Legal origins theory

The legal origins theory claims that the two main legal traditions or origins, civil law and common law, crucially shape lawmaking and dispute adjudication and have not been reformed after the initial exogenous transplantation by Europeans.[1] Therefore, they affect economic outcomes to date.[1] According to the evidence reported by the initial proponents of such a theory, countries that received civil law would display today less secure investor rights, stricter regulation, and more inefficient governments and courts than those that inherited common law.[1][2] These differences would reflect both a stronger historical emphasis of common law on private ordering and the higher adaptability of judge-made law.[3] Recent contributions however have criticized the idea that transplanted legal institutions remained intact and have documented that indeed they evolve moved by how each country solves the trade-off between the uncertainty of judge-made law and the bias possibly injected into civil law by inefficient political institutions.[4] Crucially, these latest studies show that considering both the endogeneity between legal traditions and the economy and the evolution of legal systems over time implies that civil law can often economically dominate common law.[4][5]

Colonial Transplantation and Main Structural Differences

While English common law originated in thirteenth century England and has then been transplanted through colonization and occupation to England’s ex-colonies (United States, Canada, Australia, and several countries in Central America, Africa and Asia), the Scandinavian common law was developed in Denmark and Sweden and the German common law sprang in Germany and Switzerland [Guerriero 2016a, p. 54].[4] These last four countries then exported their common law model to the respective colonies or to those jurisdictions (China, Greece, Japan, Romania, South Korea, Taiwan, Thailand, and Turkey), which were never colonized but borrowed their initial legal order from the European codes considered most advanced at the time [Guerriero 2016a, p. 54].[4] Civil law instead has its roots in Roman law, was incorporated by the Napoleonic codes first and then by both the Austrian and Russian Civil codes, and has been then introduced via mainly colonization and occupation into continental Europe, the Near East, Latin America, Africa, and Indochina.[4] Bulgaria, Ethiopia, Iran, and Kazakhstan instead purposely borrowed their initial legal order from either France, Russia, or England [Guerriero 2016a, p. 54].[4]

Structurally, the two legal traditions constitute a well-defined bundle of lawmaking and adjudication institutions and operate in quite different ways [Merryman 1969, p. 52, 123–127; Zweigert and Kötz 1998, p. 272].[6][7] While common law entrusts a key role to the precedents selected by appellate judges and allows more procedural discretion to lower adjudicating courts,[6] civil law relies on legal codes designed by political representatives and bright-line adjudication rules.[7]

Early Empirical Evidence

In a series of influential papers published between 1997 and 2008 (the first one being La Porta et al. (1997) and the last one being La Porta et al. (2008)),[1][2] Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny exploited the exogenous assignment of these very different institutions and assumed that they have not been reformed later on to provide evidence consistent with the idea that common law is correlated with

"(a) better investor protection, which in turn is associated with improved financial development […], (b) lighter government ownership and regulation, which are in turn associated with less corruption, better functioning labor markets, and smaller unofficial economies, and (c) less formalized and more independent judicial systems, which are in turn associated with more secure property rights and better contract enforcement " [La Porta et al. 2008, p. 298].[1]

Operationally, the "legal origins" scholars assigned the majority of countries in the world to either the English-common law, the French-civil law, or one among the German, Scandinavian, and Socialist legal traditions and then they calculated correlations between these legal origins dummies and proxies for the aforementioned economic outcomes.[1]

Theoretical Justification to the Putative Primacy of Common Law

Two are the justifications given by the "legal origins" scholars for the alleged superiority of common law.[1] First, historical events in England and in France built into the common law a stronger emphasis on the independence of the judiciary, private ordering, and human capital.[1] Second, judge-made law would make common law more adaptable to the contracting needs of the economy.[1]

Historical Emphasis of Common Law on Private Ordering

Edward Glaeser and Andrei Shleifer contend that the development of a system of adjudication by lay juries in England and one of adjudication by professional judges in France were conscious choices reflecting the different political power of the English and French barons during the 12th century (Glaeser and Shleifer, 2002).[8]

