Legal institutions Flashcards
3.1 Two legal traditions: Common law and Civil law, and their evolution - overview (5)
Legal institution definition
- Legal institutions - Institutional framework that underpins contractual relationships in a society
- Upholding law and order is a basic duty of the state
- Courts secure property rights and enforce contracts
- Protecting law enforcers from coercion by litigants through violence and bribes
- Protection and control of law enforcers by the state
- Led to creation of trials by independent juries in England c.f. state-employed judges in France
3.1 Two legal traditions: Common law and Civil law, and their evolution - common law and civil law (3)
- Common law tradition originates in England and was transported to US, Australia, Canada etc. by colonization
- Civil law has roots in Roman law and adopted in continental countries like France and her Empire
o Civil law relies on professional judges, legal codes, written records (more state control in civil law)
o Common law relies on lay judges, broader legal principles and oral arguments (system of law enforcement relying on decentralized adjudication by peers) - La Porta et al. - for similar levels of development, French civil law countries exhibit tighter regulation, less secure property rights, more corrupt and less efficient governments and less political freedom than common law
3.1 Two legal traditions: Common law and Civil law, and their evolution - (Glaeser & Schliefer, 2002) (8)
- Glaeser & Shleifer present a theoretical model that explains why judicial independence is the defining characteristic of common law. They argue that any legal system faces a trade-off between vulnerability of law enforcers to either private subversion through bribery and intimidation or public subversion through executive control.
- G&S argue that the politicization of justice may be necessary when the state is the only institution with enough military power to fight local bullies
- In France, local feudal lords were very powerful – no possibility of effective local justice when these lords’ interests were involved
- England had weaker local magnates and so its juries were less vulnerable to subversion and could be trusted with adjudication; in England, royal power was sufficient to protect local law enforcers
- Glaeser & Shleifer (2002) – “The English Magna Carta was a Coasian bargain supporting the efficient outcome” – higher ability of magnates to subvert justice led to civil law system controlled by the Crown, lower ability of magnates in England led to the jury-controlled common law system – both outcomes were efficient at the time for their environments
- French nobles held sway over vast areas of land, but in 1066 William the Conqueror gave out to his followers dispersed holdings of land to minimize the ability to create local power base in England
- France had war on its soils 22% of time between 1100 and 1800, England only 6% hence weapons and warriors readily available in France to those who wanted to subvert justice
- Recent research shows that compared to civil law and socialist law societies, common law countries exhibit better protection of investor rights (La Porta 1999).
3.2 Legal institutions in rich vs poor countries (8)
- Economists generally agree that the state’s main role in the economy is to protect property rights – but how do they do this?
- Efficient solutions to the problem of designing legal systems to protect property rights may lead to very different answers in different environments
- When the law and order environment is benign to begin with, a system of law enforcement relying on decentralized adjudication by peers may be the most efficient
o In such a system, we would see greater security of property rights and relatively little state intervention in the economy - In contrast, when law and order is weak to begin with, a system of law enforcement relying on more centralised adjudication of disputes by government employees may be the most efficient
o In such a system, we would see less security of property rights, more regulation, and more state intervention in the economy - Richer countries tend to have better legal institutions than poorer ones (Development & Incentive Theory):
- Development theory: courts work better in richer countries with better education
o Due to: fixed costs of setting up institutions only worth paying when demand high enough; more complex contracts needs courts, not informal disputes to resolve; and better educated population raises the efficiency of courts and demand for them. - Incentive theory: the efficiency of courts is shaped by the incentives of the participants in dispute resolution, including judges, lawyers and litigants
o Judges need to care about delays; lawyers shouldn’t be paid to prolong proceedings; defendants don’t seek to avoid judgement - Hence factors like mandatory deadlines for judges, contingency fees for attorneys and ‘loser pays’ rules improve court performance
3.3 Procedural formalism – a third theory (Djankov et al., 2003) (10)
Djankov et al. (2003)
* Most countries in the developing world today have either had a common law or civil law system transplanted onto them
* Using data from 109 countries, Djankov, La Porta, Lopez-de-Silanes and Shleifer (2003) measure and describe the exact procedures used by litigants and courts to evict a tenant for non-payment of rent and to collect a bounced cheque
* Construct an index of procedural formalism of dispute resolution for each country
* They find that even these simple disputes are resolved extremely slowly by courts in most countries, taking an average of over 200 days
* Legal origins alone explain around 40% of the variation in measures of formalism among 109 countries
* Also associated with less consistency, less honesty, less fairness in judicial decisions, more corruption
* Suggests legal transplantation may have led to an inefficiently high level of procedural formalism, esp. in developing countries, and that this needs to be reduced
* Formalism is not proof of inefficiency – it may control the subversion of the legal system, or guarantee fairness and accuracy of trials – without some level of formalism it may be impossible to achieve justice
* Civil law countries have systematically greater judicial formalism than common law – lower formalism in the richest countries 🡪 however the duration of dispute resolution is extraordinarily high suggesting significant inefficiencies – expected duration is systematically higher in countries with more formalised proceedings
* At an empirical level the analysis suggests that at least some institutional features of developing countries such as financial underdevelopment, integration of firms into groups, and the importance of family businesses might constitute a response to the difficulties of using courts to resolve disputes.
