Abstract

Economic-analytic arguments exhibit very little impact on court decisions in the German legal system. The present study explains this phenomenon by investigating the incentive structure embodied in the formal organization of the legal administration. The ranking of judges who are candidates for promotion also determines the probabilities to ascend. The probability to choose the traditional legal lines of arguments and the size of the hierarchical levels can be determined endogenously. Assuming that utilizing economic arguments leads to fewer appeals by the conflict parties, but court decisions based on such arguments are revised more frequently by higher courts than decisions which draw on the legal tradition, the stable hierarchy may thus will be inefficiently large. This problem can only be overcome, if the judges of the supreme courts decide on a reform of the system.