"The former were concerned about the powerful English king’s ability to interfere in adjudication and bargained for trial by local, lay juries, a right enshrined in Magna Carta. The relatively weak French crown, by contrast, was less a threat than other barons. French barons accordingly desired a centralized adjudication system controlled by royal judges who would not be easily captured by local interests" [Klerman and Mahoney 2007, p. 279].[9]

Napoleon’s attempt to turn through its codes the judiciary into bureaucrats controlled by the State and the post-1688 Glorious Revolution success of the English judiciary in establishing its independence should have reinforced these dissimilarities, instilling at the same time into the common law a stronger emphasis on judicial independence and on private ordering.[8] This divergence would imply that common law will always shore up markets and the civil law will always restrict markets or replace them with state command.[8] This analysis of the medieval European history has been however criticized by Daniel Klerman and Paul Mahoney, who conclude that a system of adjudication by lay juries was initially favored in England because of the low literacy levels and later enforced to place the judicial power in the hands of the crown (Klerman and Mahoney, 2007).[9] Moreover, during the Middle Ages, not only did both French and English judiciaries have the de facto power to make law through precedent, but French judges enjoyed a greater independence being their office a heritable property.[9] Hence, the only permanent divergence between the legal orders in England and in France originated from the different fortunes of the judiciary in the aftermath of their respective revolutions.[9]

Adaptability of Judge-made Law

The key institution differentiating the two legal traditions is the lawmaking institution, which determines the identity of the lawmaker.[7] As aforementioned, common law relies on case law, i.e., the convention that precedents set by appellate courts guide subsequent adjudication by courts of the same or lower standing and can be changed by appellate judges only with a costly justification effort.[6] Civil law instead is grounded on statute law, i.e., which is the act of legislation by political representatives.[7] "Legal origins" scholars identify three main advantages of judge-made compared with statute law: (1) since overruling is costly, precedents tend to include both the deciding appellate judge’s opinion and those of the preceding appellate judges in such a way that the long-run law optimally incorporates the different opinions of all appellate judges, whereas statute law can be permanently biased by special interests (Gennaioli and Shleifer, 2007);[3] (2) appellate judges can effectively introduce new information into the law by distinguishing the precedent (Gennaioli and Shleifer, 2007);[3] (3) since inefficient rules tend to be appealed more often, they should be evaluated more often by appellate judges than by politicians (Miceli, 2009).[10]

Recent contributions, however, have criticized the ideas that transplanted legal traditions remained intact[11] and can be measured through legal origins dummies.[12] Inspired by these studies, Carmine Guerriero documents that in a cross-section of 155 transplants, which are countries that received their legal tradition externally, 25 reformed the initial lawmaking institution and 95 reformed at least one among their transplanted lawmaking and adjudication institutions.[5] In particular, in countries that inherited statute law, reforms towards case law have been more likely the largest preference, and in particular both ethnic and genetic, diversity is and reforms towards a pure common law tradition, which is the mix of case law and some discretion in adjudication, are found where the quality of political institutions is the lowest (Guerriero, 2016a).[5] Symmetrically, in countries in which case law was transplanted, reforms towards a pure civil law tradition, which is the mix of statute law and bright-line adjudication rules, are found where the quality of political institutions is the highest (Guerriero, 2016a).[5]

This evidence is consistent with the idea that appellate judges' offsetting biases make common law unbiased but volatile and thus more efficient than the certain civil law only when the latter is sufficiently distorted by the lobbying activities of special interests, i.e., when preferences are sufficiently heterogeneous and/or the political process sufficiently inefficient (Guerriero, 2016a).[5] These results cast several doubts on the putative primacy of common law and suggest that comparative law and economics should not only take into account the evolving nature of legal traditions and their endogeneity to preference diversity and the quality of political institutions, but also the nature of the performance of interest.[5] Guerriero (2016b) shows that properly considering these points delivers conclusions very different from those drawn by La Porta et al. (2008).[5]

