AN ECONOMIC ANALYSIS OF LAW VERSUS EQUITY Henry E. Smith* October 22, 2010 I. INTRODUCTION Like “property,” the terms “equity” and “equitable” are hardly missing from legal discourse. They can refer to fairness, a type of jurisdiction, types of remedies and defenses, an owner’s stake in an asset subject to a security interest and other ownership interests, as well as a set of maxims, among other things. These uses of “equity” and “equitable” all trace back to courts of equity, which, with some exceptions, ceased to exist as separate courts or even as a distinct form of jurisdiction by the early twentieth century.1 So the term “equity” might seem to be an etymological curiosity. This paper challenges that view. It argues that the notion of equity is functionally motivated and can be given an economic analysis under which it makes sense to have a separate decision making mode that is loosely identified with historical equity jurisdiction and jurisprudence. * Fessenden Professor of Law, Harvard Law School. Email:
[email protected]. I would like to thank Bob Ellickson; Bruce Johnsen; Louis Kaplow; Steve Spitz; and audiences at the Fourth Annual Triangle Law and Economics Conference, Duke Law School; the George Mason University School of Law, Robert A. Levy Fellows Workshop in Law & Liberty; the Harvard Law School Law and Economics Seminar; the Workshop on Property Law and Theory, New York University School of Law; the University of Notre Dame Law School Faculty Workshop; the International Society for New Institutional Economics, 14th Annual Conference, University of Stirling, Scotland; and the Carl Jacob Arnholm Memorial Lecture, Institute of Private Law, University of Oslo Faculty of Law.