations by giving or withholding information (duties to inform), and whether 
the defendant delivered goods or behavior that live up to the legitimate expectations of 
the plaintiff (Barendrecht 2009).  
 
The empirical studies cited above show that most conflicts are solved through 
negotiation. Conflict resolution can aptly be described as a negotiation process in which 
the parties try to achieve Pareto efficient outcomes (create value), and bargain about 
distributive issues (share value), but this process is complicated by the parties being 
dependent on each other. They cannot solve the conflict with somebody else if their 
negotiations fail, like they can go to another seller of a car if they fail to reach agreement 
on the price. Because of this bilateral monopoly, they need mechanisms to decide on the 
outcome if they cannot reach an agreement. This creates the need for justice services. 

C. Justice Transactions 
A first, intuitive understanding of justice services would probably distinguish two basic 
types: legal advice and neutral, third party interventions. But from the interdisciplinary 
literature on conflicts, dispute system design (Ury, Brett et al. 1988; Costantino and 
Sickles Merchant 1996; Menkel-Meadow 1996; Bendersky 2003; Barendrecht 2008; 
Bingham 2008; Bordone 2008; Barendrecht 2009), institutional design (Hadfield 2008) 
and legal procedure, five necessary and sufficient dispute resolution tasks can be 
derived. In essence, justice services help clients to perform these five tasks. For each of 
these five basic types of dispute services, basic technologies have become available. 
 
Task Description Basic technology 

1. Meet Centralized forum for information 
processing in which both parties participate 

Make costs and benefits of participation for defendant 
higher than costs and benefits of fighting, 
appropriation, or avoiding 

2. Talk Communication and negotiation Support integrative negotiation  (interest based) 
3. Share Distributing value fairly Supply information about fair shares (sharing rules, 

objective criteria) 
4. Decide Decision making procedure Make option of a neutral decision available (at low 

cost) 
5. Stabilize Transparency and compliance Supply tools to make arrangements explicit;  

Make costs and benefits of compliance higher than 
those of non-compliance 

 
Table 1 Necessary and Sufficient Elements of a Dispute System with Basic Technologies for Delivery (Barendrecht 
2008). 
 
The plaintiff and the defendant have to meet somehow. Friends or lawyers may help a 
plaintiff to make meeting more attractive for the defendant. Mediators and lawyers can 
then help the parties to communicate and negotiate in a structured way. If they provide 
information about ways other people have settled similar disputes (norms, objective 
criteria), the plaintiff and the defendant can solve the distributive issues more easily. 



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Decision-making in the bilateral monopoly is facilitated by the availability of a low cost 
neutral decision, that provides an exit option for both parties. Stabilizing relationships is a 
matter of making expectations explicit and creating motivation to live up to the outcome. 
Formats for contracts and registrations, as well as strategies to induce compliance, can 
be supplied to serve these interests of clients.  
 
Dispute system design is still a young discipline, but there is a beginning of a common 
understanding of “what works” in order to perform these five basic types of services (Ury, 
Brett et al. 1988; Wall Jr and Callister 1995; Tyler 1997; Wall, Stark et al. 2001; 
Bendersky 2003; Bingham 2008; Bordone 2008; Barendrecht 2009; Wall Jr and Chan-
Serafin 2009). These best practices can build on years of conflict research by social 
psychologists, economists, and socio-legal researchers (Barendrecht 2009). Negotiation 
and conflict resolution technology can deal with emotions and psychological barriers. 
Procedural justice satisfies the procedural needs of the parties. If norms for distributing 
value are unclear, suitable objective criteria can be developed. If justice is not achieved 
through negotiations and bargaining, a neutral third party can break the impasse, if 
necessary by giving a binding decision. If a powerful defendant does not cooperate, he 
can be forced to do so by increasing sanctions, rewards, and other incentives. 
 
We may probably assume that the basic justice technologies are now sufficiently 
developed. If justice is out of reach for many people, the cause is unlikely to be that 
justice providers do not know what to do for their clients, or face high costs of 
interventions. Although there are some exceptions, where interventions are indeed very 
costly, a major problem seems to be that clients and justice providers do not succeed in 
concluding suitable justice transactions.  

D. Transaction Costs of Justice Services 
Justice can only reach a plaintiff if there is a provider of justice services who is motivated 
to deliver suitable services to this plaintiff. Assuming these justice services cost less to 
produce than the value for the plaintiff, such transactions will take place, unless the costs 
of concluding the transaction are too high.   
 
Transaction costs analysis is usually applied to the broader economy. On the market for 
goods and services, buyers and sellers incur various costs of undertaking a transaction 
(Williamson 1981; Rao 2003). The parties have to search for suitable partners, inform 
themselves about the attributes of goods and services, and negotiate a contract. After 
the contract has been concluded, the buyer has to monitor the performance by the seller, 
and the seller has to ensure that the buyer pays the price. Transactions need some  
governance structure and this is costly to set up. Legal costs and other costs to resolve 
disputes are textbook examples of such transaction costs. Regulation of the market is 
sometimes necessary to prevent market failure, and where governments step in other 
rules are needed to diminish government failure. The costs of regulation, the costs of 
running the economic system, are also transaction costs.  
 
Legal advice, dispute resolution, and regulation are also services that have to be 
provided by people to other people, however. Plaintiffs conclude justice transactions with 
advisers, such as lawyers, and experts, or with neutrals, such as mediators, judges, 
neutral factfinders and arbiters. In the area of enforcement, police officers, bailiffs, and 
other government agents may have to be involved. On informal paths to justice, plaintiffs 
and defendants may consult friends, local leaders, and religious authorities. In case 
plaintiffs have to deal with powerful companies or individuals as defendants, they may 
have to convince other people with similar complaints to join the action. In order to put 
enough pressure on the defendant, thousands of people may have to join forces. These 
transactions can again be studied through the perspective of transaction costs. In a 
sense, this is thus a second order transaction cost problem. 
 



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Transaction costs of justice services include again the costs of information about suitable 
providers of justice services, the search costs, and the costs of negotiating the 
transaction (Rao 2003). For instance, a plaintiff will have to explain his problem to the 
lawyer, and the lawyer will have to decide on which conditions he will take the case. If a 
local leader is addressed, he will also hear the plaintiff, and then decide whether it is 
worthwhile for him to help the plaintiff. After the plaintiff has reached agreement with the 
provider of justice services that he will take some action, the plaintiff has to monitor the 
service provider and see to it that he delivers what he promised (Williamson 1981; 
Williamson 2005).  
 
Another type of transaction costs are the costs of running the part of the economic 
system that delivers justice services, These costs include the costs of coping with market 
failure and government failure. Market failure may arise from public goods, externalities, 
incomplete markets, and incomplete information. Government failure may also be caused 
by limited information, as well as by limited control over private market response, over 
bureaucracy, or over the political process (Stiglitz 2000). Each way of organizing 
transactions, either through the market or through goverments, has its costs and the 
challenge is to minimize these costs  (Williamson 1999; Rao 2003; Brousseau and 
Raynaud 2006).     
   
Table 2 gives an overview of transaction cost problems that are likely to occur in justice 
markets (Barendrecht 2009). Each of the five types of dispute resolution services that a 
plaintiff needs, has its own characteristics that lead to certain transaction cost problems. 
Three transaction cost problems are most salient in these five justice markets.  
 
First, buying dispute services is difficult because two opponents are unlikely to agree on 
the kind of service they need. Disputants may experience psychological barriers that 
make it difficult to enter a cooperative procedure and often also have strategic reasons 
for not agreeing on a procedure. These coordination problems persist during the dispute 
resolution process. When courts or other neutrals decide disputes, they thus experience 
insufficient incentives from their clients to supply high quality and low cost procedures. 
 
A second source of high transaction costs is that dispute services partly consist of 
providing expertise. Such information tends to be difficult to sell for a profit because of its 
public good character. As a consequence, conflict management skills (integrative 
negotiation know how), objective criteria for settling distributive issues, and relationship 
formats (contracts) do not always reach the persons that need them most.   
 
Third, justice transactions tend to have a higher value if other justice transactions are 
also available. Negotiation assistance and neutral decision making by courts, for 
instance, work better if objective criteria for settling distributive issues are available. The 
incentives on defendants to solve conflicts cooperatively and to live up to outcomes 
typically come from the joint effects of monitoring, the value of reputation, the threat of 
informal sanctions, internal motivation, and formal enforcement. Many people have to 
cooperate to make this happen. These complementarities, network-effects, or connected 
transactions require an integrated approach (Barendrecht 2009). 
 
These major sources of transaction costs explain several important characteristics of 
justice markets. Although it would generally be most efficient if two disputing parties 
would consult one neutral agent, such transactions with mediators or arbiters are unlikely 
to occur. Instead, the parties tend to go to unilateral advisers, such as lawyers. Because 
the market for neutral assistance is likely to fail, the state steps in with a procedure in 
which the defendant is obliged to appear before a court. Transaction cost analysis also 
explains why legal services tend to be individualized. This is a business model that 
circumvents the public good character of information. Negotiation skills, conflict 
management know how, and knowledge about norms for distributive issues is hard to sell 
for a profit, because it can spread freely to other customers once it is sold. Furthermore, 



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legal uncertainty is likely to occur: the market will not produce sufficient objective criteria 
for settling distributive issues. Finally, litigation and other forms of adjudication tend to be 
inefficient, because plaintiff and defendant are unlikely to agree on a procedure, and  
because of the connectedness between different justice services.           
 
Tasks Basic technology Sources of Transaction Costs Market reactions 

1. Meet Make costs and benefits of 
participation for defendant 
higher than costs and benefits 
of fighting, or avoiding 

1. Difficulties of  concluding ex post 
dispute resolution agreements: 
- Psychological barriers 
- Strategic barriers  
2. Cooperation between many 
people needed to organize 
sufficient incentives on powerful 
defendants to cooperate 

1. Little demand for 
mediation,  arbitration, and 
other tailor made neutral 
dispute services  
2. Unilateral advice where 
neutral services would be 
more efficient 
3. Demand for patronage 
(help from people who can 
influence the defendant) 
4. Demand for checks and 
balances 

2.Talk Support integrative 
negotiation  (interest based) 

Information about negotiation and 
conflict management is public good 

1. Insufficient supply 
2. Business models for 
delivering expertise: 
- individualized advice 
- coaching client through 
process 
- taking over process from 
client 
- packaging information  

3. Share Supply information about fair 
shares (sharing rules, 
objective criteria) 

1. Information about fair solutions is 
public good 
2. Providers of fairness information 
face pressure/criticism from all 
sides 

1. Insufficient supply 
2. Business models for 
delivering expertise (see 
above) 

4. Decide Make option of a neutral 
decision available (at low 
cost) 

1. Difficulties of  concluding ex post 
dispute resolution agreements: 
- Psychological barriers 
- Strategic barriers  
2. Insufficient incentives on neutral 
to provide efficient processes and 
fair solutions because of:  
- dependence on neutral 
- low frequency of transactions 
- uncertainty and complexity 
- monitoring difficulties. 

1. Access to neutrals on 
markets is unavailable or 
unreliable 
2. States provide neutrals 

5. Stabilize Supply tools to make 
arrangements explicit;  
Make costs and benefits of 
compliance higher than those 
of non-compliance 

Information about contracting and 
making relationships transparent is 
public good 
Cooperation between many people 
needed to organize sufficient 
incentives on powerful defendants 
to cooperate 

1. Insufficient supply 
2. Business models for 
delivering expertise  
3. Lack of enforcement, in 
particular against powerful 
defendants 

Supply 
Chain 
Approach 

Strengthen links between 
tasks  

Complementarities/connectedness 
between the five types of services  
 

Integrated business models 
for providing unilateral legal 
services, mediation and 
adjudication 

Table 2: Sources of Transaction Costs on Markets for Justice and Ways Markets Cope with Them (Barendrecht 
2009) 
   
The following five sections explore how government interventions in the justice sector 
react to these transaction cost problems. For each of the five types of justice services, I 
first give an impression of the structure of the market. I describe the basic technology, 
discuss some best practices for delivering the services, and identify justice providers that 
are active on this market. Then, I summarize the transaction costs problems that occur 
on this market (Subsection A)? Next, current justice policies are discussed, taking their 
potential to diminish transaction costs as a criterion for evaluation (Subsection B). As 
many of these policies not seem to address these problems squarely, Subsection C 
identifies alternative justice policies that tackle the problems of transaction costs more 
directly, and that thus may be more promising.          



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III. Letting Disputants Enter a Cooperative Procedure   

A. Market Analysis 
Managing a conflict in a cooperative way requires interaction between parties. A 
procedure or negotiation is unthinkable without some kind of information exchange 
(Shariff 2003). The parties require some kind of process where both of them are present 
and willing to communicate about the conflict: a room, or a tree under which to talk; 
written communication channels, or a webinterface. The first challenge for a plaintiff is to 
tempt the defendant to come to such a meeting place.  
 
The basic technology for letting the defendant (and the plaintiff) participate in cooperative 
dispute resolution is to make the costs and benefits of participation higher than the costs 
alternatives, such as fighting or avoiding the other party. The meeting place can be made 
attractive by being safe, close (low travelling costs), and giving the prospect of a solution 
with high value for the defendant.  
 
Letting disputants meet in order to solve a dispute cooperatively is difficult, 
Psychologically, one or both of the parties may suffer from loss aversion or overoptimism, 
and emotionally it may be hard to face the other party again. The parties may distrust the 
proposal of the other party to solve the conflict in a particular procedure, a phenomenon 
called reactive devaluation (Ross 1995; Barendrecht and De Vries 2006). Strategically it 
can be more attractive for the parties to avoid or postpone meeting, especially for a 
defendant who is better of now than he expects to be after resolution of the dispute. 
Landes and Posner called this the “submission problem” in the context of letting the 
disputants chosing a private judge (Landes and Posner 1979). 
 
Theoretically, a transaction aimed at solving the dispute through mutually agreed upon 
methods poses a bargaining problem. By agreeing on the procedure, the parties 
influence the outcome of the dispute (see, for the distributional effects of agreeing about 
institutions in general, Knight 1992). Bargaining failure is likely, because parties tend to 
do better if they take extreme positions, commit to earlier offers, or use delaying tactics 
(Muthoo 1999; Muthoo 2000; Mnookin 2003; Barendrecht 2009).  
 
The high transaction costs of concluding an agreement over the way to resolve a dispute 
have a major impact on the market for dispute services. They are probably the most 
significant reason why state interventions in this market are needed. If it was easy to 
solve disputes simply by buying dispute services, governments would probably not set up 
courts and legal procedures.  
 
Moreover, this transaction costs problem causes serious trouble on the market for 
alternative dispute resolution. Mediation and arbitration services are widely available, but 
demand for it is negligible, because it requires two parties who jointly decide to contract 
such a third party, which is unlikely to happen in case of a dispute (Barendrecht and De 
Vries 2006; Barendrecht 2009; Velikonja 2009). 
 
On the micro-level, plaintiffs respond to this problem in two different ways. These 
reactions create a lively market for unilateral legal advice, as well as an even more 
interesting demand for powerful ‘neutrals’ that can influence the defendant. These 
transactions are complicated and make life not always easier for the plaintiff.  
 
An agent such as a lawyer is in a slightly better position to solve a problem of how to 
meet with the opposing party than the client himself (Mnookin, Susskind et al. 1999). He 
may be more skilled in contacting the other party and inducing her to cooperate, as well 
as being less emotional and thus avoiding some psychological barriers to conflict 
resolution. But he cannot reduce reactive devaluation, over-optimism and loss aversion if 
he contacts the other party as an agent for the plaintiff. The strategic barriers to reaching 
an agreement over the dispute resolution process do not diminish because the agent is 



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present. With a lawyer, it is still difficult to solve the second order bargaining problem. In 
this “second” dispute, over the way to solve the “first” dispute, the parties are still likely to 
put forward extreme offers, use delaying tactics, and commit themselves to positions.  
 
In many countries, the major reason a plaintiff uses a lawyer is probably that he is the 
one who can activate the court system. Hiring a lawyer may signal that court action is 
imminent, making the threat of court action more credible. But concluding a transaction 
with a lawyer also creates new transaction cost problems: How to incentivize him to 
obtain a speedy and high value solution to the dispute? How to prevent an arms race 
where both lawyers invest more and more in winning the dispute, creating work for each 
other? And a lawyer is most effective if he can threaten with a neutral intervention, which 
may be unavailable.       
 
An alternative for the plaintiff is to go to a person who can influence the defendant. 
People look for parents, bosses, clan leaders and government officials who can help 
them to get their way in relationships with others. Asking the powerful for help can be 
also be seen as a transaction. The powerful person offers his interventions, which will 
cost him an effort, and will probably want something in return: cash, support for his 
causes, or an increased reputation. The transactions between plaintiffs and powerful 
third parties have high transaction costs, because influencing a defendant is a highly 
context specific task, which is difficult to monitor. Moreover, the defendant may be 
influenced in a way that is undesirable. Therefore the demand for interventions from the 
powerful creates an additional demand for checks and balances on power.  
 
Task 1. Meet 
Description Centralized forum for information processing in which both parties participate 
Basic technology Make costs and benefits of participation for defendant higher than costs and benefits 

of alternatives such as fighting, or avoiding 
Best practices for dispute 
services/-transactions  

- Local meeting places or other channels of communication 
- Pre-mediation skills 
- Social norms to solve conflicts cooperatively  
- Enhance incentives that link to reputation of defendants to solve conflicts 

cooperatively 
- Option of default judgment 

Possible providers of 
services 

- First line legal aid (paralegals) 
- Friends and advisers 
- Community leaders 
- Mediators 
- Courts 

Sources of Transaction 
costs 

1. Difficulties of  concluding ex post dispute resolution agreements: 
- Psychological barriers 
- Strategic barriers (bargaining failure) 
2. Cooperation between many people needed to organize sufficient incentives on 
powerful defendants to cooperate 

Market reactions 1. Little demand for mediation,  arbitration, and other tailor made neutral dispute 
services  
2. Unilateral advice where neutral services would be more efficient 
3. Demand for patronage (help from people who can influence the defendant) 
4. Demand for checks and balances 

Table 3 Market Analysis for Services that Assist Disputants with Meeting 
 
A third way to cope with the high transaction costs of meeting is to agree on a dispute 
resolution mechanism before a conflict arises (Landes and Posner 1979). Business 
partners, for instance, sometimes put an arbitration clause in their contracts. More 
complex dispute resolution agreements may provide for several stages of dispute 
management, prescribing first negotiations between the parties, followed by mediation, 
and, as a last resort, arbitration.  
 