To illustrate, if preference heterogeneity is limited, civil law is more technologically efficient being unbiased as common law but also certain.[5] If preferences are sufficiently diverse instead, the distance between the biased civil law and the technologically efficient legal rule, which is the social optimal rule that will prevail in a perfectly homogenous society, becomes wider the higher preference heterogeneity is and the lower the quality of the political process is.[5] Thus, civil law loses its technological primacy when preferences are sufficiently diverse and/or the political institutions are sufficiently inefficient (Guerriero, 2016b).[5] Consistent with this prediction, a proxy for preference and, in particular, genetic diversity interacted with a measure of the degree to which the transplant legal system in 2000 was nearer to a perfect common law tradition has a positive and significant impact on the stock market development, the extent of private credit, and the employment level.[1][5] The estimates also imply that reforms towards a pure common law tradition in developing transplants with smaller than average preference heterogeneity will significantly brake stock market development and the extent of private credit, whereas reforms towards a pure common law tradition in developing transplants with larger than average preference heterogeneity will significantly foster stock market development.[5] Finally, the two legal traditions fare equally well when compared with self-reported managers’ beliefs on how much the legal system is able to hit its efficiency targets and their satisfaction with the law.[2][5] This last patterns squares with the idea that legal traditions have a tendency towards optimality and so should not differ when compared through a proxy for social welfare.[5]

"This evidence delivers conclusions quite different from those drawn by the legal origins project and raises several concerns for the recent waves of reforms that, inspired by the legal origins literature, have introduced in developing countries institutions typical of a pure common law legal tradition (World Bank, 2004).[13] This is particularly worrisome nowadays given the increasing demand for regulation created by the recent global economic crisis" [Guerriero 2016, p. 16].[5]

References
  1. Porta, Rafael La; Lopez-De-Silanes, Florencio; Shleifer, Andrei (2008). "The Economic Consequences of Legal Origins". Journal of Economic Literature. 46 (2): 285–332. CiteSeerX 10.1.1.335.5384. doi:10.1257/jel.46.2.285.
  2. La Porta, Rafael; Lopez-De-Silanes, Florencio; Shleifer, Andrei; Vishny, Robert W. (1997). "Legal Determinants of External Finance". Journal of Finance. 52 (3): 1131–1150. doi:10.1111/j.1540-6261.1997.tb02727.x.
  3. Gennaioli, Nicola, and Andrei Shleifer (2007). "Overruling and the Instability of Law". Journal of Comparative Economics. 35 (2): 309–328. doi:10.1016/j.jce.2007.02.003.
  4. Guerriero, Carmine (2016). "Endogenous Legal Traditions". International Review of Law and Economics. 46: 49–69. doi:10.1016/j.irle.2016.02.001.
  5. Guerriero, Carmine (2016). "Endogenous Legal Traditions and Economic Outcomes". Journal of Comparative Economics. 44 (2): 416–433. doi:10.1016/j.jce.2015.12.008.
  6. Merryman, John H. (1969). The Civil Law Tradition. Stanford: Stanford University Press.
  7. Zweigert Konrad, and Hein Koetz (1998). Introduction to Comparative Law. Oxford-New York: Oxford University Press.
  8. Glaeser, Edward, and Andrei Shleifer (2002). "Legal Origins". Quarterly Journal of Economics. 117 (4): 1193–1229. doi:10.1162/003355302320935016. JSTOR 4132477.
  9. Klerman, Daniel, and Paul G. Mahoney (2007). "Legal Origin?". Journal of Comparative Economics. 35 (2): 278–293. doi:10.1016/j.jce.2007.03.007.
  10. Miceli, Thomas J. (2009). "Legal Change: Selective Litigation, Judicial Bias, and Precedent". Journal of Legal Studies. 38 (2): 157–168. doi:10.1086/587439. JSTOR 587439.
  11. Roe, Mark J. (2004). Convergence and Persistence in Corporate Governance. Cambridge, UK: Cambridge University Press.
  12. Rosenthal, Howard; Voeten, Erik (2007). "Measuring Legal Systems". Journal of Comparative Economics. 35 (4): 711–728. doi:10.1016/j.jce.2007.08.001.
  13. World Bank (2004). Doing Business in 2004: Understanding Regulation. Washington, DC: Oxford University Press.

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