The Economic Consequences of Legal Origins

Recently, in the Law School’s Seminars in Law & Economics and Law, Economics, and Organization, Florencio Lopez de Silanes presented his latest work with Rafael La Porta and Andrei Shleifer (LLS) on legal origins. Over the last ten years, LLS and different co-authors collected data on various sets of legal rules in up to 129 countries. They covered areas of law ranging from civil procedure to military conscription, but mostly focused on legal rules particularly relevant to corporate finance. In all their studies, LLS invariably found that common law countries had “better” laws than civil law countries, particularly those of the French legal family. In particular, it appeared that common law countries were much better at protecting investors, and hence developed larger and more liquid financial markets.

These findings had an enormous academic and real-world impact–and generated a good deal of controversy. In The Economic Consequences of Legal Origins, written for the Journal of Economic Literature and presented at the Law and Economics seminar, LLS provide a synthesis of the academic debate that has taken place over the last ten years. Here is their abstract:

“In the last decade, economists have produced a considerable body of research suggesting that the historical origin of a country’s laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes. We summarize this evidence and attempt a unified interpretation. We also examine the effects of legal origins on resource allocation and economic growth. Finally, we address a broad range of objections to the empirical claim that legal origins matter.”

The paper’s survey of the existing literature is outstanding. Yet the paper’s main contribution is its articulation of a “unified interpretation” of the empirical results. LLS “develop the Legal Origin Theory, namely that legal origins represent fundamentally different strategies of social control of economic life.” A big advantage of this theory is that it can explain why legal origins also seem to matter in areas dominated by statutes, such as military conscription or the regulation of entry of new businesses. These subjects had eluded previous attempts at explanation; earlier hypotheses had usually focused on the differences between judicial and legislative law-making.

One may wonder, however, what is specifically “legal” about the “Legal Origins Theory” as now articulated by LLS. To be sure, the theory predicts differences in legal rules as found in the data collected by LLS and others. But the theory seems to locate the root cause of these differences in the cultural and political inclinations of countries’ populations or elites rather than in institutional differences (even though LLS argue vigorously against competing cultural and political explanations in the paper). Among the many questions raised by the theory, then, is how these inclinations could have been so profoundly influenced by the identity of the colonizing power–which is ultimately what legal origins refers to (where a country chose its legal family, as in the case of Japan, legal origin is endogenous and hence does not have explanatory power). Likewise, one might ask how these inclinations could be so stable over time, especially through the many and often profound changes in local political climate.

Studies of legal change promise some insight into these questions. In The Divergence of Legal Procedures, co-authored with Aron Balas and presented at the Law, Economics, and Organization seminar, LLS analyze the change of civil procedure rules as applied to two standard small cases in 40 countries between 1950 and 2000. The paper extends the dataset from Courts, co-authored with LLS and Simeon Djankov and published in the Quarterly Journal of Economics, 50 years back into time. Balas and LLS find that the procedural rules for collecting a bounced check and evicting a tenant were already more “formalist” in civil law countries than in common law countries in 1950, and only became more so by 2000. They conclude that the difference between legal origins is neither a recent phenomenon nor about to disappear, at least in civil procedure for the cases they study. At the same time, Balas and LLS explicitly recognize that French civil procedure in these cases was less “formalist” than English civil procedure, at least until the late 1960s and throughout the 150 years before that.

This seems to be at odds with LLS’s theory that differences in legal origins originated in England and France and spread from there to the rest of the world, mainly by colonization. (That theory is explained in detail in an earlier LLS paper, coauthored with Djankov and Edward Glaeser, The New Comparative Economics.) After all, the main wave of colonization happened in the 19th century, and de-colonization was largely complete by the late 1960s–and during these periods France was less “formalist” than England by Balas’s and LLS’s measure. Moreover, if “formalism” is a consequence of “fundamentally different strategies of social control of economic life,” why did England and France flip positions on “formalism” between 1950 and 2000?

Apparently, Balas and LLS do not believe that England and France changed their “fundamentally different strategies of social control of economic life” around 1970. Instead, they argue that the change in the English and French procedure was a reaction to a perceived “crisis” of litigation, and that the different strategies manifested themselves in the means chosen for facing that crisis–centralization in France, decentralization in England. Be that as it may, one still wonders how England and France arrived at their 1950 starting position in the first place if “formalism” had the same meaning in the 150 years before.

These questions are far from resolved. But these papers, particularly the majestic The Economic Consequences of Legal Origins, very considerably advance the debate.

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  1. By Is Canada an Anglo-Saxon Economy? « The Past Speaks on Sunday, November 6, 2011 at 5:39 pm

    […] and the ideas of Rafael La Porta,  Florencio Lopez-de-Silanes, and Andrei Shleifer, see here). I’m not a legal historian (far from it), but legal origins theory really isn’t […]