Ex ante dispute resolution agreements work because the psychological barriers of 
reactive devaluation, loss aversion, and over-optimism are less prominent at the time the 
parties conclude a contract. As long as there is no actual conflict, the risk of bargaining 
failure regarding a conflict resolution clause is also lower. Both parties generally wish to 



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minimize the costs of future conflict in their relationship, so they are quite likely to agree 
on a way to resolve possible disputes. 
 
Most agreements about a way to resolve future disputes are part of a contractual 
arrangement. This formalization process does not take place in many relationships, 
though. Most family, business, land use or neighbour relationships are not made explicit 
in a contract. Tort claims or claims against governments are seldom preceded by a 
contractual arrangement. Even if a written contract is reached, this opportunity to choose 
a dispute mechanism is not always used. Eisenberg and Miller found that only 20% of 
contracts between sophisticated business partners contained a dispute resolution clause 
(Eisenberg and Miller 2006).  
 
Often, one of the parties takes up the formalization process that produces dispute 
resolution clauses. Employers write employment contracts. Sellers and building 
contractors refer consumer disputes and building disputes to specialized neutrals. The 
problem with dispute resolution clauses in adhesion contracts is that there can be serious 
doubts regarding neutrality. Plaintiffs may be excluded from using litigation mechanisms 
that they wanted to use after the conflict arose, or may be confronted with an arbitrator 
who depends on a constant stream of cases from the defendant. These worries translate 
into an extensive debate, continuing before the courts, on whether arbitration clauses in 
adhesion contracts should be allowed or not (Ware 2004; Sternlight 2005; Brunet, 
Speidel et al. 2006; Sternlight 2007). 

B. Current Interventions by States 
The stage is set. High transaction costs of agreeing to meet and solve a dispute 
cooperatively shape the markets for justice. Plaintiffs go to unilateral advisers (lawyers), 
or to powerful peopls who can influence the defendant, unless they have concluded an 
ex ante dispute agreement, but that is unlikely. Let us now see how governments 
intervene in this area. Do they tackle the problem that two people in a dispute cannot 
agree on a suitable way to manage the dispute? Are these policies effective in reducing 
the transaction costs of such an agreement? 

1. Reducing the Rewards of Continued Conflict 
An indirect response to the high transaction costs of meeting is to make other ways of 
solving conflicts, such as fighting, less attractive. Societies have social norms and legal 
rules that prohibit the use of violence by citizens. Besides lowering the costs of conflict, 
such rules make fighting less attractive as a way to solve the conflict. Cooperation thus 
becomes more likely (Hirshleifer 2000; Hirshleifer 2001; Posner 2003). Restraints on 
using some technologies of conflict, such as strikes or employee lock-out in labour 
conflicts, also makes cooperation more likely (Posner 2003) 
 
However, these policies do not diminish the transaction costs of meeting. They do not 
lower the psychological and strategical barriers to starting a negotiation process and 
jointly deciding on a procedure to cope with the conflict. Moreover, strategies that use 
other forms of power, such as threats to withhold essential goods to the other party 
(access to water, food, economic opportunities, or protection), are not affected by these 
rules. So powerful defendants still have many other options than sitting down with the 
plaintiff to reach a fair solution.  

2. Judgments by Default 
Societies also developed procedures in which the defendant is forced to meet with the 
plaintiff. If he does not cooperate in the procedure by putting forward his views on the 
conflict when summoned, a default judgment will be issued against him. The basis for 
this judgment by default is usually the point of view of the plaintiff. So the decision will 
generally be unfavourable for the defendant, giving him a powerful incentive to 



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cooperate. Ultimately, a defendant has to talk to the court, and thus it is more sensible for 
him to talk about the conflict with the plaintiff prior to that occasion.   
 
We should note, however, that this incentive to meet and talk only works if a plaintiff can 
credibly threaten to take the defendant to court. Poor plaintiffs may not be able to do this,  
especially if defendants know that they do not have the resources to sit through a civil 
court procedure. For governments, the costs of organizing a court system that is able to 
guarantee enforceable default judgments are substantial.   
 
A similar problem regarding access to a neutral decision may arise for public law 
enforcement. The administrative and other costs of criminal prosecution may be so high 
that the threat of an orderly criminal procedure is not credible anymore. Police officers, 
who can be seen as the plaintiffs in these procedures, may then choose to neglect crime, 
or resort to violence to fight it, because these options become a more attractive 
alternative for them. 
 
Finally, the incentive of a default judgment is still indirect. It is an incentive to appear in 
court and defend oneself against an accusation. In order to avoid this procedure, some 
defendants prefer to try settlement negotiations. There is no direct obligation to 
participate in such negotiations.         

3. Stimulating Mediation and Arbitration 
Lately, governments have started to promote mediation as a way to solve legal disputes.  
Mediators have been trained and mediation programs have been set up. For international 
conflicts, diplomats from many countries are available to facilitate talks between the 
parties.  
 
Unfortunately, merely offering these services does not seem to substantially help in 
bringing disputants to the negotiating table. Mediation is hyped, but it solves a negligible 
proportion of disputes. Its main source of survival after 30 years of experimentation in the 
US and Europe is as an add-on to courts (Goldberg and Shaw 2007; Velikonja 2009). In 
court annexed mediation, judges refer some of their cases to mediation. Ex post 
mediation, agreed directly between the parties without a contract or a neutral person 
telling them they have to mediate, is still the exception. The same is true for arbitration 
(Landes and Posner 1979). 
 
Our analysis strongly suggests that the cause of this problem is not an insufficient supply 
of low cost mediation and arbitration services. In fact, helping other people to solve their 
disputes is psychologically rewarding work and many mediators offer their services. 
Mediation is also good value for money. Mediation services attract high satisfaction 
ratings and big majorities of users say they will use it again in future conflicts (Wall, Stark 
et al. 2001; Wissler 2004; Wall Jr and Chan-Serafin 2009). It is not, however, an answer 
to the high transaction costs of meeting, the psychological barriers to agreeing on a 
process to solve the conflict, nor the strategic barriers that are likely to lead to bargaining 
failure influenced by making mediation available.       
 
It is easy to see how the availability of mediation only tips the balance in favour of going 
to the meeting place in a limited category of cases. For the defendant, it makes meeting 
and talking a bit more attractive because it creates a friendly and private environment to 
discuss issues. Availability of mediation services at the meeting place also influences the 
expected outcome because the parties may then be able to create more value. If the 
parties already want to cooperate, it thus helps them.  
 
But availabilty of mediation does not really change the way value will be distributed. If the 
dispute is (mostly) about distributing value, and a neutral decision is not available for a 
reasonable price so that the expected outcome is still low for the plaintiff, mediation 
services are not likely to make a real difference and the plaintiff will not find it very 



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attractive. In the words of Hazel Genn, one of the leading experts on mediation: 
“Mediation without a credible threat of judicial determination is the sound of one hand 
clapping” (Genn 2008). For the defendant, if his goal is to extract as much value from the 
distributive issues as possible, mediation services are not very interesting either. At the 
mediation table, he cannot as easily use delaying tactics, make extreme offers, commit to 
earlier offers, or hide information, although these are the strategies that lead to the best 
results in distibutive bargaining. As we will see in Section VII where complementarities 
are discussed, mediation services are far more valuable for both parties if they are 
delivered in the shadow of an easily accessible neutral decision.  

C. Promising Policies 
We discussed three government policies (prohibiting violence, threatening to issue 
default judgments, and making mediation available) that indirectly stimulate the parties in 
a conflict to meet. These policies do not directly tackle the problem, however. They do 
not lower the costs of jointly determining a way to solve the conflict. There may be 
policies or market solutions that make it easier to agree about a process to solve a 
conflict.    

1. Social Norms and Unilateral Pledges to Deal with Conflict Cooperatively  
One such policy is instilling a social norm, or even imposing a legal rule, that parties in a 
conflict should meet and talk. If they cannot solve the conflict through negotiation, they 
should at least look for a process to solve the conflict, or to cope with it in a way that 
minimizes difficulties. That can be felt as an obligation. Social norms about the ways to 
deal with conflict exist in many cultures, communities, and organizations. Collectivist 
cultures tend to stress the need for harmony, and have less tolerance for other strategies 
such as fighting. Mediation by third parties is stimulated by social norms in many Asian 
countries (Wall, Stark et al. 2001). Chinese conflict management embodies “a culture of 
three”, in which it is preferred to have a third party present above solving conflicts in 
direct, confrontational negotiations. The third party can help persons with status to loose 
face, avoid the assertiveness necessary in direct conflict negotiations, help disputants to 
cope with emotions, and restore harmony (Jia 2002).  
 
Legal norms to meet and talk also exist. Many bar associations have at least a nominal 
rule that requires lawyers to attempt settlement before they bring a case to court. Conflict 
between employees and employers can be reduced by allowing employees and 
employer to organize themselves, and creating a setting in which they will trust each and  
negotiate (Posner 2003). 
 
A unilateral pledge to cooperatively solve conflicts is a possibility as well. The CPR 
pledge has been accepted by a number of U.S. companies. This policy statement obliges 
subscribing companies to seriously explore ADR in cases with other signatories before 
pursuing full-scale litigation. Such a pledge reduces the probability of bargaining failure 
regarding a way to process the conflict. Likewise, a government agency can commit itself 
to resolving disputes with citizens through direct and informal communication, and, if 
necessary, to negotiations assisted by a mediator.   

2. Opening the Market for Neutral Dispute Resolution Services 
As we have seen, lawyers acting unilaterally for one of the parties may contribute to the 
dispute resolution process. This, however, has costs: clients and lawyers have dissimilar 
interests, and invoking lawyers increases the possibility of an arms race. Lawyers add 
additional levels of communication and thus complexity (Mnookin, Susskind et al. 1999). 
Folk wisdom is that lawyers are sometimes necessary, but should be avoided whenever 
possible.  
 
Lawyer services can be developed, however, that are less likely to increase transaction 
costs (Lande 2005; Lande 2008). Lawyers may empower the client to meet and talk, 



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lowering the costs of confrontation for him, if they work as a coach, staying in the 
background, helping the client to communicate and negotiate.    
 
Another possibility is to let a neutral person set up a pre-mediation process, in which the 
option of making an agreement about a way to cope with the conflict is discussed with 
both parties. Paralegals and other first line legal aid providers often try to contact the 
other party on behalf of their clients in order to get the communication going. Facilitation 
of meeting may help to overcome the second order bargaining problem in similar ways 
as a mediator may help to overcome the first order bargaining problem. There is little 
research, however, on the effectiveness of these first line interventions, and also little 
descriptive work regarding the best practices for nurturing these initial contacts between 
disputants (see Moore 2003 for some possible interventions).  
 
One step further is the development of neutral dispute resolution services that integrate 
this first phase. The plaintiff goes directly to a neutral dispute resolution provider. This 
person commits himself to the plaintiff to facilitate a transparent process that leads to a 
fair outcome against reasonable cost, not to maximize the plaintiff’s outcome. If a client 
comes with a problem, the consultation can be about the possible views from both sides, 
about ways to solve the problem, and about neutral criteria that may be applicable. The 
facilitator establishes contact with the defendant and invites him to participate, giving him 
the same commitment to process and a fair outcome. If the defendant does not 
participate, the process continues without him and creates reasonable incentives for the 
defendant to live up to the outcome that results from the process (see Barendrecht 2009 
for an exploration of this approach).  
 
Although they have not yet been tested extensively, it is likely that these approaches can 
lower the transaction costs of meeting. Reactive devaluation is less likely, particularly if it 
is not the opponent but a neutral who proposes a suitable dispute resolution procedure. 
A neutral, who is generally less susceptible to negative emotions, may also be able to 
reduce over-optimism as to what will happen if the conflict remains unresolved. He may 
also reduce the probability of bargaining failure, as he can facilitate information 
exchange.  
 
But other problems may emerge. It remains to be seen whether these more neutral 
dispute resolution services can develop into a sustainable business model. Not only does 
a neutral have two clients that may not be on speaking terms, she has to secure payment 
of her fees from both of them. Although more neutral models are frequently practiced by 
lawyers, they are not yet emphasized in legal education. Regulation of lawyers tends to 
stress the unilateral model. And non-lawyers, who may have the necessary coaching 
skills, often do not have access to the market for such services because of the tight 
regulation of the legal profession in many countries (Stephen and Love 1999). Even if 
neutral legal advice in conflicts is permitted, one-sided legal advice may still be the norm 
in the legal profession. 

3. Regulating Ex Ante Dispute Resolution Agreements 
As we saw, ex ante dispute resolution agreements are a good tool to lower transaction 
costs. Regulation of such clauses can be an important contribution to increasing their 
acceptability, and to prevent abuse of ADR. Several authors have suggested criteria that 
make ADR clauses more acceptable, which are sometimes already part of legislation or 
case law (Welsh 2004). Making them binding for the (powerful) party who wrote the 
clause and not for the (less powerful) consumer or employee (Sternlight 2007) is one 
option. Criteria as to the acceptability of waiving punitive damages claims, extensive 
discovery, or participation in class actions are important as well. On the positive side, 
criteria can be formulated that guarantee procedural quality, outcome fairness, and low 
cost access to justice.    
 



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Most of the scholarly discussion focuses on arbitration clauses, mediation clauses, and 
jurisdiction clauses when choosing a particular court for dealing with disputes. Dispute 
resolution agreements, however, can be more sophisticated than that. They may 
stipulate that the parties will first consult with each other in case of a dispute. If they do 
not agree on substance, they can agree that they will search for a procedure. If they still 
cannot agree, the clause can tell them to ask a third party to determine the procedure, for 
which they can set some criteria beforehand. 

4. Requiring Repeat-Players to Offer an Accessible Dispute System 
A more active regulation policy is to require an organization to have a suitable dispute 
resolution mechanism in place (O Shea and Rickett 2006). Financial services regulators 
and telecom regulators have started to require an effective dispute resolution mechanism 
as a condition for being given a license to operate in the consumer market.  
 
Interestingly, companies facilitating consumer markets make similar moves. The “Square 
Trade” dispute resolution process is mandatory for eBay sellers. Trade organizations 
sometimes also require that a member lets his disputes be resolved by a private dispute 
resolution mechanism. 
 
Such policies can be extended to other areas where repeat-players regularly have 
disputes with users of their products or services. Government agencies, companies 
serving a certain number of customers yearly, and employers with a certain number of 
employees could be required to have a dispute resolution system in place that is of 
sufficient quality and offers low cost access to justice. If these dispute resolution 
schemes are adequately monitored (against criteria such as the ones discussed in the 
preceding paragraph), they may be a powerful way to increase access to justice. This is 
particularly true if the consumer or employee can opt out and choose to use a court 
action instead (Sternlight 2007).  

5. Co-opting Powerful Defendants 
The biggest threat to a dispute system is that a powerful defendant has insufficient 
reasons to cooperate. An extreme example of this is a dictator who has committed 
atrocities in the past and is now an obstacle to lasting peace and economic development. 
Somehow, the costs of not cooperating have to be increased for him, and the benefits of 
cooperating as well. But why would he cooperate in the future if he can expect to be 
severely punished for what he did in the past? It may be necessary to co-opt him by 
granting him some form of immunity. Prosecution of heads of state, as is now taking 
place before the International Criminal Court, may be a good idea in order to prevent 
future harm, but it is also an obstacle to peaceful resolution of conflict as it raises the 
costs of cooperation for dictators.  
 
This setting is not unique for the international arena. Employers using unfair employment 
conditions and husbands committing domestic violence face a similar trade-off. For them, 
cooperation may be too threatening because sanctions loom large.   
 
The solution can be found in two directions. The costs of non-cooperation can be raised  
by increasing the likelihood of sanctions, such as the use of force against dictators, or 
other perpetrators. If a government has the resources to bring every perpetrator to 
justice, to conduct a trial, and to inflict costly punishment, this resolution can be a 
sustainable policy.  
 
Lowering the costs of cooperation for perpetrators can be another road to a peaceful 
settlement of conflict. This is the realm of transitional justice (Mani 2005). Truth and 
reconciliation commissions, like the ones used in South Africa and many other post-
conflict situations, may not meet everyone’s taste for justice. Economically, they make 
sense though. Cooperation is made more attractive for those who cooperate, in manners 
such as telling the truth, by granting them immunity from sanctions. For the victims of the 



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crimes committed by the apartheid regime, this process, which can lead to apologies and 
reconciliation, may or may not be the optimal outcome. However, this way to induce 
defendants to meet and talk can be preferable, because the expected outcome for the 
victims is still better than the alternatives, including the possibility of getting no justice at 
all, or of a civil war that would destroy many opportunities for joint gains in the future (Lie 
et al. 2007). The same reasoning applies to disputes between individuals. Informal 
justice mechanisms in developing economies, which have to operate in situations with 
low levels of enforcement, tend to concentrate on reconciliation, even in cases of severe 
crimes (Quinn 2005).  
 
