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60 Geo. Wash. L. Rev. 293 (1991-1992)
Rationality in Law and Economics

handle is hein.journals/gwlr60 and id is 301 raw text is: Rationality in Law & Economics Herbert Hovenkamp* L Introduction: The Role of Rationality Assumptions in Law & Economics Law & economics cannot exist without some theory of human ra- tionality. Economists model and attempt to predict individual be- havior on the assumption that people act rationally with the goal of maximizing their expected utility.' Likewise, economists assume that firms act rationally to maximize profits.2 Law & economics adds two important insights to these basic eco- nomic notions of rationality. The first insight is that a person's cal- culation of the utility maximizing course of conduct is affected by the presence of legal penalties or rewards. For example, driving at 100 miles per hour may be rational when someone considers only the urgency of the situation and the risk of an accident given her driving skills; but it may cease to be rational when one also consid- ers that the speed limit is forty miles per hour and is strictly en- forced. To the extent that legal penalties change the cost-benefit calculus, rational actors will respond accordingly. * Ben V. & Dorothy Willie Professor of Law, University of Iowa College of Law. Thanks to Randall Thomas for reading an earlier draft and to participants in a works-in- progress seminar given at the George Washington University National Law Center. 1. See RICHARD A. POSNER, ECONOMIC ANALYSIS OF Law 3 (3d ed. 1985) (The task of economics... is to explore the implications of assuming that man is a rational maxi- mizer of his ends in life.). On the meaning of economic rationality, see generally, SHAUN H. HEAP, RATIONALITY IN ECONOMICS 1 (1989); HERBERT A. SIMON, MODELS OF BOUNDED RATIONALITY (1982) (surveying how various assumptions of rationality help explain economic behavior). 2. See, e.g., EDWIN MANSFIELD, MICROECONOMICS: THEORY AND APPLICATIONS 151- 54 (5th ed. 1985). January 1992 Vol. 60 No. 2 293

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