The Yale Law Journal

January 2001

Signaling Discount Rates: Law, Norms, and Economic Methodology

Richard H. McAdams
110 Yale L.J. 625 (2001)

For decades, sociologists and law-and-society scholars have studied law in a broader social context that includes norms. More recently, the subject of social norms has come to the sustained attention of rational choice scholars, including economists, philosophers, political scientists, and legal theorists. Where the former group of theorists emphasizes the way that norms and other social forces constrain individual behavior, the latter theorists seek to explain social norms as the result of the choices individuals make while (more or less) rationally pursuing their own interests. The seminal work in the law-and-economics camp is unquestionably Robert Ellickson's Order Without Law. After its publication, the analysis of norms exploded. The number of articles using a rational choice framework to discuss the interaction of law and norms is now too large to list even in a law review footnote. Eric Posner's new Law and Social Norms, however, represents the first book-length treatment of this subject by a law professor since Ellickson.

I should disclose at the outset that I am one of the many participants in this new rational choice take on the old subject of social norms, which obviously colors my perspective on Posner's book. Several critics of law and economics have taken to task this scholarly subfield; they have not liked the new trend to incorporate norms any more than they liked the "old" law and economics, perhaps even less because it purports to explain what prior scholarship merely ignored. Posner's work will undoubtedly attract this kind of criticism, but not from me. I accept the notion that we can gain some purchase on the difficult subject of norms by looking for the individual interests in creating, following, and enforcing norms. My scholarly perspective is focused more on how, rather than whether, to use rational choice theory to explain norms.

Posner's explanation for the behavior we would label adherence to norms is audacious and original. For the most part, he locates the source of norms in individuals' need to convince others that they will be good cooperative partners. Individuals need to "signal" that they value the future sufficiently--have a low enough "discount rate"--to forego the immediate benefits of defecting or cheating for the deferred benefits of a sustained cooperative relationship. The departure from earlier work within law and economics is to set aside internalized values and other normative motivations, rather than to wrestle them somehow into the framework. Posner then uses his theory to analyze an amazing number of topics: manners, fashion, gift-giving, marriage, conspicuous consumption, voting, race discrimination, and nationalism--from why people obey law to why they bother to make contracts legally enforceable, from the sources of group loyalty to the requirements for individual autonomy. The subject of norms is a big one, and this book attempts to cover a lot of it.

For those seeking an early bottom line, it is this: Law and Social Norms succeeds well in individual contributions to the many topics it covers, but less well in the construction of a broad theory of norms. Those interested in these topics will benefit from the precise way that Posner states the relevant theoretical issues and the creative approach he takes to resolving them, even if one does not always agree with the resolution. But the value often comes directly from Posner's thinking about the specific issue rather than from applying his conceptual apparatus--the discount-rate signaling theory of social norms. In my view, this model exaggerates the importance of the motivation and mechanisms it employs and understates the importance of the normative origins of norms.

My Review proceeds in four parts. Part I describes Posner's discount-rate signaling model of norms, as well as a supplemental "commitment" model he uses. Part II raises a concern about the falsifiability of the general model and then describes and critiques a few of his many substantive applications. The falsifiability problem arises because the abstract model puts so much weight on an unexplained and unconstrained process by which "norm entrepreneurs" create new norms. The problem infects some but not all of Posner's analysis of particular concrete norms. To illustrate, I explain what is powerful about his explanation of gift-giving and family norms, but also what is unpersuasive in his discussion of conspicuous consumption and norms of race discrimination. Part III then critiques Posner's theory more broadly. I suggest a more complex way of understanding discount rates and raise some doubts about the core inference from a person's discount rate to his or her suitability for cooperation. I then describe some improbable implications of the signaling model of norms, such as that there is less norm compliance among the aged and in groups with smaller and more stable membership, and that people would never volunteer information that implies a high discount rate. I conclude by questioning whether people would invest so much in signaling given better alternatives for attracting cooperative partners. Part IV then critiques Posner's reductionist methodology: his provocative choice to explain norms without relying on any sort of normative motivation.