The broader message is probably this: In situations of unequal power which cannot be 
restrained by government action (and this is often where the need for justice is biggest!), 
a dispute system that promises completely neutral and fair justice for all participants is 
likely to be ineffective. It will not be used, in particular, if costly retribution is part of it. 
Hence, only the second best solutions may be feasible, in which the outcomes are 
unambiguous improvements of the position of the less powerful parties, but not ‘perfect 
justice.’ This settling for second best justice is not for eternity, however. The cycle of 
creating stability, new challenges, and coping with conflict can start once again. In 
several rounds of improvements, which may take many years, it is possible to move 
gradually towards a truly satisfactory situation.    
  

IV. The Market for Negotiation Assistance 

A. Market Analysis  
Once he has succeeded in opening communication channels, the next service a plaintiff 
needs is assistance in the negotiations that will take place. The basic technology for this 
is generally described in the literature as integrative – or problemsolving – negotiations 
(Walton and McKersie 1965; Fisher, Ury et al. 1991; Lewicki, Saunders et al. 2006). This 
well developed technology supports negotiations by creating an environment that 
promotes communication and information-sharing, reviewing and adjusting perceptions. 
In these processes, the focus is on the needs, wishes and fears of the disputants. 
Integrative negotiations are interest based. The disputants are advised to take a joint 
problem-solving approach to the dispute, be creative in developing a number of 
solutions, and choose a (win-win) solution that best fits the interests of both parties. Skills 
and practices that support these processes are described in the literature and tested to 
some extent as well (Wall, Stark et al. 2001; Moffitt, Bordone et al. 2005; Deutsch, 
Coleman et al. 2006; Oetzel and Ting-Toomey 2006; Wall Jr and Chan-Serafin 2009).  
 
Task 2. Talk 
Description Communication and negotiation 
Basic technology Support integrative negotiation  (problemsolving, interest based) 
Best practices for dispute 
services/-transactions  

- Negotiation assistance (integrative negotiations) 
- Communication, active listening, questioning techniques 
- Reframing and adjusting perceptions 
- Managing emotions and interaction 
- Improving relationship, recognition, apology, supply of coping skills 
- Standard formats for integrative negotiations (identify interests, issues, explore 

win-win solutions) 
Possible providers of 
services 

- Advisers 
- Lawyers 
- Mediators (facilitative) 
- On-line facilities 

Sources of Transaction 
costs 

Information about negotiation techniques and conflict management is public good 
and experience good 

Market reactions 1. Insufficient supply 
2. Business models for delivering expertise: 
- individualized advice 
- coaching client through process 
- taking over process from client 
- packaging information 

Table 4 Market Analysis for Services that Assist Disputants with Talking 



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Transactions in which the parties buy these services can be concluded with friends or 
family members who happen to have these skills. Professional mediators, (cooperative) 
lawyers, and perhaps even with online dispute resolution providers can supply them as 
well (Katsh, Katsh et al. 2001; Wall, Stark et al. 2001; Moore 2003; Lande 2005; Lande 
2008). In an ideal world, people in a conflict could learn these skills cheaply, or they 
could be coached by a professional who helps leads them through the communication 
and negotiation process. 
 
Such services have trouble to reach customers with limited resources, though. 
Assistance with resolving a conflict using the techniques and skills of integrative 
negotiations basically consists of delivering expertise. Markets for such information 
goods are special, because information is a public good (it is difficult to exclude people 
from using it once it is supplied), an experience good (the quality of the information can 
only be assessed by the customer after delivery) and the upfront production costs  of the 
information are high in comparison to the marginal costs of producing an extra copy and 
distributing it (Varian 1998; Stiglitz 1999). If a professional just teaches his clients how to 
communicate and negotiate, he will soon be out of business, because clients can spread 
this information freely, and are likely to be unwilling to pay for the information upfront.     
 
Thus, the transaction costs on this market are substantial and providers of conflict 
management skills have to find ways around it. Like other professional services firms, 
lawyers typically sell services that are customized and individualized. Often they  
combine delivery of information with other work, such as conducting negotiations for  
clients (instead of just coaching them) or litigation. These business models diminish the 
possibility for clients to reuse or to resell the information (Dawson 2005). However, these  
mixed and individual services tend to be expensive for the client. Hiring an individual 
expert such as a professional lawyer for the maybe ten hours that are needed to 
negotiate a simple dispute is too costly for most individuals. Dispute resolution services, 
like other knowledge products usually delivered by professional services firms, easily 
become a luxury good.    

B. Current Interventions by States 
Gradually, we now gain an understanding of the market for justice, using transaction 
costs analysis and knowing about the newest technologies for solving disputes, including 
the technology of integrative negotiations that dates from the 1960’s and became a 
mainstream part of conflict management in the 1980’s. But governments had to put 
dispute systems in place long before that. Their systems for coping with conflicts 
developed over the centuries. They had to cope with the effects of the transaction costs 
problems, lacking an understanding about the causes of these problems, and with limited 
knowledge about ways to solve conflict. What societies experienced, was a substantial 
number of disputes, an apparent unwillingness of disputants to meet and talk about these 
disputes, and a tendency of disputants to go to unilateral advisers or powerful people. 
The broader message they probably picked up was that many people are not able to 
solve their problem through negotiations. Somehow, the decisions have to be made for 
them. So governments resorted to norms and to decision makers with undisputed 
authority.  

1. Framing Disputes in Terms of Rights and Obligations 
What gradually emerged in most societies is the procedure of resolving disputes in terms 
of who is right or wrong. If a conflict continues, a party can bring forward a claim that his 
rights were infringed on, and the other party can present a defence. The dispute is thus 
discussed in terms of rights and obligations. If this discussion does not lead to a result, a 
neutral third party has to decide for them. Thus, courts of law have to be established.   
 
This rights and obligations approach is attractive. It can build on moral categories and 
social norms about what good conduct is, which may come from religious sources. For a 



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functioning market economy, it is very important that people live up to their contractual 
promises. So contractual rights and obligations are added to the norms that courts can 
enforce. Moreover, the moral duties as well as the norms related to enforcement of 
property rights and contracts can be applied generally, so that similar cases can be 
treated alike. They can also be used to reign in the powerful third parties who are asked 
to intervene in conflicts. Their power becomes less absolute, if they are bound by the rule 
of law.   
 
Reframing disputes in terms of rights and obligations also has several disadvantages. 
The legal framework does not necessarily fit the perceptions of clients. Many researchers 
have established that clients addressing the formal legal system feel that their needs are 
not sufficiently taken into account and experience a loss of control, which is commonly 
attributed to the selection effects of viewing social conflicts through a legal lense (see 
Relis 2002 for an extensive review of the literature).  
 
Morover, invoking a right and accusing a person that he has committed a wrong easily 
leads to polarization. It implies moral superiority of one party over the other, which is 
likely to lead to denial, or defensiveness. In disputes, the parties are very sensitive to 
being treated like other persons, and with all due respect. They use the way they are 
treated as a cue for their social status (Lind and Tyler 1988; Tyler 2007). The dynamics 
of accusing and excusing can be very troublesome in dispute resolution (Allred 2005). 
Escalation of conflicts is often the consequence of using this framework of rights and 
obligations.  
 
Another complication is that many conflicts are hard to solve on the basis of pre-existing 
duties that have not been fulfilled. As we saw, conflict is inherent to long term 
relationships with high specific investments, where it is caused by changes in 
circumstances that the parties cannot regulate completely in their contracts. Problems 
between business partners or family members are thus hard to resolve on the basis of 
right and wrong. Judging these conflicts on the basis of rights and obligations does not 
go well with the idea of an incomplete contract. And even in one time transactions, most 
disputes have other causes than pure opportunism. Most people know quite well that 
they have to pay for what they order and should deliver goods of appropriate quality, and 
have sufficient reasons to do so. The basis of contractual disputes is often a 
misunderstanding, or unhelpful communication at the time the problems came up. Even 
for major crimes, framing the issues in terms of rights and obligations is unlikely to do the 
job. Victims of crime have other needs besides a desire for punishment. They would like 
to be informed, to be offered an explanation, and to see their harm repaired.  
 
Finally, the confrontation creates an additional need for unilateral advice. Now, people 
not only need a trusted adviser who can coach them in difficult times, but also someone 
who can inform them about their rights and obligations. The need for a lawyer is 
increased.   
 
Solving conflicts through a system of rights and obligations is thus a mixed blessing. It 
fits moral categories, reinforces norms of desired behaviour, and prevents abuse of 
power to some extent. But it also raises the costs of dealing with disputes because it 
increases the possibility of escalation and impasse, leads to much uncertainty because 
many real life disputes are hard to solve by applying pre-existing norms, and creates an 
extra need for legal expertise.   

2. Legal Aid 
Thus it is not surprising that governments resort to another common justice policy. They 
supply conflict management expertise to the poor who cannot afford it, and because the 
government dispute resolution system is based on rights and obligations, this is 
considered legal expertise. Most governments supply subsidized legal aid, or stimulate 
lawyers to do pro bono legal work. Some other models developed as well, such as the 



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use of public defenders, in which government agencies provide legal aid in criminal 
cases.  
 
These policies are troublesome, however, because subsidizing legal aid given on a one 
lawyer to one client basis is a very expensive way to get conflict management know-how 
to the parties (Pearce 2004). Most states only offer legal aid to defendants in criminal 
cases facing severe sentences, and in a restricted manner to some plaintiffs in civil 
cases. Only a few countries have broad programs for legal aid in civil and administrative 
cases. 
 
More fundamentally, legal aid exacerbates the problems associated to unilateral advice, 
such as the possibility of an arms race between the parties (Pearce 2004). Giving the 
poor legal aid will not bring them equal access to justice if their richer counterparts can 
afford better lawyers.   

3. Mediation Aid 
More recently, governments have started to subsidize mediation. In theory, this is an 
attractive approach because one mediator can replace two lawyers, and the problems 
with unilateral advice are avoided. Mediation also applies the method of integrative 
negotiations. These policies typically have little impact, however, for the reasons 
discussed earlier. The problem of letting two opponents agree on one mediator remains 
unsolved, whereas a party to a dispute can engage a lawyer without consulting her 
opponent.  
 
Moreover, mediation does not really fit the rest of the formal dispute resolution system 
that has been built on enforcing rights and obligations. Procedures, legal education, 
professional norms, business models, and the social norms of lawyers are all based on 
this model. So mediation is embedded in practices where lawyers do an intake with their 
clients focussed on rights and obligations, where they negotiate on this basis, and where 
courts interprete legal norms in order to decide conflicts in which mediations failed.  
 
Conflict management, and in particular the way to support integrative negotiations, is a 
new technology, which basically changed the way in which negotiations can be 
structured. Before that, the world just had to accept that some disputants do not 
communicate. With this new technology, up to 90% of people in a conflict can 
communicate and negotiate in order to improve their relationship, and around two thirds 
actually solve the dispute. If we take the long term view, it seems to be a disruptive 
technology, a paradigm change. But this new technology cannot take hold, unless the 
surrounding system also adapts to the new possibilities.    
 
Once a system of resolving disputes is based on a certain technology, the costs of 
changing this are likely to be huge, however. Resolving conflicts in terms of rights and 
obligations is a game everyone knows. Lawyers, courts, law schools and lawyers in the 
government form powerful interest groups. As collectives, they have little interest in 
changing the game, and individual lawyers cannot easily change it by themselves. New 
entrants in the market face barriers, such as the prohibition for non-lawyers to give legal 
advice in important markets like the U.S. and Germany. So, subsidizing and stimulating 
mediation is not likely to be a very successful justice policy in the short run.     

C. Promising Policies 
Instead, governments should rethink their interventions in the light of the new technical 
possibilities, but with a keen eye for transaction costs. Availability of conflict management 
know-how has made new ways of supporting negotiations possible. In the light of the 
new technology of integrative negotiations, government interventions in this part of the 
dispute resolution market may have become too broad. Before this conflict resolution 
technology developed, it was sensible to subsidize lawyers and to see neutral decisions 
by courts of law as the main way to let parties solve disputes. Now that we know that 



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many issues in disputes can be solved by integrative negotiations, and the market can 
supply this, governments can target their interventions in a better way.  
 
Governments have already started to retreat. Trials and judgments by courts have 
become the exception, and settlement is the norm in civil disputes. Even in criminal 
cases, plea-bargaining has taken over. In the once considered very litigious US legal 
system, the trend has been named the ‘Vanishing Trial’ (Galanter 2004). But then what 
should governments supply instead?  

1. Education in Integrative Negotiations and Conflict Management 
A promising approach can probably be found by directly confronting the major causes of 
transaction costs: the public good and experience good character of conflict 
management know-how. One way to spread this knowledge is through education 
programs, and this becomes an  increasing part of the legal aid agenda. Non-formal legal 
education (Commission on Legal Empowerment of the Poor 2008), human rights 
education (Ramírez, Suárez et al. 2007), civic education (Davies 2004), or public legal 
education (Buck, Pleasence et al. 2008) are the terms under which this message is 
conveyed.  
 
Learning how to solve disputes, how to negotiate, and other relationship know-how seem 
to be valuable assets for anybody, but these skills are not taught at school in any formal 
way. NGOs in developing countries invest in teaching women and employees about their 
rights, and use a mixture of mass media, programs for schools, clinics, and paralegal 
services to spread the message (Penal Reform International and Bloom Legal Clinic of 
the Northwestern School of Law 2007; Commission on Legal Empowerment of the Poor 
2008). Besides basic knowledge about law, these programs increasingly teach skills for 
coping with conflict, for instance in situations of domestic violence . 
 
The good news is that communication and negotiation skills are fairly general and can be 
used in most economic and personal relationships. A basic negotiation course can be 
taught in a week and this seems money well spent. Negotiation expertise is a public good 
that may have a big impact on human well-being if it were more universally available. 
Both economic growth and human development depend critically on how good people 
are in creating win-win relationships with other people and how they manage the 
disputes inside these relationships.    
 
The bad news is that the curriculum of schools and universities are full and belong to the 
kind of institutions that are most resistant to change. Slots in primary and secondary 
education are thus very difficult to obtain. In this respect, it is interesting to note that the 
theory and skills of integrative negotiations are not even an obligatory part of the 
curriculum in economics. Economists assume that wealth and welfare will be created by 
transactions, but do not study how transactions are formed.  
 
A more targeted approach is to spread this know-how to people who are likely to find 
themselves in the beginning stages of a conflict, or at key transitions in their lives (Buck, 
Pleasence et al. 2008). Some American states apply this principle by requiring that 
people complete a divorce course before they are admitted to a divorce procedure. 
Programs assisting women with dispute skills in order to cope with domestic violence 
have been linked to maternity care programs in developing countries (Commission on 
Legal Empowerment of the Poor 2008). 

2. Economies of Scale in Communication and Negotiation Advice 
Once in a dispute, the parties must cope with the skills they have at that moment. 
Disputants may learn on the spot, but they will often need help with communicating and 
negotiating in a productive manner. The challenge is to bring this expertise to the 
negotiating table at a low cost, which means without having to pay one professional for 
exensive individualized dispute advice.   



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The most promising approaches here are in the area of finding economies of scale. Legal 
expenses insurers have developed ways to serve many clients with similar problems by 
standardizing their services through protocols. Specialized dispute resolution services 
are offered by trade unions and consumer organizations to their members. Government 
outfits and law clinics at universities offer basic legal advice to people with legal 
problems. Paralegal programs are the most promising variant for developing economies 
(Maru 2006).  
 
Increasingly, legal advice is supported by internet interfaces, so that clients can start with 
self-help and then go onwards to personal advice if necessary. Advice can now be 
obtained by posting questions on the internet and obtaining answers in return for a fee. 
Websites that use this model include findlaw.com and lawguru.com. The question 
remains, however, whether this leads to viable business models for selling expertise. 
Like most IT companies, the providers struggle with keeping the balance between 
attracting many customers with free services and selling more sophisticated services for 
a fee.  
 
Most of these standardized services still have to integrate communication and 
negotiation advice into their offerings, however. The market still perceives the need as a 
legal need, and not so much as a need for knowing how to communicate and to 
negotiate (Hacker 2008). Governments can surely help to adjust this perception, which is 
caused by their prior interventions in this market. Because mechanisms for dispute 
resolution are widely perceived as a task for state institutions, the public is likely to 
appreciate some guidance from the government regarding the best ways to solve 
disputes. Public awareness programs regarding the way conflict management know how 
can be obtained are one way to achieve this.  

3. Structuring Settlement Negotiations    
A more direct way to stimulate the use of modern conflict resolution know-how is to 
structure the communication in disputes along these lines. This is the modern equivalent 
of the rights and obligations approach. Instead of inviting people to frame their dispute in 
legal terms, the parties can be asked to communicate about their emotions and their 
needs, wishes and fears. Moreover, a government dispute system can ask them to bring 
forward a number of possible solutions and to suggest legal criteria and social norms for 
evaluation of these solutions, instead of requiring the plaintiff to formulate a claim and the 
defendant to submit all his possible defences.  
 
This negotiation support system could have the form of procedural rules, very similar to 
the codes of procedure, but now applicable to the negotiations that usually precede the 
court action. Other possibilities are to build a web-based negotiation support system, or 
to let interest groups come to a code of conduct for the settlement of claims (Van 
Zeeland, Kamminga et al. 2007). Again, a motive for this government intervention could 
be to compensate for the existing government incentives to frame a conflict (only) in 
terms of rights and obligations.  
 
Once such a framework is in place, the market can bring additional negotiation and 
communication skills to the table. As we have seen, there are many people around who 
wish to assist people with communication and negotiation, once they sit in a room and 
are ready to be helped. Mediators, other neutral facilitators, online dispute resolution 
services, collaborative lawyers, or more traditional lawyers can provide these services. 
Finding the people with the right skills is something disputants can sort out by 
themselves, probably with support from a little regulation that helps clients to distinguish 
good quality from bad quality, as is common in other professional services (Stephen and 
Love 1999). 



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V. Supplying Information about Fair Solutions 

A. Market Analysis 
In disputes, the parties always have to cope with distributive issues. The parties must  
determine an amount of compensation, the length of a notice period, a way to divide 
assets which they jointly own, and sometimes the severity of a sanction. Bargaining in 
this situation of bilateral monopoly is likely to fail, because parties tend to obtain better 
results if they have more patience, make more extreme offers, commit themselves more, 
have more attractive outside and inside options, and have more information. (Muthoo 
1999; Muthoo 2000; Carraro, Marchiori et al. 2006; Korobkin and Doherty 2007). This all 
amounts to uncooperative conduct. Consequently, the tension between creating value, 
for which cooperation and information sharing is most effective, and distributing value, 
where a unilateral strategy is usually more succesful, complicates the process of dispute 
resolution (Mnookin, Peppet et al. 2000).  
 
The only known way this bargaining failure can be prevented, is by bringing neutrality in 
the game. Information about the way other people have settled similar issues is one way 
to do provide a neutral point of view. Informing the parties about solutions reached in 
comparable situations helps them to assess the fairness of outcomes (Pillutla and 
Murnighan 2003; Husted and Folger 2004; Cialdini 2007). Market prices, rules of thumb 
used in practice, social norms, or case law can provide people with this information 
(Fisher, Ury et al. 1991; Shell 2006; Barendrecht and Verdonschot 2008; Verdonschot 
2009). These ‘objective criteria’ create a shadow of the law, a neutral image of a just 
world, that the parties can use as a point of reference for reaching agreement (Mnookin 
and Kornhauser 1978; Cooter, Marks et al. 1982; Hacker 2008; Nisenbaum 2009; Ray 
2009). People in a dispute tend to ask for these criteria: what did others get in my 
situation (Hacker 2008)?  
 
Task Share 
Description Distributing value fairly 
Basic technology Supply information about fair shares (sharing rules, objective criteria) 
Best practices for dispute 
services/-transactions  

- Bargaining assistance (distributive negotiations) 
- Objective norms and criteria for three/five most common issues in most 

common disputes that: 
o can be applied easily; 
o weigh similar elements for both; 
o give a continuous range of outcomes, not binary answers (yes/no); 
o belong to the parties (legitimacy, fairness, appropriateness); 
o allow for adjustment to situation: 
o are not exclusive;  
o show what others did in similar situations;   
Make this information widely available in order to increase transparency 

Possible providers of 
services 

- Advisers 
- Lawyers 
- Mediators (evaluative) 
- Legislators 
- Courts rendering precedents 
- Legal academics 

Legal information providers (publishers) 
Sources of Transaction 
costs 

1. Information about fair solutions is public good and experience good 
2. Providers of fairness information face pressure/criticism from all sides 

Market reactions 1. Insufficient supply 
2. Business models for delivering expertise (see above) 

Table 5 Market Analysis for Services that Assist Disputants with Sharing 
 
Unfortunately, objective criteria are not always available (Barendrecht and Verdonschot 
2008; Yeazell 2008). Information about the going rates of justice is costly to produce 
(Barendrecht 2009), because it requires extensive knowledge about the ways disputes of 
a certain type have been settled by the disputants or decided by neutrals. The 
information has the character of a public good: once the information is published, the 
marginal costs of letting another person use the information is close to zero, and it is very 
difficult to exclude people from using the information. To make things worse, the client 
can only know whether the information is valuable for him if the norms are disclosed to 



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him first. But why should he pay upfront for a good that still has to prove its value? 
Because the production costs of this information are high, and it is a public good, as well 
as an ‘experience good’, there is little commercial incentive to produce rules regarding 
suitable ways to deal with distributive issues (Posner and Rasmusen 1999; Parisi 2000). 
 
To make things worse, the producer of distributive rules is unlikely to have many friends. 
Because of the natural tendency of people to be biased in the way they perceive 
fairness, producers of distributive norms are likely to be criticized from all sides. 
 
The market for legal expertise thus has similar characteristics as the one communication 
and negotiation know-how. Lawyers offer tailor made legal advice, and bundle legal 
information with other services, such as helping parties to write a contract or to argue a 
case in court. Legal information providers such as writers of handbooks and publishers of 
databases supply packages, in which procedural rules, rules of conduct put down in 
legislation and commentary are sold together with an occasional norm for settling 
distributive issues. If a plaintiff just wants to know what the usual criteria are for dividing 
assets in a divorce, for damages in a personall injury case, or for compensation if a 
second hand car has serious defects, there is often no place to go.       

B. Current Interventions by States 
The scarcity of public information about distributive issues is a problem that has been 
tackled by several government interventions. 

1. Codificattion 
Making law transparent is a classical task of governments. Following the examples of 
Justinian and Napoleon, states enacted civil codes, criminal codes, and codes of civil 
and criminal procedure. The extent to which they codified law varies between common 
law countries, where more of the task of making law transparent is left to the courts, and 
civil law countries, where legislation is the primary way to make law transparent. 
Although common law and civil law are often presented as opposites, the amount of 
centralized codification is primarily a matter of degree. Both common law and civil law 
systems see making law transparent as a government task and do this partly through 
codification.  
 
However, codes have not been able to give citizens access to the information that is 
needed to settle their disputes. A consumer who has a dispute with a seller about the 
quality of the goods he bought will find in the code that he is entitled to the quality that is 
described in the contract, or the quality that may be expected from goods of this type in 
general. Parties in a divorce, or an employment contract termination, will only obtain 
limited information about their entitlements. Civil codes give little attention to very 
common causes of disputes. Transitions in long term relationships, changes of 
circumstances, and interactions in which both parties made a series of small, 
understandable mistakes, are issues that are hardly touched upon.  
 
Generally, codes are rather abstract statement of rights. They thus mainly provide a 
structure for reasoning, or a way to frame issues in a dispute. This can be very useful 
because it is easier to compare outcomes across cases if the outcomes are classified in 
categories of legal problems. Whilst rules from codes somewhat limit the range of 
possible outcomes, they rarely give much guidance for the outcome itself. The going 
rates for rights remain hidden for the general public. Codes hardly ever mention 
percentages, amounts or numbers.    
 
It is not so difficult to find the sources of government failure here, that are causes of 
transaction costs. Governments have limited information about the going rates of justice 
because they do not know how private disputes are usually settled. Codification projects 
tend to be the realm of academic lawyers. They have access to precedents, but, as we 
will see, these are also not very informative about the going rates of justice. Because the 



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lawyers working on the code are not able to provide guidelines, they focus their attention 
on providing an encompassing framework for legal reasoning. Codes have the ambition 
to be comprehensive in this respect. This means that codification efforts are often 
targeted at making the code cover every imaginable problem. The discussion in 
codification projects is thus mostly about the different ways to systematize the law. These 
projects attract little or no attention from the general public, which is understandable 
because codes do not seem to have much impact on outcomes. Currently, the vivid 
academic debate about a European Common Frame of Reference for contract law is a 
case in point. In this academic debate, there is surprisingly little discussion about the 
distributive effects of the rules that are in the process of being designed  (Hesselink 
2006; Kerber and Grundmann 2006; Smits 2008).   
 
Another reason why codes tend to remain silent on distributive issues is related to the 
format of rights and obligations. Any codification of knowledge needs a model, a 
language and concepts in which the codification takes place (Cowan and Foray 1997). 
Unsurprisingly, the existing legal codifications tend to follow the model of rights and 
obligations. Civil codes regulate how people can establish property rights, how they can 
conclude a contract, under what conditions a contract is enforceable and what their 
obligations are to prevent damage to others (tort law). Criminal codes qualify conduct as 
crimes and mention the sanctions that can be attached to them. The rights and 
obligations model is not likely to produce concrete guidelines for settling real life disputes 
in which both parties interacted in a way that was less than perfect.     
 
Limited incentives are also a problem. Codification experts in the government 
bureaucracy are not directly responsive to client needs (Couyoumdjian 2008). 
Sometimes they are more concerned with the integrity and the system of their code than 
with the way it is used in practice. Because lawyers and repeat-playing disputants may 
very well have an interest in keeping legislation complex (Galanter 1974), they are 
unlikely to put pressure on the codification experts to do a better job  Whilst plaintiffs who 
are one-shotters need transparency at the time they use a rule, they are unlikely to need 
it again in the future. So, from both sides, there is little pressure on governments to 
provide good information on the going rates of justice.    
 
For legislators, and as we will see for courts, an impediment to the development of 
objective criteria is that legal norms are thought to be binding. There are good reasons 
for this requirement. Legal norms often cannot be fully supported and explained by one 
consistent set of reasons. Law is frequently based on ‘incompletely theorized 
agreements’ (Sunstein 2007). Thus, the courts and the subjects applying the law cannot 
be left free to consider the substantive reasons behind the rule and improve it if 
necessary (Sherwin 2006; Schauer 2008). If legal norms are to provide law and order 
they must not be questioned and, therefore, they are binding. The downside of this 
requirement is the increase in costs of developing criteria. Widespread agreement about 
the norms is necessary, at least in a democracy, and they should pass through a formal 
legislation process. If courts are setting precedents, they have to operate cautiously. 
Errors in binding norms have to be avoided because they are difficult to correct at the 
stage of applying the norms. Thus, legislators may refrain from creating norms or set 
open-ended norms that give little guidance to the parties in a dispute.   
 
The political process is also ill suited for negotiating and deciding norms for distributive 
issues. Politicians have little to gain from taking clear stances regarding ways their 
citizens should divide the gains and losses of their private transactions. Only some 
norms – like sentencing guidelines for criminals and, currently, norms for salaries of 
business leaders – are interesting for politicians, because they protect the interests of 
many voters against the selfishness of a few.  
 
Thus, codes tend not to provide the information that people need to settle their 
distributive issues. This is understandable once we look at the incentives for those 



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involved in writing the code. Once a code is enacted, however, it becomes a tool for 
teaching future lawyers. The code will influence their ways of thinking and doing. It 
reinforces the idea that the law consists of rather abstract and open ended rules that 
classify issues more than guiding the way towards solutions for real life problems. In the 
minds of lawyers working in law practice, solving actual disputes happens in an 
interaction between the parties and, probably, the courts. They are helped by legal 
expertise that operates within the broad framework of rights and obligations. Little of this 
expertise is codified. Lawyers are probably not unique in this respect. Cowan and Foray 
show that the initial high costs of codification may sustain an equilibrium in which a large 
group of experts has little interest in codification, although this would have high social 
benefits (Cowan and Foray 1997).    

2. Precedents 
Another government intervention in the area of providing legal information that helps 
people to settle distributive issues is the assignment of this task to courts. Within the 
broad framework of rights and obligations that form the existing legal system, the courts 
can give guidelines about reaching outcomes in concrete disputes. This task of courts 
exists both in legal systems where the courts defined the framework in the past and have 
powers to adjust it (common law) and in legal systems where this structuring is primarily 
done by means of codes (civil law, Germanic legal systems). In practice, both types of 
legal systems have a division of labour between courts and legislators in which more 
abstract rules and more concrete guidelines have to be formed in an interaction process 
(Calabresi 1999; Ponzetto and Fernandez 2008).    
 
Building a body of case law is a slow process, however. Litigation, up to the phase of 
decision making by a court, takes time. Generating sufficient experience with a number 
of different disputes may cost five to ten years. Aligning these precedents in appellate 
review and through decision making by the highest courts can easily be a matter of five  
more years (Ponzetto and Fernandez 2008). Moreover, the prevailing culture among 
judges is to see a dispute as an individual problem that needs a contextualized decision. 
Consequently, even the highest courts may see the production of rules as a by-product 
of their true task: doing justice in the individual case. Thus, it can take decades before a 
clear guideline emerges from case law.  As a result, court decisions seldom give much 
guidance in issues of sentencing, sharing of liability, damages, or other quantitative 
matters (Bovbjerg, Sloan et al. 1989). Searching databases of case law for percentages, 
numerical guidelines or ranges of damages leads to a very limited number of hits. 
 
Incentives are probably misaligned here as well. Judges generally do not have many 
reasons to create precedents that are useful for future parties (Landes and Posner 
1979). They face similar problems as politicians. What they say is likely to be seen, at 
least by one of the groups involved, as a decision against their interests. Accordingly, 
making such rules will not add much to a court’s popularity. Lower courts that create 
clear guidelines expose themselves to criticism from higher courts. With some creativity, 
it is always possible to find an example of a situation in which the proposed guideline 
should not be applicable. Add to this the doctrine of binding precedent, or at least an 
obligation on the part of courts to follow an established line of precedents (Fon and Parisi 
2006), and higher courts will think twice before expressing a clear guideline. It binds 
them for the future as well. It takes more time and effort of judges to agree on a more 
general guideline than on a narrow decision in one case (Sunstein 1999). Overall, courts 
are rather cautious. They favour rulings that are narrow, in the sense that they govern 
only the circumstances of the particular case, and also shallow, in the sense that they do 
not accept a more general theory of the legal  issue (Sunstein 2008).  

3. Supporting Law Faculties at Universities 
The market and government failures linked to the production of legal information are 
probably one of the reasons why states tend to invest in law faculties at universities. 
Within universities there is a lively debate whether legal scholars at universities should 



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be real scientists, testing theories about law and its effects, or if they should collect, 
organize and publish the legal information from legislation and precedents. The latter 
function is certainly one that is much appreciated by law practice. Law firms and other 
providers of justice services buy legal information from academics in the form of law 
books, law review articles, and legal education.   
 
Legal academics have not always been effective in producing information about objective 
criteria for distributive issues. The prevailing attitude has become that academic lawyers 
should reflect on what happens in case law and in legislation. Therefore, they primarily 
follow the trends in production of norms in these sources of law. Within these categories, 
they are likely to focus on the information that is easiest to access and has the greatest 
impact. This focus tends to be case law from the highest courts and changes in codes. 
These changes in the law are thoroughly commented on from all sides. Academics at law 
faculties seldom analyze hundreds of cases from lower courts in order to find patterns in 
decision-making by using statistical methods. This lack of responsiveness to the needs of 
clients is understandable, if we look at the transaction costs of supplying this information 
again. It would be a time-consuming and costly business from which the results would be 
immediately copied by all those other academics writing their own textbooks.      

C. Promising Policies 
How can providers of justice services, courts, academics, or legislators be seduced to 
produce helpful objective criteria, going rates, sharing rules, prices of rights, or whatever 
name we give this information? This is an area that has hardly been researched yet, so 
we cannot do more than explore the issues.   

1. Improving Incentives to Generate Guidelines 
A person can gain from providing information about objective criteria in many different 
ways. Besides financial profits, the satisfaction of helping others to solve disputes can be 
one such motivation. Another reason can be the fame associated with providing a lasting 
solution for a category of disputes. Rules sometimes carry the name of their authors. For 
example, the Loi Badinter that introduced strict liability for car owners causing accidents 
has the name of the French Minister of Justice who was the driving force behind it. The 
Learned Hand formula for negligence is named after the judge (and philosopher) who 
wrote it down in the case United States v. Carroll Towing Co (1947).  
 
If courts have to deal with many similar cases, they sometimes have an incentive to 
provide more clarity about the basis of their decisions. Otherwise, they will be 
overburdened with work, or be exposed to accusations of unequal treatment in similar 
cases. Other incentives work in the opposite direction. A court or decision-maker 
providing clear guidance for future cases will attract a lower number of cases in his future 
because more cases settle. This can lead to a reduction in income, as well as a loss of 
opportunities to make a difference (Landes and Posner 1979).  
 
More generally, the way courts are funded is an area for enquiry. It might be worthwhile 
to develop methods for financing courts that tie compensation to the responsibility of 
solving all disputes in their jurisdiction in a low cost/high quality manner within a limited 
amount of time. If a court’s financing would be tied to its dealing with all divorce cases or 
employment issues, the court is likely to look for economies of scale and for ways to 
increase the likelihood of settlement. Communicating guidelines for distributive issues to 
disputants achieves both goals.   

2. Rulemaking through Intermediate Private Institutions 
Many schedules, guidelines, and formulas that are used within the legal system are non-
binding rules. Commissions or groups of academics design schedules or formulas; 
judges join forces to agree about non-binding guidelines.  
 



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This can hardly be a coincidence. The costs of binding distributive rules are high. They 
have to pass through formal procedures with limited capacity, they will be exposed to 
criticism from all sides, and the rules will limit flexibility of decision-makers. Thus, new, 
lower cost ways of rulemaking develop. As institutional economists have noted, groups 
may jointly form their own institutions because the transaction costs of individual 
coordination or coordination at the state level is too high (Brousseau and Raynaud 2006).  
 
Governments can see this as undesirable competition and, thus, try to preserve a 
rulemaking monopoly, but they can also choose to facilitate such private rulemaking 
processes. Developing nonbinding guidelines is still costly for stakeholders, and it may 
be difficult for them to finance these efforts. The process of rulemaking works best if 
groups of stakeholders are involved, but presided over by a neutral body, which 
governments can provide. The state can also put pressure on the private rulemaking 
process by threatening to use its procedures for formal and binding rulemaking if the 
stakeholders do not solve the issue themselves.   

3. Removing Restraints on Rulemaking for Distributive Issues 
Another approach is to remove restraints on governments and courts that produce rules 
for distributive issues. A good strategy may be to have general principles as binding rules 
in combination with specific non-binding guidelines for recurring problems. Damages for 
personal injury cases, for instance, can be determined on the basis of the general and 
binding principle that all loss of income has to be compensated. Schedules can than give 
guidelines for establishing the amount of damages, whilst the parties and the courts 
retain the possibility to deviate from the schedule if the general principle is violated.  
 
Instead of discussing in a general way whether precedents are binding, it could be left to 
the courts themselves to decide how strongly they recommend that other courts follow 
their criteria. Similarly, a civil code could have a combination of general principles with 
specific criteria as guidelines for recurring issues under the article in question. 
 
The idea that codification should be comprehensive is another restriction that raises the 
costs of production of useful criteria. If legislators and courts would focus their efforts on 
criteria for the problems that are most frequent and urgent for citizens, then the costs of 
producing rules would drop. Depending on the costs of error and the costs of decision 
making, it is possible to find an optimal level of specificity of rules (Fon and Parisi 2007; 
Sunstein 2008). Generally, more specific rules are desirable for problems that occur 
frequently (Kaplow 1992). Instead of relying on interest groups, parliamentarians, 
individual judges, or lawyers working in the justice department to set the agenda, 
governments might research the most urgent needs for criteria and then focus efforts in 
that direction. One additional reason for adopting this strategy is that producing the right 
type of guidelines will diminish the costs of courts and of subsidized legal aid.  

4. New Models for Sharing Rules 
In the information age, codification of knowledge has become much easier. The cost of 
codification has fallen, the ability to codify more complex phenomena has increased, and 
the value of codified knowledge has risen because it became less expensive to 
reproduce and more valuable (e.g. faster) to use (Cowan and Foray 1997). This general 
truth is likely to apply to legal codification as well.  
 
Objective criteria for distributive issues, the going rates of justice, have a similar role as 
pricing information. Sustainable business models exist for sites that inform the public 
about prices of goods. It is true that this is easiest for goods that are homogeneous and 
standardized, but sites that compare prices of rather complicated goods, including 
insurance or loans, have developed. They now compare products that have many 
relevant attributes. Similarly, it may become possible to develop bottom-up models for 
sharing criteria for distributive issues. Local going rates for settling recurrent issues could 
be uploaded to a website so that others can use them. Such a “wiki-norms solution” 



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depends on the willingness of individuals to share their knowledge about such criteria. As 
of yet, it is uncertain whether it will be possible to create a forum on which the going rates 
of justice can be made transparent by users of the dispute system, but attempts to 
achieve this are under way (Barendrecht and Verdonschot 2008 and 
www.microjustice.org).  
 
One problem is that websites disclosing pricing information tend to be tied to spot 
markets where the goods in question are traded. Here, sellers have an incentive to 
disclose their price if it is low. Sellers or buyers usually pay a small commission to fund 
the infrastructure for disclosure of pricing information. Rights, however, are not traded 
like telephones or holiday homes. They are settled with one particular opponent, so there 
is little reason to inform others of offers to settle for a certain price. Other incentives have 
to be offered to induce people to disclose information about the going rates of justice. 
People could do this for money, because it enhances their reputation, or for altruistic 
motives.   

VI. Delivering the Option of a Neutral Decision 

A. Market Analysis 
The plaintiff also needs the option of a neutral decision that imposes a fair outcome on 
the plaintiff. This justice service is an essential element of a dispute system. It is valuable 
to the plaintiff, because it creates incentives on the defendant to participate and to make 
moves towards a fair solution for the distributive issues. Moreover, the neutral supervises  
the negotiation process, making aggressive bargaining tactics less likely, and can take 
decisions if the parties do not reach an agreement (Barendrecht 2009). 
 
 
Task 4. Decide 
Description Decision making procedure  
Basic technology Make option of a neutral decision available (at low cost) 
Best practices for dispute 
services/-transactions  

- Adjudication 
- Simple procedure (oral presentation, hearing, decision)  
- Limited fact-finding 
- Judicial/neutral case-management and information processing 
- Online formats for defining interests, distributive issues, possible solutions, 

decisions 
- Stimulate cooperative attitude 
- Procedural justice: voice, participation, trustworthiness, neutrality, interpersonal 

respect. 
- Discussion of possible objective criteria for outcome 
- Integration of decision making and settlement  
- Mild time pressure 
- Preliminary judgments in more difficult cases 

More generally: minimize sum of decision costs and error costs 
Possible providers of 
services 

- Persons with informal power 
- Courts 
- Arbitrators 
- Neutral fact-finders 

State agencies 
Sources of Transaction 
costs 

1. Difficulties of  concluding ex post dispute resolution agreements: 
- Psychological barriers 
- Strategic barriers  
2. Insufficient incentives on neutral to provide efficient processes and fair solutions 
because of:  
- dependence on neutral 
- low frequency of transactions 
- uncertainty and complexity 
- monitoring difficulties. 

Market reactions 1. Access to neutrals on markets is unavailable or unreliable 
2. States provide neutrals 

Table 6 Market Analysis for Services that Assist Disputants with Deciding 
 
Let us assume that a plaintiff and a defendant would look for a judge on the market for 
private transactions and that they found one. This is unlikely, as we have seen in Section 
IIIA, because parties in a dispute have difficulties to agree on a procedure, but let us 



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imagine for a moment they have succeeded in overcoming this problem. Now how will 
their transaction with the private judge unfold? Normally, the client of a service provider 
would make clear what he wants, negotiate a price, and then monitor whether the seller 
will do a good job.   
 
A privately contracted judge, however, has two clients. They would need to give their 
judge instructions what they want from him: How to exchange views and documents? 
How much time for the hearing? A jury or a bench trial? How many witnesses will be 
called? How will they be questioned? How to conduct settlement negotiations? On many 
of these issues, the plaintiff and the defendant are likely to disagree, because they 
expect to obtain better results in one version of the procedure, or make elements of the 
procedure a bargaining chip if their opponent is strongly in favour of one way of dealing.  
 
Consequently, a private judge or an arbiter does not get a clear message from his clients 
regarding the kind of interventions they want, or the costs they want to spend. Once they 
find themselves before a judge, the parties are also unlikely to go to another judge 
because they are unhappy with the first one. The consent of the other party would be 
needed for this. The parties are locked into the service of this one judge, but cannot give 
him clear instructions. They are also unlikely to need the services of the judge in the 
future, because most parties will not be regular clients of courts. If, exceptionally, one of 
them is a regular buyer of judge services, this is bad news for the other party and likely to 
affect the neutrality of our private judge. Managing this neutrality is another transaction 
cost problem that should be solved. The private judge may be inclined to accept side 
payments from one of the parties to influence the decision. This is difficult to detect for 
the other party.  
 
In sum, the transaction costs of hiring a private judge are very substantial. The normal 
discipline of the market does not work well if a plaintiff tries to hire a judge. 

B. Current Interventions by States 

1. Courts 
Taking into account the number and size of these transaction cost problems, it is 
unsurprising that governments intervened. The standard policy that developed over time 
was to nationalize the business of providing neutral decisions by setting up an 
independent judiciary. Every nation has a court system for solving civil and criminal 
disputes, and most countries have some form of judicial review of decisions by the 
administration as well. It is often possible to opt out of this government system, but we 
saw that this is difficult, as it requires agreement between both disputants, which is not 
likely to materialize (Section III.A). So most disputes are solved by formal courts set up 
by states, or in the shadow of their interventions. Courts face little competition.   
 
Courts set up by governments are not very efficient institutions. Clear signals of this are  
the amount of court delay that is pervasive around the world and the high costs of 
litigation (Trubek, Sarat et al. 1983; Buscaglia and Dakolias 1999; Messick 1999; 
Zuckerman 1999; Peysner, Seneviratne et al. 2005; George 2006; Cabrillo and 
Fitzpatrick 2008). This is even true for courts in developed economies that have had a 
stable court system for more than a century (Woolf 1996; Rhode 2004; Peysner, 
Seneviratne et al. 2005). Courts are slow in taking up information technology. They do 
not systematically incorporate innovations in conflict management in their services, 
although there is much criticism on the way courts intervene in disputes (Tyler 1997). The 
inefficiencies are so apparent, that the basic attitude of citizens is that litigation should be 
avoided. Governments have accepted this, which is a strange state of affairs, taking into 
account that courts were set up in the first place in order to help people to solve 
problems they cannot solve themselves.       
 



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There is general agreement between scholars studying courts about the reasons for 
these inefficiencies. Judges have insufficient incentives to deliver high quality and low 
cost services (Trubek, Sarat et al. 1983; Messick 1999; López de Silanes 2002; Botero, 
La Porta et al. 2003; Peysner, Seneviratne et al. 2005; George 2006; Cabrillo and 
Fitzpatrick 2008).  
 
There is also a fair amount of consensus about the policies that are unsuitable to 
increase efficiency. Making money for courts available and asking judges to render 
neutral decisions in conflicts is not enough to create access to neutral decision making 
(Botero, La Porta et al. 2003). Empirical research confirms that hiring more judges does 
not increase the productivity of the courts (Beenstock and Haitovsky 2004), nor does a 
salary increase (Choi, Gulati et al. 2009). These outcomes are understandable, because 
just giving judges the task to decide disputes does not make it easier for clients to 
determine what courts should do for them, to monitor court performance, and to make 
them satisfy client needs. Shifting from private judges, who try to make a business from 
deciding conflicts, to state paid judges is not a solution for most of the transaction 
problems. The only real change is that judges become less dependent on the parties for 
their income, so they may be less tempted to take side payments from the parties, but 
also less inclined to do a good job for their clients.  
 
The incentives that are lacking in the market place will have to be put in place by  
governments. If the clients cannot decide what exactly they want from the judge, and 
cannot monitor her sufficiently, someone else has to take over this task. If this does not 
happen, a likely type of government failure that applies here is  inadequate control of the 
bureaucracy. Individual judges may be very motivated to deliver adequate solutions for 
disputes in time, but their internal motivation is not complemented by external incentives 
(Posner 1993; Cabrillo and Fitzpatrick 2008). So let us see which incentives 
governments have put in place. 

2. Extensive Rules of Procedure  
Extensive regulation of the procedure is one way to protect the interests of the clients of 
courts. Civil procedure rules and codes of criminal procedure, as well as their 
counterparts for administrative litigation, typically exist of hundreds of articles, with many 
details about filing claims, providing evidence, rules for hearings, options of intermediary 
decisions, rules for many different complications that can arise during the procedure, and 
rules on how the court gives reasons for its decision.  
 
This extensive regulation protects the parties to some extent because it makes the tasks 
of the courts more transparent and their performance thus more easy to monitor. Appeal 
courts, colleagues, lawyers, and legal academics can monitor whether judges follow the 
rules of procedure. If they do not comply, their reputation as a judge and their career 
opportunities will suffer.  
 
But making courts stick to the procedural rules attracts the usual risks of a rule based  
bureaucracy. Instead of focusing the judge on the needs of the disputants, the rules can 
easily become a target in themselves. In the dysfunctional variant, rules become an 
obsession (Bovens 2005; Bovens 2007).  
 
Moreover, rules of civil, criminal, and administrative procedure do not cover all the needs 
of the disputants in a systematic way. They tend to deal mostly with issues that are easy 
to address in general terms, like the opportunities of both parties to submit their point of 
view at various stages of the procedure, and formal issues like the data that documents 
must contain to identify the plaintiff and the defendant (see, for instance, Article 5 of the 
Principles of Transnational Civil Procedure: ALI and UNIDROIT 2004). More complicated, 
but much more essential issues like the way the parties present their case in documents, 
or the way a hearing is structured are mostly left to the individual lawyer of judge. The 
trade off between error costs and decision costs is not addressed, or only in very general 



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terms like an obligation of the court to “resolve the dispute within a reasonable time” 
(Article 7 PTCP).    
 
The operation of courts is indeed rather bureaucratic, probably more bureaucratic than 
one can find in any other government agency. Researchers have begun to measure the 
efficiency of procedures by counting the number of procedural steps, the costs of 
accessing the procedure, or the amount of time at least one of the participants is active 
when compared with the duration of the procedure (see the World Bank "Doing 
Business" reports and  Djankov, La Porta et al. 2003; Gramatikov 2008). In these terms, 
even simple court proceedings tend to compare unfavourably with other procedures in 
the bureaucracy. As a consequence of this, the expected costs of litigation can easily be 
higher than the value at stake (Zuckerman, Chiarloni et al. 1999). Waiting times for 
hearings and decisions can be months, or even many years (Messick 1999; Zuckerman 
1999; Zuckerman, Chiarloni et al. 1999).  
 
Another signal of the inefficiency of court procedures is the acceptance that professional 
lawyers are needed to steer clients through the system. In many countries, using lawyers 
is even obligatory for important types of court proceedings, whereas having to hire a 
lawyer obviously adds to the cost of access to a neutral intervention. This is even more 
worrisome, because the parties can become trapped in an arms race, where they try to 
invest more and more in convincing the court of their position (Tullock 1980; Hirshleifer 
2000; Cabrillo and Fitzpatrick 2008). It is obvious that this war of attrition is more likely to 
occur in situations where lawyers are paid by the hour, and thus have an interest in 
keeping the war going.  

3. Protecting Clients and Monitoring Neutrals through Appeals 
Governments also help to monitor and control the courts by setting up a complaint 
mechanism in the form of appeal courts. A party that is not satisfied with the outcome 
can ask the appeal court to reverse it. Because there is always the possibility of an 
appeal, lower courts will know that decisions that are not truly neutral have quite a 
substantial probability of being detected (Shavell 2004). 
 
An obvious problem with an appeal as a solution to the monitoring problem is that it adds 
to the transaction costs. An appeal can be used by a powerful defendant to increase the 
costs of accessing justice for plaintiffs. Compared with complaint mechanisms for other  
services, where a customer can pick up the phone and give his feedback to a call center, 
appeals are extremely formal and costly. Private arbitration procedures usually do not 
include the possibility of appeal, which suggests that parties setting up these procedures 
usually think they are too costly in comparison to the advantages (Landes and Posner 
1979; Barendrecht, Bolt et al. 2006).   
 
As a mechanism for enhancing the quality of outcomes, appeals have rather limited 
effects, because there are normally no sanctions for lower courts that are reversed in an 
appeal, except for those judges that have the ambition to become an appeal judge 
themselves. Moreover, appeal courts tend to monitor only whether the decision of the 
lower court is legally correct and whether the rules of procedure were observed. Many 
attributes of legal decisions and procedures that are important to clients are not covered 
by this type of monitoring. Appeal courts usually do not oversee whether courts 
interacted with the clients in a respectful and effective way (interpersonal justice, 
informational justice). They do not assess whether the decision solves the problem of the 
parties, whether the procedure was cost efficient, or whether the outcome was delivered 
timely (Cabrillo and Fitzpatrick 2008).  

4. Independence of Courts 
Guaranteeing independence is another common element of the regulation of courts.  
Good salaries for judges and appointments for life are often presented as tools to prevent 
corruption. The measures to guarantee independence have been researched 



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extensively. Most effective are a transparent case management system with transparent 
and consistent rules for the assignment of cases; predictable rewards and penalties 
driven by performance-based indicators, with a consequent clarification of the career 
paths for judicial and law enforcement officers; specific organizational roles for judicial, 
prosecutorial and police personnel in order to secure their own internal independence; 
increasing capacity to review the consistency of court rulings; and a political system in 
which alternation in power becomes a likely outcome of periodic elections, so that all 
parties have an interest in an independent judiciary that actively controls government 
(Buscaglia and van Dijk 2003).  
 
Unfortunately, the independence of courts is not only a valuable principle of state 
organization, but also a shield against incentives that would align the interests of courts 
closer to those of their clients (Posner 1993; Cabrillo and Fitzpatrick 2008; Choi, Gulati et 
al. 2009). Opportunities for interactions with the parties that are normally a good way to 
align the interests of principals (clients) and agents (courts) have to be curtailed because 
of the danger of corruption. Judges who would like to learn more about client needs may 
refrain from this because they want to keep a distance.   
 
Independence of courts means that courts are not fully part of the government structure 
with internal and external feedback mechanisms. Thus, it may not be fully appropriate to 
study them as entities exposed to government failure. A more adequate description of 
their economic position may be as service providers who have been granted a monopoly. 
The rules of procedure give them this monopoly position because they are the only 
dispute resolution forum where the defendant has to appear under the threat of a 
sanction in the form of an enforceable default judgment. Courts are in some respects 
even more problematic than other monopolists because they are more isolated from their 
clients. Most courts do not directly work with clients, but only through the lawyers as 
middlemen, who do not have a direct interest in a low cost and speedy resolution to the 
dispute.  
 
Monopolies usually fall under some sort of external supervision or regulation of the price 
and/or quality of the services they supply (Sappington 2005). This aims to guarantee that 
they take the interests of their client seriously enough, and in a balanced manner, when 
compared to their own interests. Supervision of courts is not truly independent, however. 
Appeal courts are part of the same hierarchy. We also saw that their supervision is 
limited to some aspects of the quality of outcomes and procedures, thus leaving the 
costs and many other quality attributes unguarded.  
 
Establishing judicial councils is the most recent attempt to improve the governance of 
courts (Fabri and Langbroek 2000). The major reason for their establishment has been to 
decrease the possibilities of the administration to influence the court system. Judicial 
councils can guarantee that courts are a truly independent government body by removing 
decisions to appoint judges and to allocate budgets from other government agents. 
Judicial councils can also improve the management of courts. Judicial councils, however, 
do not have clear responsibilities to provide low cost access to neutral interventions of 
appropriate quality. The rules of procedure are outside their control. Their organisations 
usually have no mechanisms that ensure that clients’ interests are taken into account. 
Because the councils are led by judges and answerable only to the community of judges, 
they tend to behave more like an interest group of judges than like an independent 
supervisor of courts.         

C. Promising Policies 
Until now, government policies have not been very successful in making high quality and 
low cost court interventions available to citizens. From the perspective of transaction cost 
analysis this is not surprising, because they have not directly tried to diminish the costs of 
transactions between neutral adjudicators and their clients. They focused on appeals as 
a monitoring device, procedural rules as a way to constrain the parties and the judge, 



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and independence as a guarantee for neutrality. It has proven to be difficult to make 
courts more efficient and responsive to client needs in this way. Transaction cost analysis 
suggests to look elsewhere. 

1. Simple, Low-Cost Default Procedures 
The main transaction cost problem that has to be solved is that the parties cannot 
determine between the two of them what is an adequate procedure for their conflict. So 
this has to be determined for them. Governments thus set a default procedure, from 
which the parties can agree to opt out. Opting out, however, is an almost theoretical 
option, specifically because of the strategic and psychological barriers to agreeing on a 
procedure, so setting the default for procedures is a very crucial decision.  
 
Default procedures (usually the ones codified in procedure rules) have traditionally been 
formulated by members of the legal profession. Judges, lawyers, and legal academics 
have an interest in providing accurate decisions. In the long run, they also have an 
interest in setting the defaults in a way that maximizes the total sum that disputants 
invest in legal dispute resolution. It is unlikely that their procedural designs will result in 
default rules that minimize the costs of error and the costs of decision-making (Tullock 
1980; Cabrillo and Fitzpatrick 2008), which would be optimal for citizens.  
 
Governments thus have to solve this conflict of interest between the legal profession and 
the users of the legal system. They can design the procedures themselves or carefully 
supervise the way the legal profession is serving the public. If the target would be default 
procedures that minimize the costs of error and the costs of decision-making, then the 
result would probably be a simple and low cost procedure for all standard disputes, 
including divorce, employee dismissal, consumer problems, neighbour problems, 
property conflicts and business disputes. Total decision costs should probably not be 
more than 10 to 15% of the value at stake. If, during such a procedure, the costs of error 
in the particular case seem to be higher than average, a more sophisticated procedure 
can take off, with better fact-finding and more elaborate interaction between the parties 
and the court. Instead of a high cost default, with little possibilities for the parties to 
restrain costs, the system could provide a low cost default, with possibilities to decide on 
a higher level of investment in accuracy.      
 
Simplifying procedures is indeed often mentioned as an effective way to improve access 
to justice and court performance, both by external observers (López de Silanes 2002; 
Botero, La Porta et al. 2003; Islam 2003; Cabrillo and Fitzpatrick 2008; Commission on 
Legal Empowerment of the Poor 2008) and by experts in the law of procedure (Woolf 
1996). This policy is likely to have other positive effects on transaction costs as well. The 
quality and cost-effectiveness of a simple procedure is more easy to monitor than a 
complex one. If the default is a low cost procedure, the defendant has more reasons to 
negotiate a fair solution. Bargaining failure will be less likely, because delaying tactics 
and threats to inflict high litigation costs on the other party will not work anymore.     
 
But is it possible to design low cost default procedures that have sufficient quality? Most 
disputes between individuals, as well as the conflicts that companies are involved in, are 
rather standard in nature. Disputes about the delivery of goods and services are mainly 
about how both parties contributed to quality expectations versus the actual quality of 
what was delivered. Disputes related to termination of long term relationships (divorce, 
employment, landlord-tenant, business relationships) are primarily a matter of applying 
objective criteria to a limited amount of standard issues, such as adequate notice periods 
and compensation. The scenario’s in which most crimes take place are also rather 
common. It is rare for the facts to be seriously disputed. If they are, the evidence is not 
very difficult to evaluate, and the real issue is an adequate package of retribution, 
treatment, restoration of harm, and possibly reconciliation. It is not being suggested that 
deciding disputes is easily done. In fact, some cases are very complicated. Decision 
making by courts, however, is not in an entirely different league as, for example, 



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decisions about medical interventions, or decisions by senior managers. It requires 
expertise and skilful application of best practices.   
 
A promising approach is to have a court hearing early in the process, where a judge 
discusses settlement opportunities with the parties, often after giving them some 
guidance on the distributive issues, and also rendering summary judgments (López de 
Silanes 2002; Miller 2008). In this way, the courts manage their costs, and the option of a 
neutral intervention may become available at a much lower price. Moreover, a more 
active judge can compensate inequalities in skills and knowledge between the parties, 
and this is probably a much more effective way to create equality of arms than legal aid 
(Resnik 1982; Pearce 2004).  
 
Much depends, however, on the design of this preliminary hearing and the moment the 
hearing takes place. If extensive fact-finding is required or usual before this hearing, the 
costs for the parties will not be substantially reduced. The tendency to require extensive 
exchange of information before the court looks into the case already has a name: 
frontloading of costs (Peysner, Seneviratne et al. 2005). Courts should be induced to 
consider not only their own costs, but also the costs of the parties of initiating a 
procedure up to the hearing. Just a simple form may be sufficient, asking the parties to 
give preliminary answers to some questions about the dispute: how the relationship 
developed, how the problem triggering the dispute came up, the interests that have to be 
satisfied, which attempts to solve the problem have been made, and some possible 
solutions. The key documents and correspondence that have been exchanged could be 
added to this.    
 
Besides extensive fact-finding, the biggest impact on aggregate litigation costs probably 
comes from the need to use a lawyer. Thus, making this the exception, rather than the 
rule, is likely to help. For the most common disputes of individuals it seems to be possible 
to design procedures in such a way that representation is unnecessary. Experience in 
Japan and in many countries with small claims procedures shows that it is possible to 
attain high levels of efficiency and litigant satisfaction (López de Silanes 2002). Recent 
empirical research into the outcomes obtained by represented and unrepresented clients 
suggests that the so-called ‘representation premium’ is diminishing (Adler 2008). 
Research also shows that the more complex a procedure, the more adversarial, and the 
more dominated by professional lawyers, the greater the need for representation 
(Sandefur 2006). Thus, simplifying procedures diminishes the need for a lawyer. 

2. Accountability towards Clients 
Other strategies may enable the clients to monitor court performance. In order to fight 
court delay, publication of performance data for individual judges has proven to be 
effective in the United States (López de Silanes 2002). Individual calendars increase 
accountability of individual judges and have proven to be  effective tools to speed up the 
pace of justice (López de Silanes 2002). Likewise, the other costs suffered by users of 
the court services can be measured in combination with the quality of processes and 
outcomes as experienced by the users (Gramatikov, Barendrecht et al. 2008). 
Transparency of this type of data, and thus increased accountability towards clients 
(Cabrillo and Fitzpatrick 2008), is probably more effective than attempts to measure court 
performance in terms of inputs or observance of internal quality standards (Cabrillo and 
Fitzpatrick 2008; Albers 2009). It is also more effective than mere regulation of attributes 
of the procedure. Statutory time limits for decisions without ways to monitor and enforce 
individual performance of judges do not work (López de Silanes 2002). 
 
Specialization of courts also increases accountability. It makes courts more clearly 
responsible for dealing with a certain class of disputes, and creates interfaces where 
client needs can be made transparent. In addition, it has all the other advantages 
commonly associated with the division of labour (López de Silanes 2002).  
 



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Another approach that seems to be successful is to make court interventions obligatory 
for a certain type of disputes. If courts have to be involved in order to get a divorce, to 
dismiss an employee, or to terminate a lease, this increases the pressure on courts to 
deliver decisions in time against low costs. Obviously, however, this may add to the 
administrative costs for the parties as well, so it is a type of policy that should only be 
considered for disputes that are likely to need neutral interventions anyhow.       
 
The overall approach is to create closer relationships between clients and courts, thus 
enabling them to monitor each other’s effectiveness and increase the incentives to use 
each other’s time efficiently. Part of this strategy can also be to let clients pay fees that 
are proportional to court effort. An example of the latter is to charge court fees based on 
how much of the court’s time is used (López de Silanes 2002; Cabrillo and Fitzpatrick 
2008). Courts in Singapore, for example, ask increasing fees for each day of court 
hearings. Courts can also ask fees for the hearing and, if the case is not settled, 
separately for the written decision.  

3. Giving Plaintiffs Choice 
Promising as these approaches may be, they are part of one particular strategy to solve 
the problem of failure on the market for neutral dispute resolution services. Instead of 
letting the parties decide, government decides for them by which process they will solve 
disputes. Are there other ways in which the market for neutral decisions can be 
facilitated? Having neutral ADR providers available for disputants, and waiting until the 
plaintiff and the defendant are ready to come, is no solution, as we saw. There should be 
some reason for the defendant to show up and participate in the process.  
 
One option is to make the sanction of an enforceable default judgment more broadly 
available. Instead of giving formal courts of law an exclusive jurisdiction, and thus a 
monopoly position, it may be possible to let a number of neutrals compete for plaintiffs by 
making their jurisdiction non-exclusive (Botero, La Porta et al. 2003). In such a setting,  
the plaintiff can chose the neutral with the best price/performance ratio and neutrals will 
start competing for business (depending on the way they are funded).  
 
Giving plaintiffs a choice can happen in many ways. Plaintiffs may have the option to 
address a neutral from an informal dispute system, a neutral complaint commission  
outside the formal court system, an ADR program offered by the defendant, a number of 
different courts within the formal system, courts from different states, or summary 
proceedings instead of full proceedings. This forum-shopping is generally seen as 
beneficial if it is motivated by a desire of the plaintiffs to find a low cost and high quality 
procedure (Ghei and Parisi 2004).  
 
However, the plaintiff will not only look at the quality and the costs of the procedure, but 
also at the expected outcome (Klerman 2007). If the variation in possible outcomes over 
the different forums is large, forum-shopping may be motivated by being able to opt for a 
forum that is likely to yield a more favourable outcome. Thus, neutrals may lose their 
neutrality as they try to attract more business from plaintiffs by rendering pro-plaintiff 
decisions (Landes and Posner 1979). Although there is no agreement yet about the 
desirability of forum-shopping, there is a consensus that it should be restrained to some 
extent by choice of law rules that determine which forum and substantive law regimes 
are accessible by the plaintiff (O'Hara and Ribstein 2000). The debate about forum-
shopping is fiercest in high stakes litigation related to patents, bankruptcy, and class 
actions, however. This is not so surprising, because in these areas plaintiffs often have a 
wide range of choices available due to conflicts extending over many jurisdictions, and 
costs of litigation that are less relevant than the ability to influence the substantive 
outcome.  
 
At the opposite end of the spectrum are cases with low stakes in comparison to the costs 
of litigation, and low expected variability of outcomes. Most disputes of individuals are in 



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this class, particularly if objective criteria for distributive issues have been published, so 
that systematic biases of courts can easily be monitored and corrected. In such an 
environment, plaintiff’s choice and increased competition between neutrals seems largely 
beneficial. Giving poor people access to multiple paths to justice makes them less 
dependent on particular neutrals. Moreover, defendants are quite likely to be repeat 
players and they can set up competing dispute resolution systems by ex ante dispute 
resolution clauses in their standard contracts (Klerman 2007) or by offering plaintiffs a 
low cost and high quality neutral alternative (see Section III).      
 
The information age, with its low cost transparency, creates new opportunities for 
managing the tension between letting people shop for efficient fora and for favourable 
outcomes. Most jurisdictions have developed rules that limit the number of possible fora 
(personal jurisdiction in the US, forum non conveniens in civil law countries). Thus, 
plaintiffs have a choice, but not a choice between an unlimited number of neutrals. 
Possibly, a system where the plaintiff can choose the neutral from a list can co-exist with 
some kind of oversight by an authority that hears appeals. This system works well in 
commercial arbitration. The list can give information about costs, duration, and other 
essential elements of the procedure (Gramatikov, Barendrecht et al. 2008). Some kind of 
certification of neutral adjudicators can be required. Such a system can be combined with 
ratings by customers on the impartiality of the neutral and other quality characteristics.  
 
This gradual opening up of the market for neutral decision making services is already 
happening. It is essentially what takes place if informal dispute resolution systems are 
incorporated in the formal legal systems (Commission on Legal Empowerment of the 
Poor 2008). This can be done in a variety of ways. First, local court-like forums can be 
recognized as a forum next to formal courts, so that the plaintiff has a choice. Secondly, 
some disputes can be left to exclusively to informal courts, and their decisions become 
enforceable in the formal system, either subject to full appeal at the formal courts, or 
under a more limited type of supervision. Our analysis suggests that giving plaintiffs a 
choice is preferable. Incorporation of informal systems as an exclusive forum is probably 
a good temporary solution, as it lowers the costs of access to a neutral decision, but in 
the long run it creates a new monopoly, with little incentives for the providers of the 
neutral service.  
 
Besides opening up the court monopoly, other tracks for innovation can be explored. For 
distributive issues, it may be possible to organize evaluation in such a way that the 
plaintiff and the defendant can obtain several independent neutral views simultaneously. 
This approach is an extension of the idea that a court consisting of multiple judges is less 
prone to judgment error or bias than a single judge. This requires, however, that 
disputants can inform such a forum about their interests, views, emotions and other 
relevant facts at low costs. At the present stage of dispute resolution technology, this is 
still a problem. On-line dispute resolution tools may at one time help to solve this 
problem.     

4. Terminating Unhelpful Approaches 
The literature on court reform and court performance has also identified some policies 
that are unhelpful. Sometimes these approaches are even likely to increase the costs of 
transactions between clients and a neutral who helps them to decide the distributive 
issues. These policies generally follow from the analysis provided in the preceding 
paragraphs, but it is good to list them here again, as they are so frequently proposed and 
applied. 
 
Making legal representation obligatory or broadly subsidizing legal aid in standard 
litigation is an understandable policy. If court procedures are difficult to access for 
disputants, they need help. But in the long run, these policies weaken the incentives on 
courts to serve clients according to their needs. Because lawyers help clients already, 
courts do not need to simplify procedures. Gradually opening up the legal services 



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market, so that those other than lawyers admitted to the bar can help clients with 
presenting their case, drives down costs of access to justice and will make courts more 
responsive to clients’ needs (Islam 2003; Baarsma, Felsö et al. 2008; Commission on 
Legal Empowerment of the Poor 2008). This should be combined with increased 
accountability of courts towards clients. Like any other government service, a court 
procedure should be understandable and accessible for citizens with average 
capabilities. Help should be available, but not be a necessity. 
 
Limiting competition among courts and between courts and other neutral decision 
makers is undesirable. So sorting out jurisdiction issues by giving one court exclusivity is 
not a good idea. Competition increases the possibility that services are tailored to the 
needs of the clients. On the other hand, specialization is helpful as well, so the optimal 
number of competing neutrals is higher than one but not as big as the number of lower 
courts in a medium sized country.  
 
Stressing quality or accuracy of decisions, without constraints on aggregate litigation 
costs for the disputants, is unhelpful (Cabrillo and Fitzpatrick 2008). Incentives on judges 
should not be distorted towards either high quality or high costs.  

VII. Making Arrangements Explicit and Enforcement 

A. Market Analysis 
Dispute resolution does not come to an end once a settlement is reached, or a judge has 
taken a decision. Settlement contracts and judgments have to make clear what the 
parties can expect from each other in the future. Moreover, enforcement has to be 
ensured.  
 
Lawyers may assist the parties in making clear what they will pay, do, or refrain from 
doing in the future. They do this by supplying them with contracts, which often have 
standard clauses that provide solutions for recurring conflicts. Unfortunately, contracting  
information has again a public good character, and is an experience good, so it is difficult 
to make money with supplying these services. Lawyers do this by individualizing the 
information, but their contracting services are again out of reach for many individual 
clients.  
 
Property rights and personal identity can also be proven by individualized documents. 
But it is often more efficient to register them at a central place, so this information 
becomes available to everyone. Setting up a registration system requires the cooperation 
of many people, however, so the transaction costs are high.     
 
Task 5. Stabilize 
Description Transparency and compliance 
Basic technology Supply tools to make arrangements explicit;  

Make costs and benefits of compliance higher than those of non-compliance 
Best practices for dispute 
services/-transactions  

- Standard negotiating, settlement, and decision documents 
(contracts/registrations) for most common disputes and issues; 

- Registrations, contracts, regulation (may be costly) 
Informal compliance mechanisms (reputation, reciprocity, identification, 
authority) 

- Expected sanctions and rewards 
Possible providers of 
services 

- Lawyers, mediators, notaries,  other legal advisers 
- Community pressure 
- State agencies 
- Police 
- Bailiffs 

Sources of Transaction 
costs 

Information about contracting and making relationships transparent is public good 
Cooperation between many people needed to organize sufficient incentives on 
powerful defendants to cooperate 

Market reactions 1. Insufficient supply 
2. Business models for delivering expertise  
3. Lack of enforcement, in particular against powerful defendants 

Table 7 Market Analysis for Services that Assist Disputants with Stabilizing 



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The parties must also ensure that each of them, and in particular the defendant, lives up 
to the agreed outcome. Enforcement of contracts, settlements, and judgments is a matter 
of sufficient internal motivation for the defendant, supplemented by external  incentives 
when needed. Take the example of a consumer who is entitled to a sum in damages 
determined by a neutral adjudicator. The seller of the goods may be motivated to comply 
because he accepts this as a fair decision (Beersma and De Dreu 2003; Tyler 2006; 
Tyler 2006; Hollander-Blumoff and Tyler 2008), because he wants to maintain a good 
reputation with customers, because he sees the neutral as an authority, because other 
conform to the law as well (Cialdini and Goldstein 2004), or because of the threat of 
sanctions from the justice system (Kennett 2000).   
 
Plaintiffs have always been creative in finding ways to induce compliance. Fafchamps 
studied how commercial contracts are enforced in Ghana. He shows that compliance 
with contractual obligations is mostly motivated by the desire to preserve personalized 
relationships based on mutual trust. Harassment is the main form of debt collection. 
Other enforcement mechanisms – court action, reputation effects, use of illegitimate force 
– are less important. Contract renegotiation is common, suggesting that compliance to 
outcomes is often bought by additional concessions (Fafchamps and Lund 2003; 
Fafchamps 2004).  
 
The formation of groups that reserve important relationships to group members also 
helps to enhance enforcement. These groups include trade organizations for commercial 
contracts. Clans, local communities and extended families may take care of compliance 
with land use agreements, employment contracts, and family relationships (Ouchi 1980; 
Greif 2006). Property rights on land are often collectively held so that the group can 
jointly protect the property against threats from outsiders (Deininger 2003; Fitzpatrick 
2005).  
 
However, these ways of organizing compliance have high costs and only work in a 
limited number of situations. Self-enforcing contracts can help if reputation for either one 
of the parties is important enough to perform, or if the value of the transaction is low 
(MacLeod 2007). Strong groups also have their drawbacks. The number of transactions 
with people other than group members will be more limited. People from within the 
community cannot easily sell their property to outsiders or trade with them in other ways. 
Employment relationships or marriages with outsiders are more difficult if compliance is 
organized in this way. Because the group is ‘closed,’ the likelihood of conflict with 
outsiders who want access to its resources is substantial. Inside the group, the members 
organize their own enforcement, and it may be that individuals are severely punished for 
minor offences, or that there is an internal hierarchy in which some people (men, people 
with resources such as political connections) do markedly better than others (women, 
poorer persons) (Goldstein and Udry 2008).    
 
If we look at the most common categories of disputes again, it is clear that these private 
enforcement mechanisms will often not help. Quality of goods or services will mostly be a 
problem if the parties expect little future interaction and if the trade has a high value. 
Conflicts in long term relationships are often related to termination and end in settlements 
where one party has to pay a sum of money as compensation, together with some 
obligations for both parties regulating their future (lower level) interactions. The members 
of the group may not have sufficient reason to help the plaintiff to enforce these 
outcomes against another member of the same community. In case of tort claims, or 
human rights violations, where compensation or some sort of sanction is likely to be part 
of the outcome of the dispute resolution process, next to obligations to refrain from 
similar acts in the future, the group may have insufficient means to influence an outside 
perpetrator.  
 



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From the perspective of the plaintiff, organizing compliance can thus be a difficult task. 
Many different people may have to be involved in order to gain sufficient influence over 
the defendant.  

B. Current Interventions by States   
Making relationships transparent through contracts and property rights, as well as 
enforcement of these rights, is often seen as one of the core tasks a government in a 
free market economy should perform. As we may expect by now, governments are not 
necessarily very effective in overcoming these transaction cost problems. They have 
found it difficult to set up registrations, provide contracting formats, and organize 
enforcement. In many countries, these government services still do not reach a 
substantial proportion of the population. Taking a closer look at the way these policies 
influcence transaction costs may help to understand why.   

1. Registrations of Identity  
One way the government can help to make relationships transparent and reduce the 
costs of enforcement is by the registration of rights. This begins with giving people a 
means to prove their identity so that they can be recognized as owners of property, 
parties to a contract, or beneficiaries of social security (Setel, Macfarlane et al. 2007; 
Szreter 2007; Barendrecht and Van Nispen 2008; Commission on Legal Empowerment 
of the Poor 2008; Sabates-Wheeler, Devereux et al. 2009). Informal ways of ascertaining 
identity have emerged in many communities. Szreter describes how Anglican churches 
set up parish registers in rural 17th century England, and thus satisfied a local need to 
establish age, lines of inheritance, legitimization of bastardy, and eligibility for primitive 
forms of social security. Obtaining this registration was an important reason to be a 
member of the church, so the church was eager to supply this service. Once migration to 
the cities started in the 19th century, the local parish registers could not keep up with the 
demand for registration and the state took over (Szreter 2007).     
 
Building an effective registration system is difficult and costly. A birth registration system 
requires an initial investment through some form of information technology. Then, it is 
necessary that parents have sufficient incentives to go through the registration 
procedure, and bureaucrats have sufficient reasons to help them. Network effects add to 
the transaction costs. If many people refrain from registering because they face high 
costs of queueing or travelling, the system becomes unreliable. Entering the system 
often has high costs because parents have no valid documents themselves, and must 
first start formal court procedures to obtain these. They may also fear becoming subject 
to taxation. Civil servants may have insufficient incentives to help the poorest of the poor 
to register. For them, the transactions that are necessary to make registration happen 
are less likely to occur (Setel, Macfarlane et al. 2007; Barendrecht and Van Nispen 
2008).  

2. Registrations of Property Rights 
Registrations of property rights in land (titling) make clear which persons have which 
rights to use, sell, or appropriate which pieces of land. Informal ways of making 
entitlements to land transparent develop locally, because communities profit from this 
once their land has a certain threshold value (Rakodi and Leduka 2004). At later stages 
of development, this is typically a task that is taken over by governments. 
 
More security and transparency in entitlements to land has been shown to lead to a 
higher investment of urban squatters in their homes (Field 2005), better access to the 
labour market (Field 2007), better health conditions, and other social benefits (Payne, 
Durand-Lasserve et al. 2007). Security of interests in rural land is also linked to higher 
investment and productivity (Goldstein and Udry 2008; Fenske 2009; Galiani and 
Schargrodsky 2009). The role of titling in this, however, is contested (Deininger 2003; 
Cousins, Cousins et al. 2005; Payne, Durand-Lasserve et al. 2007; Otto 2009). The link 



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between having a formal title and increased access to credit (with land as a collateral) 
seems to be weak (Payne, Durand-Lasserve et al. 2007).  
 
Property rights protection through registration (titling) is difficult to achieve. Boundaries 
have to be surveyed, documents must be drafted, and registration has to be undertaken 
by a trustworthy neutral. If conflicting claims of property arise, they have to be decided on 
by a neutral or another third party. Tenure rights are often ambiguous, or in the hands of 
poorly delineated families or communities, so there is a lot of sorting out to be done 
before a piece of land can be registered in one person’s name. This registration almost 
certainly has some distributive effects (Knight 1992; Payne, Durand-Lasserve et al. 
2007). Thus, it becomes attractive to use the system to one’s advantage, which the 
affluent may do better than the poor, and men better than women. Besides being tools of 
the powerful, registrations can quickly become outdated, as use patterns change and not 
every person involved has incentives to register his rights on land. Finally, having a 
formal title means little if there is no protection against eviction by the more powerful.  
 
In summary, titling systems require many transactions between many people that must 
all work well. The network effects are such that using the system becomes more valuable 
if more people participate. This is unlikely to occur in rural settings (Cousins, Cousins et 
al. 2005; Otto 2009) and not always likely in urban settings (Lanjouw and Levy 2002).  

3. Default Rules for Contractual Relationships 
Governments also play an important role in making explicit what the parties in a 
relationship can expect from each other in the future. The market is very active here, as 
lawyers supply boiler plate clauses that people can use in their contracts. But they do so 
against the background of default rules for contracts that are government made. If the 
parties have not regulated their future relationship in an explicit contract, it will be 
assumed that they have made the same arrangement as others in a similar situation (a 
majoritarian default rule, see Ayres and Gertner 1989; Korobkin 1998). Civil codes and 
case law determine these default rules. 
 
Because of the way the information market operates, it is questionable whether sufficient 
contracting expertise reaches the citizens who need it. Lawyers and other legal 
information providers are probably hesitant to share this information widely. Governments 
may also have insufficient incentives to produce suitable default arrangements for – say 
– the consequences of divorce, settlement of property disputes in a village, or an 
employment relationship that is likely to be adjusted many times during a 10 year period. 
In this respect, default rules are similar to objective criteria. Legislators and courts will not 
profit much from them, and have to spend a lot of effort on formulating them (see Section 
VB).  
 
Another problem is that drafting default rules is usually left to lawyers. They may be 
rather task-oriented, and use a rights and obligations approach to the relationship that 
does not take into account the emotional and relational issues that also determine 
whether a relationship will be successful. .  
 
A final transaction cost problem mentioned in the contracting literature is that default 
rules are sticky. Both parties have to agree to deviate from them, and this raises the 
costs of contracting for the parties to relationships for which the default rule is not 
appropriate (Korobkin 1998; Ben-Shahar and Pottow 2006). 

4. Enforcement by State 
Because there are situations in which market mechanisms clearly fail to produce 
enforcement, a demand for public enforcement arose (Polinsky and Shavell 2000). State 
enforcement typically builds on the authority of courts and uses the threat of sanctions.  
There is ample evidence that this type of enforcement can work and is necessary, 



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particularly for arms length commercial transactions such as providing credit (Jappelli, 
Pagano et al. 2005).  
 
Countries differ in how they organize public enforcement of dispute outcomes: some 
leave it to the courts, some organize a regulated private profession to deal with it, a few 
put the executive in charge, and others have a system of mixed responsibility 
(Henderson, Shah et al. 2004). Public enforcement of court decisions is problematic in 
most countries, however (Kennett 2000). It consists of a process of finding assets of the 
debtor, bringing them under control of the creditor, letting them be sold publicly, and 
bringing the proceeds in the hands of the creditor. Debtors who frustrate this process 
may have to be threatened with sanctions and put in jail (Henderson, Shah et al. 2004). 
This requires an intricate cooperation between plaintiffs seeking enforcement, bailiffs, 
police, banks, and bankruptcy lawyers to sell the property of a debtor and allocate the 
proceeds.  
   
Besides these network problems, government failures that are likely to be present are 
absence of information (about the assets of the debtor), and insufficient incentives to 
perform the tedious and sometimes dangerous task of making people pay what is due to 
others. Henderson et al. report five categories of problems as the most important 
obstacles to enforcement: the efficiency and integrity of the judicial enforcement and 
justice system, delays, costs, inadequate access to information, and lack of 
accountability of  the actors in the enforcement process (Henderson, Shah et al. 2004). 

C. Promising Policies 
What can governments or NGOs do to lower the transaction costs of making 
expectations in relationships explicit and ensure that these solutions to a dispute are 
enforced? This is a far-reaching question, and the answers are strongly related to the 
core functions of contract law, property law, and registration of rights. These functions 
are extensively debated in economics, law, development studies, and other disciplines 
that theorize about the ordering of relationships. We cannot do more than indicate the 
type of reasoning that is suggested by the transaction costs approach and link it to some 
of the research that has recently become available.   

1. Formalization As Is and Step by Step 
Identity registrations and registrations of property rights are valuable tools for making 
relationships explicit and transparent so that people can rely on each other. In the 
process of registration, however, rights are allocated. People who are registered as 
citizens get access to pensions, schools, and other government services. Registering 
property means a piece of land will now be owned by a man, a community, and (less 
frequently) a woman or a farmer. Because of these distributive effects, the dynamics of 
disputes may arise (Payne, Durand-Lasserve et al. 2007). The registration system needs 
to have a mechanism to resolve these disputes fairly, making it more costly to operate, 
and less accessible.    
 
The emerging consensus is to lower these transaction costs by gradual formalization. 
Formalization processes should increase security of tenure instead of allocating property 
rights. Giving people an address on a street, and providing infrastructure (roads, 
sewerage, water) creates increased trust that their position will be recognized. It already 
helps if personal use of land is registered, and this can later be upgraded to long-term 
leases or freehold (Durand-Lasserve and Selod 2007). If different people from a family or 
a group use the land or have other claims on it, registering these claims at least protects 
the groups against outsiders. Registration of transactions and outcomes of disputes 
about land is generally less costly than registering rights because it focuses on situations 
where the clients felt a direct need for transparency, thus it is more demand-driven.  
 
These non-formal ways of increasing tenure security focus on registering the situation as 
it is and as the need arises. Registering is seen more as making existing relationships 



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transparent than making them legal. Transparency can be achieved by noting which use 
has been made of land by which persons, for how long, and by which agreement with 
whom. Such a more open system does not try to resolve all issues that may arise, but 
may do enough to make the relationships workable for the foreseeable future (Payne, 
Durand-Lasserve et al. 2007). If new disputes arise, they can be resolved more easily on 
the basis of this information. The outcomes of the disputes can be made transparent in 
the system, and thus the registration will gradually reflect more of the legal status of the 
land. 
 
The gradual approach fits in the paradigm of minimizing error costs and decisions costs. 
Economies of scale can be reached in large scale titling programs, and it is important to 
look for them, but taking just one big leap to registration of individual property rights for 
every piece of land has high decision costs. It can also lead to unfair outcomes and, thus, 
high costs of error.  
 
A similar step by step approach may work for identity documents. Uncertainties in birth 
dates, misspelling of names, or even uncertainties about parentage can be seen as an 
obstacle to registration. If these issues can be resolved quickly, the increased certainty is 
valuable. But in many countries, these issues require more extensive and costly 
procedures on higher levels of administration, or even higher courts (Barendrecht and 
Van Nispen 2008). Besides making procedures less formal, and thus reducing the 
decision costs (see Section VI.C), one option is simply to live with the uncertainties for 
the time being. A person is better off with identity documents showing that he was born 
either on 24 March 1980 or 24 March 1982 compared to not being able to prove his 
identity at all. Sorting out his birth date can probably wait until he is close to the age 
where he is entitled to a pension.        
 
Access to registration is in many ways similar to access to the neutrals who have to settle 
a dispute. Clients can become dependent on the registrar in similar ways. A viable 
strategy is to make the civil servants in charge of registration more responsive to client 
needs. It helps if clients have multiple points of access, so that they can avoid civil 
servants who have backlogs or ask for bribes. This is available in the e-seva projects in 
Andhra Pradesh, India, where citizens can use kiosks in different sites to interact with the 
government about permits and registrations (Commission on Legal Empowerment of the 
Poor 2008).  

2. Menus for Making Relationships Explicit 
The market for contracts, settlement agreements, and written judgments is again a 
market for expertise. Unfortunately, the recurring public good problem and experience 
good problem make it difficult to get the right expertise to clients. Standard documents 
that make the relationship explicit are difficult to obtain. These documents would lay 
down the expectations that parties could realistically have about their future relationship 
in case of a divorce, a neighbour dispute, or a termination of employment. Some kind of 
ex ante formalization of long term relationships can also be beneficial, as in a marriage 
contract, a will, or a contract about cooperation between business partners.  
 
Here, there seems to be ample room for innovation. Instead of one set of default rules 
provided by the state, the parties can be offered a menu of choices for suitable 
contractual arrangements (Ayres 2006). Production and publication of fair and efficient 
arrangements by private parties can be stimulated (Hadfield and Talley 2006). 
Governments, or private parties, could also begin to certify certain standard 
arrangements as fair and valid. Instead of regulating agreements by limiting freedom of 
choice ex post through courts that invalidate a contract, governments could stimulate 
productive and fair relationships ex ante.   
 
The way relationships are regulated can be enriched with knowledge of the social 
sciences. The legal way of making expectations explicit is to write down rights and 



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obligations. Relationships, however, are more than tasks and duties. It also helps if 
people know about each others’ interests, wishes and fears. Besides commercial 
interests, relational and process interests can have a place in a contract. Besides 
sanctions and bonuses, it can be useful to talk about situations in which both parties 
consider the relationship to be a success or a failure. Besides an allocation of risks, it is 
useful that the parties think about the main threats to the relationship, and determine 
ways to share gains and losses if these materialize (see Section V about objective 
criteria). In contracting practice, there is some activity aimed at reinventing relational 
contracting in this direction. In complex infrastructure projects, contract charters can form 
the basis for the cooperation between the parties (Walker and Hampson 2003; Van den 
Berg and Kamminga 2006). In these charters, the parties lay down how they see the 
relationship and how they will communicate.  
 
Another way in which governments can facilitate the market for stabilizing relationships is 
by ensuring that contracts can easily be used across jurisdictions so that economies of 
scale can reached. The basic tensions and interests caused by an employment 
relationship are similar in Korea, the Netherlands, and Zimbabwe. Cultural differences 
will certainly exist, and these can be reflected in different templates from which the 
parties can choose. Contract law, however, departs from freedom of contract 
everywhere, and governments can take care that contracting parties are not surprised by  
unexpected forms of illegality. The least governments could do is to list the situations in 
which their courts will not enforce a clause in the types of contract that are most essential 
for the economy. This sort of regulation would save parties involved in such a contract 
from having to ask for specialized legal advice.    

3. Facilitating Compliance Mechanisms 
The transaction costs of organizing compliance can be reduced by making it easier to 
exchange information about compliance. People tend to improve enforcement by 
investing in connectedness: if they share more information with more people about 
performance of a debtor, they have more impact on his reputation (Dhillon, Rigolini et al. 
2006).  
 
This connectedness can probably be facilitated by offering internet-platforms on which 
information about compliance can be shared. EBay enables buyers to exchange 
information about sellers. Hotels and restaurants are now routinely evaluated by 
customers on the internet. Internet networking sites such as Facebook and LinkedIn 
make it possible to share information about people in new ways as well. Likewise, the 
status of compliance with settlements or judgments can be reported. This might start with 
a neutral mention of an issue as unresolved. In case of continued non-performance, the 
information could go more towards the direction of shaming. It would certainly be 
necessary to protect debtors against people abusing such tools, but this protection is 
also needed for the existing enforcement mechanisms. 
 
Other strategies to increase access to compliance can be developed. The literature on 
enforcement suggests simplifying procedures for enforcement and privatizing 
enforcement tasks whilst putting them under neutral supervision, and organizing access 
to information about the whereabouts of assets of the debtor (Henderson, Shah et al. 
2004).  

4. What Works 
When facilitating the market for obtaining enforcement, governments and NGOs should 
keep in mind that the basic technology of providing compliance is not only a matter of 
incentives. The joint effects of intrinsic motivation and of external triggers living up to the 
decision are what matters. There are many reasons why people might comply with what 
they have agreed on as a dispute solution or with a judgment by a neutral. They may 
consider this to be their duty, feel it is fair to do so, or be afraid of sanctions. The 
psychological literature on compliance suggests several mechanisms to induce 



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compliance: reciprocation, the human tendency to be consistent in their acts, imitation of 
what others do, positive reinforcement, identification, and authority (Cialdini and 
Goldstein 2004). A culture where disputes are considered to be normal, where solutions 
are found in cooperation between the parties and a neutral, and where compliance is 
expected can help at least as much as the threat of formal sanctions.   
 
These approaches have clear links to the attempts in many countries to decrease 
recidivism. In the ‘What Works’ literature, the internal motivation of perpetrators to 
participate in programs is seen as a crucial factor (MacKenzie 2006; Wormith, Althouse 
et al. 2007). In many other ways, these programs are combining classical enforcement 
(monitoring, increasing the probability of sanctions) with positive incentives and factors 
that are known to enhance internal motivation (structure, respectful treatment, conditional 
help with obtaining housing and work). Expertise regarding law enforcement in order to 
reduce crime is far more developed compared to the know-how on enforcement of 
property rights and contracts. The similarity between both types of enforcement is their 
attempt to induce people to have more respect for the legitimate interests of others.    

VIII. Complementarities 

A. Market Analysis 
Talking about a system suggests something more than the sum of its parts. That is 
certainly true for dispute systems (Bendersky 2003). Each of the five justice services we 
discussed is more valuable if the other services are supplied as well (Barendrecht 2009). 
Stimulating the defendant to enter a cooperative dispute resolution process (Task 1) is a 
more valuable service if there is adequate help with negotiation (2), information about 
norms for distributing value (3), and the option of a low cost neutral decision (4), which 
can be enforced (5). A plaintiff gets more value from negotiation assistance (Task 2), if 
he has the option of asking for a low cost neutral decision (4) that is enforceable (5). 
Norms for distributive issues (Task 3) make adjudication (4) easier and the ideas about 
fairness incorporated in these norms make it more likely the outcome can be enforced 
(5). A good basic structure for making an agreement explicit such as a standard contract 
(Task 5), can also be used to identify issues for negotiation (2), and serve as a template 
for a judgment (4).  
 
These complementarities, or connectedness between services, are a cause of 
transaction costs. Before suppliers can offer effective services, they have to ensure that 
the other services are available as well. This network has to be established and adjusted 
if an innovation takes place in one of the tasks. If mediation services provide better 
negotiation assistance, this creates new opportunities for adjudication as well.  
 
Providers of legal services understand this and try to offer integrated services. Lawyers 
help plaintiffs to contact defendants, coach them in negotiations, inform them about 
distributive issues, and litigate for them. Judges decide cases, but nowadays also help 
clients to settle distributive issues, and sometimes even to problemsolve in integrative 
negotiations.  
 
This coordination may be difficult, however. Judges do not interact frequently with 
lawyers, because they want to keep a distance out of worries to lose their independence. 
At the interfaces between negotiation, bargaining, and adjudication there is also 
competition between lawyers and judges. Judges tend to promote a more active and 
problemsolving attitude of courts, whereas lawyers like courts to stay passive and only 
become active if one of the lawyers asks them to intervene. 



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B. Current Interventions by States 

1. Legal System Reform: Law and Development 
Governments have invested in making dispute services work in concert. Many programs 
aimed at enhancing the rule of law in developing countries have organized efforts at 
various levels of the system. Codification projects providing information about norms 
were combined with investments in improving the court system, and sometimes also with 
setting up an independent legal profession that can help to negotiate disputes (Jensen 
2002; Carothers 2006; Dam 2006).  
 
The gist of the papers assessing these policies is a negative evaluation of their effects 
(Davis and Trebilcock 2008; Tamanaha 2009). This lack of success should hardly be a 
surprise, if we use the perspective of the transaction costs on the markets for justice. 
These policies tend to combine approaches that were not very effective in making 
dispute transactions happen in the first place. Moreover, they did not address some 
important elements of the dispute supply chain: having people meet, helping them to 
negotiate, organizing low cost access to neutrals, and guaranteeing enforcement. 

2.  Reforms in Developed Economies 
In developed economies, policies that aim to reinforce all five necessary and sufficient 
elements of a dispute system are unheard of. Civil procedure reform (Zuckerman, 
Chiarloni et al. 1999) focuses on the rules of procedure; court reform on the organization 
of courts; mediation programs on letting judges send people to mediation (Wissler 2004); 
codification efforts on writing down rights and obligations; tort reform on changing rules of 
tort law (Currie and MacLeod 2008); consumer protection law on improving the 
substantive rights of consumers; reforms of the legal profession on increasing 
competition among legal service providers.  
 
All tend to be separate issues. They are dealt with at different times by different 
commissions and with different constituencies. Improvements in one section of the justice 
system is unlikely to have effect, though, if other parts of the system are not taken into 
account as well. Referring disputants to mediation is not very effective if it happens just 
before the court decides, and most of the costs of litigation haven been made. Improving 
the organization of courts is unlikely to be beneficial for clients, unless the procedures by 
which courts adjudicate are also reconsidered. Changing substantive rules of tort law 
without looking at the incentives on lawyers and courts makes little sense.    

C. Promising Policies 
While the connectedness between various types of dispute resolution services is a 
problem, it is also an opportunity. If the weakest links in the supply chain can be found 
and addressed, the other services will become more accessible and profitable to supply 
as well.  

1. Supply Chain Approach to Access 
Strong complementarities suggest an integrated, supply chain approach to justice 
services. Governments could focus on the services with the biggest complementarities, 
hoping that improvements in one part of the dispute resolution market will spill over to 
adjacent markets. 
 
Low cost access to neutrals, for instance, is an efficient way to improve the negotiation 
climate in the shadow of the law and to drive down the aggregate costs of dispute 
resolution. This is especially true if judges or other neutrals approach the problem in the 
same way as the clients do in their negotiations. If legal rules and procedures used by 
the court focus on interests and link to the formats of (integrative and distributive) 
negotiations, the supply chain will run more smoothly. Low costs of access are more 
affordable and, thus, can be paid by the parties who use the services themselves in the 



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form of court fees, which is also a way to make neutrals answerable to their clients more 
directly. Such a policy may be hard to implement, though, because it requires rethinking 
the relationship between courts, their clients, and their sponsors within government.    
 
Another policy with positive spillovers is the publishing of the going rates of justice for the 
most important disputes through guidelines or otherwise. As we saw, this not only makes 
bargaining failure less likely, it also enables clients to monitor the lawyers that help them 
and the neutrals who decide their distributive issues. Because expectations of all players 
involved will be more aligned if objective criteria are widely shared, the overall costs of 
disputing will drop. Thus, justice transactions become more attractive to conclude, and 
more accessible for clients. This policy is a modern way to fulfil an old ideal: codification. 
 
A final example of choosing a policy with strong complementarities is to invest in default 
formats for common relationships. Marriage contracts, employment agreements, and 
business partnerships can be made explicit in standard ways, with menus for different 
arrangements that deal with the typical sources of tension and conflict. These formats 
can bring the benefits of explicit contracting within reach of every citizen. Such standard 
documents can also take over the functions of contractual default rules, serve as a 
template for dispute resolution, and facilitate the writing of judgments by courts.      

2. Monitoring, Accountability and System Ownership 
Because of the strong complementarities between the different justice services, it also 
makes sense to monitor the performance of the system. Current monitoring systems and 
measurement efforts tend to focus on the performance of courts (Cabrillo and Fitzpatrick 
2008; Albers 2009). System wide performance measurement would also gauge the 
abilities of the system to facilitate settlement negotiations and to organize enforceable 
outcomes. Besides the performance of courts as decision makers, the availability of clear 
substantive rules (objective criteria) and the enforceability of outcomes would be 
assessed. 
 
Such a method could measure the time and cost for the average user to go through the 
process, from the first attempt to obtain outside help to get in contact with the other party, 
up to the final outcome (Gramatikov, Barendrecht et al. 2008). The quality of the 
procedure and the quality of the outcome can be measured against several criteria 
(Gramatikov, Barendrecht et al. 2008), preferably from the perspective of the user 
(Masser 2009). A monitoring system could also try to visualize the number and the 
complexity of the steps an individual has to take in order to obtain an outcome, as 
demonstrated by the work of De Soto and several others (De Soto 2000; Djankov, La 
Porta et al. 2003; Masser 2009 and the yearly Doing Business reviews by the World 
Bank).   
 
Supply chain monitoring makes transparent what can be expected from suppliers in the 
system. If employment disputes are costly to deal with and lead to low quality outcomes, 
governments can revise their policies in this area. Courts, legal services providers, and 
possible new entrants in the relevant justice market will adjust their services in response 
to this information as well. Clients can make more informed decisions about using the 
system, and press for change if necessary.   

3. Focus on Problem Categories 
Making a justice system work across the board is a daunting task for civil servants at 
ministries of justice and for managers within the judiciary. They often feel responsible for 
dealing with every thinkable dispute and crime. If they see their task in this way, they are 
likely to issue comprehensive codes and procedural rules that are general in character. 
Courts tend not to be very specialized, and deal with a broad variety of disputes. 
Performance of such a broad system is difficult to measure, because the same 
procedure is applied to a great variety of disputes with different issues, different needs 
for fact-finding and different client budgets.    



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Focusing on problem categories, as well as improving the supply chain for these 
categories, seems to be a more successful approach. Law firms tend to specialize, and 
court specialization is believed to lead to higher efficiency (Cabrillo and Fitzpatrick 2008). 
The complementarities in a dispute system point in the same direction. It makes more 
sense to systematically improve access to justice for situations such as divorce, 
employment disputes, and business conflicts, as opposed to trying to reform courts, to 
invest years in overall codification, or to subsidize legal aid in general.     

IX. Conclusions 
Our analysis took the perspective of justice as a set of goods that are delivered by 
people to other people. This market for justice does not work perfectly, and that is where 
governments intervene with justice policies. The analysis from the perspective of 
transaction costs suggests that many justice policies are less than a perfect fit to the 
problems they need to address. Table 8 summarizes the results.   
  
If two opponents find it difficult to choose a procedure, it does not help to offer them 
mediation, send them each to a lawyer, or make sophisticated but expensive litigation 
available. Stimulating cooperative dispute resolution by social norms, facilitating the 
market for neutral dispute services, and requiring repeat-players to offer an accessible 
dispute system is likely to be more effective. Access to simple, low-cost default 
procedures is needed to induce fair settlements. Giving plaintiffs a choice between 
different procedures and neutrals – without consent of the defendant being necessary – 
can help to achieve this. Accountability of courts (and other neutrals) to clients is also 
important.  
 
Existing checks and balances on courts, such as extensive rules of procedure and 
appeals, have important disadvantages. Focusing on rules of procedure easily lead to 
bureaucracy and makes procedures less transparent for disputants. Appeals tend to 
improve the formal, legal quality of outcomes. But they do not stimulate judges to 
diminish the costs of litigation, to provide procedural justice, and create outcomes for 
disputes that fit the needs of the parties. Moreover, these mechanisms do not influence 
the quality of settlements, which are the primary way to resolve disputes.    
 
Where the public good character of information is the problem, governments can create 
additional incentives to supply the needed information. Without such incentives, it is 
highly unlikely that negotiation expertise, codes, precedents, or law review articles will 
ever meet the information needs of those clients that cannot afford to hire a lawyer.   
 
Governments and NGOs can make information more accessible by providing public legal 
education programs or needs-based codification, by stimulating production of guidelines 
for settling distributive issues, or by developing open source models for sharing 
information about objective criteria. Structuring settlement negotiations, menus for 
contractual relationships, and certification of fair standard contracts are also helpful ways 
to enhance access to justice. 
 
The complementarities between justice services suggest an integrated approach, aimed 
at the entire supply chain for each type of disputes. Monitoring, accountability and 
system ownership are highly important here. Mediation programs, codification projects, 
reform of civil procedure, or projects aimed at improving access to courts are less likely 
to be effective than measures that target all elements of dispute systems for categories 
such as property disputes, employment issues, or business conflicts. Making powerful 
defendants participate and creating transparency of property rights, and their 
enforcement, are best seen as gradual processes, in which many people contribute to a 
portfolio of incentives on the defendant to cooperate.       
 



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Tasks Basic technology Sources of Transaction 

Costs 
Existing Policies Additional sources of transaction costs 

 
Possible innovative policies/services that 
lower transaction costs 

1. Meet Make costs and benefits 
of participation for 
defendant higher than 
costs and benefits of 
fighting, or avoiding 

Difficulties of selling 
cooperative dispute 
services to opponents: 
- Psychological 

barriers 
- Strategic barriers 
Cooperation between 
many to make powerful 
defendants cooperate 

1. Prohibition of 
violence and 
enforcement of this 
prohibition 

2. Judgment by 
default 

3. Stimulating 
mediation  

1. Costs of monitoring and enforcement 
prohibition violence 

2. Costs of organizing credible threat of 
default judgment 

 

1. Stimulating cooperative dispute 
resolution by social and legal norms  

2. Opening markets for neutral dispute 
resolution services  

3. Regulating ex ante dispute resolution 
agreements 

4. Requiring repeat-players to offer an 
accessible dispute system 

5. Co-opting powerful defendants gradually 
2.Talk Support integrative 

negotiation  (interest 
based) 

Information about 
negotiation and conflict 
management is public 
good and experience 
good 

1. Framing disputes in 
terms of rights and 
obligations  

2. Legal aid 
3. Mediation aid 

1. Polarization in relationship governance 
2. Increased need for legal advice  
3. Search, bargaining, coordination and 

monitoring costs client-lawyer 
relationship  

4. Increased costs of hiring neutral 
5. Unilateral legal services create extra 

demand at other side (externalities)  

1. Education in negotiation and conflict 
management 

2. Economies of scale in communication 
and negotiation advice 

3. Structuring settlement negotiations 

3. Share Supply information about 
fair shares (sharing 
rules, objective criteria) 

Information about fair 
solutions (objective 
criteria, going rates of 
justice) is public good 
and experience good 

1. Codification 
2. Precedents  
3. Legal academics 

 

1. Governments lack information about 
client needs and going rates of justice 

2. Insufficient incentives to produce and 
publish useful legal information 

3. Limitations imposed by political process 

1. Improve incentives to make guidelines 
2. Privatize production of objective criteria 
3. Non-binding rules and precedents 
4. Needs based codification (instead of 

comprehensive codification) 
5. Sharing rules (open source)  

4. Decide Make option of a neutral 
decision available (at low 
cost) 

Difficulties of concluding 
ex post dispute 
resolution agreements 
Insufficient incentives on 
neutral to provide fair/low 
cost processes 

1. Setting up courts 
2. Extensive rules of  

procedure 
3. Protecting clients 

through appeals 
4. Independent courts   

1. Bureaucratic procedures  
2. Appeals increase costs of access 
3. Appeals distort incentives to improve 

quality and diminish costs of procedure 
4. Independence is shield against 

incentives  

1. Simple, low cost default procedures  
2. Accountability towards clients 
3. Giving plaintiffs choice (competition 

between neutrals) 
4. Terminating unhelpful policies (obligatory 

legal representation, etc.)  
5. Stabilize Supply tools to make 

arrangements explicit;  
Make costs and benefits 
of compliance higher 
than those of non-
compliance 

Information about 
contracting and making 
relationships transparent 
is public good 
Enforcement requires 
transactions with many 
participants 

1. Registrations of 
identity 

2. Registrations of 
property rights 

3. Default rules 
contracts 

4. State enforcement   

1. Distributive effects of allocating rights to 
individuals 

2. Information is public good 
3. Insufficient incentives from government 
4. Costs of imposing sanctions 
5. Coordination and monitoring costs 

1. Gradual formalization as is, with access 
to dispute resolution 

2. Menus for making expectations in 
relationships explicit  

3. Certification of fair standard contracts 
4. Facilitating reputation mechanisms that 

enhance compliance 
Supply 
Chain 
Approach 

Strengthen links between 
tasks  

Complementarities 
(connectedness) 

1. Legal system 
reform 
 

1. Insufficient incentives from government 1. Supply chain approach to access 
2. Integrated dispute resolution services 
3. System monitoring and ownership 
4. Focus on problem categories 

Table 8 : Sources of Transaction Costs on Markets for Justice and Policies that may Reduce them. 



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In some ways, governments may do too much. A court decision on all issues is usually available, 
although it may be sufficient that courts facilitate settlement and decide on the remaining distributive 
issues. Governments also tend to have a monopolistic attitude towards production of law, supply of 
neutrals, and enforcement of law. This may crowd out market activities in these areas. Governments 
tend to regulate legal services in ways that are not clearly linked to the goal of resolving disputes in a 
fair and efficient manner, and their regulation efforts seem poorly related to the causes of market 
failure and government failure. 
 
Analysis of the market for justice services also sheds new light on the viability of business models for 
providers of legal services. The success of the one-lawyer-one-client model is probably not so much 
a conspiracy of the legal profession (Hadfield 2000), but can instead be explained by the tendency of 
disputants to look for a trusted adviser in combination with the public good and experience good 
character of information. This model is reinforced by the prevailing framework of rights and 
obligations as tools to solve disputes. The one-lawyer-one-client model is not viable, however, for 
serving justice needs of the poor. This adversarial model is also less attractive in the light of modern 
conflict resolution and negotiation technology. Mediation fits these developments, but it is not viable 
as a business model because of the difficulties disputants face when they have to agree on a dispute 
process ex-post.      
 
Finally, the transaction costs approach of this paper offers a new explanation why attempts to 
implement the rule of law top down have largely failed. Writing legislation, setting up courts, 
organizing the procecution, and regulating the legal profession is unlikely to create access to justice. 
Such justice policies have no answer to the basic transaction costs problems that plague the market 
for justice. Affordable and sustainable justice services will emerge bottom up, because people have 
justice needs. Governments should facilitate this, by lowering the costs of agreeing to a dispute 
procedure, by stimulating the dissemination of information that fits the needs of clients, and by 
lowering the costs of organizing enforcement.   
 
The analysis thus suggests that smarter justice policies are possible. The basic technologies for 
supplying justice are available. If the transaction costs can be lowered, these technologies can lead 
to innovation on the market for justice services (Islam 2003; Hadfield 2008). Legal entrepreneurs, 
courts, and NGO’s may step in to develop low cost approaches that fit the basic technologies and the 
best new practices. Examples are development of neutral “meet and talk services”, internet portals 
for objective criteria/going rates of justice, low cost/high quality default procedures, procedural rules 
that provide choice of neutrals for plaintiffs, formats for making expectations explicit in common 
relationships, and reputation mechanisms for enforcement. 
 
Governments should stimulate these innovation processes. They, and the NGO’s working in the 
justice sector, can develop smart institutions that facilitate justice markets in a way that minimizes 
transaction costs. The state can be guardian of the rule of law by letting justice grow, on the micro-
level, from the relationships between clients and justice providers.     



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