3.4 Importance of Judicial Independence and Constitutional Review (4)
- Judicial checks and balances are often seen as crucial guarantees of ‘freedom’ (the absence of coercion by the government)
- Hayek (1960) distinguished two ways in which the judiciary provides such checks and balances:
o Judicial independence – the creation of laws and administration of justice can be separated. Legislatures make laws, but independent judges enforce them without interference from the legislature or the executive
Secures property and political rights when govt is a litigant
Socially valuable in purely private disputes when one of the litigants is politically connected
o Constitutional review – law-making and policy making can themselves be subject to review by courts for their compliance with the constitution
Limits self-serving efforts by legislators and the executive
Courts rather than legislators become final arbiters of what is law - Judicial independence promotes both economic and political freedom through resisting the state’s attempt to take property and resisting its attempts to suppress dissent respectively
- Constitutional review used to counter the tyranny of the majority, hence secures political and human rights whilst preserving democracy
3.4 Importance of Judicial Independence and Constitutional Review - La Porta et al. (2004) (4+9)
- La Porta et al. (2004) – create an empirical database of constitutional rules in 71 countries
- Variation exists across countries – US allows both, Vietnam none
- Economic freedom - measured as security of property rights, lightness of government regulation and modesty of state ownership
- Political freedom - measured as democracy, political rights and human rights
o Strong support that judicial independence and constitutional review are associated with greater economic and political freedom
Do common law and civil law countries differ in measures of the 2 checks and balances?
* Consistent with history and theory, judicial independence is empirically strongly associated with common law legal origin, and is itself a strong predictor of some of the same economic freedoms as the common law. Judicial independence may be one channel of common law’s beneficial effects on the security of property rights. In their data, judicial independence accounts for some though not all of the beneficial effects of legal origin on economic freedom.
* Economic freedom and political freedom are highly correlated but, some exceptions like Saudi Arabia and Singapore as well as Haiti. Both checks and balances are low in socialist countries.
* Compared to French legal origin countries, common law countries have sharply higher levels of economic freedom, with and without controls, for virtually every measure of freedom. German legal origins (still civil law) have significantly higher levels of economic freedom than do French legal origins, but this is partly driven by differences in wealth.
* The data show that both judicial independence and constitutional review are predictors of freedom. Judicial independence matters most for economic freedom (resists the state’s attempts to take property), and constitutional review for political freedom.
* They then go on to analyse the pervasive influence of legal origin on economic freedom around the world, and ask whether judicial independence can provide the micro-foundations of this influence. For one key measure of economic freedom, judicial independence wipes out the legal origin effect; for others, it merely reduces its size. They take this evidence to suggest that, consistent with theory, judicial independence is an important source of economic freedom, which explains part of the persistent finding of greater such freedom in the common law countries.
* So overall, at the broadest level, their results provide strong empirical support for ideas which see the Anglo-American (common law) institutions of checks and balances as important guarantees of freedom. The present paper shows that some of the central features (features that have profound consequences for human freedom and welfare) of government have common constitutional roots.
* Glaeser & Shleifer: Transplantation of civil law systems into a new environment may raise significant problems for the security of property rights e.g. when sovereign’s preferences are not close to the peoples
* Put simply, regulations and controls are much more vulnerable to misuse by the sovereign than community justice
3.4 Importance of Judicial Independence and Constitutional Review - La Porta et al. (2004) - Objections to this theory of legal origins (4)
- Most significant critique of this theory – legal origins might be proxying for something else
- For example, legal origin influences contract enforcement and the quality of the judiciary, and it is through this channel that it might affect, for example, financial development
- Significant as enforcement and rules are not entirely separable – formal judiciary better able to enforce rules than broad legal standards; independent judiciary better at enforcing standards
- Available evidence suggests that both good rules and their enforcement matter, and that the combination of the two is generally most effective
3.4 Importance of Judicial Independence and Constitutional Review - does legal origins proxy for religion/culture? (5)
- Religion: Stulz and Williamson (2003) suggest that, in light of the hostility of some religious traditions to lending on interest (Islam), religion may be a more fundamental determinant of legal rules governing creditor protection than legal tradition
- Evidence: religion is not nearly as important a determinant of creditor rights as legal origin (Djankov et al. 2007).
- Culture: Licht, Goldschmidt and Schwartz (2005) present a more sweeping case, using psychological measures of cultural attitudes to predict legal rules
- Most indices of cultural attitudes do not influence creditor rights holding legal origin constant
- Legal origins are not simply proxying for religion or culture; hence this criticism is not so severe
3.4 Importance of Judicial Independence and Constitutional Review - does legal origins proxy for politics? THEORY (5)
- Political theories of corporate governance – this criticism is more critical
- Sometime in the middle of the 20C, Continental European countries saw the formation of alliances between families that controlled firms and labour
- Alliances were a response to crises from hyperinflation, depression, or defeat in war
- Political alliances sought to win elections to secure the economic rents of the insiders, and keep them from the outsiders such as unorganized labour, minority shareholders, corporate challengers, or potential entrants. When these alliances won elections, they wrote legal rules to benefit themselves.
- The legal rules observed in the data, then, are outcomes of this democratic process and not of any permanent condition such as legal origins
3.4 Importance of Judicial Independence and Constitutional Review - does legal origins proxy for politics? EVIDENCE (7)
- The Political Story: Broader narrative of Continental European history in 20C, in which the response to crisis is characterised by the rise of proportional representation, socialist politics and social democracy
- United States was spared these political developments so did not get Continental laws
- Theory broadly consistent with evidence: Countries that have strong shareholder protection have weak protection of labour and low regulation of entry
- So, are legal origins merely serving as proxies for social democracy, leftist politics, or proportional representation? If politics were appropriately controlled for in the regressions, legal origin should not matter
- La Porta, Lopez-de-Silanes and Shleifer (2008) - What does the data say? Political variables explain the variation in legal rules only occasionally. In contrast, legal origins continue to explain the variation even with political variables in the regression, and the difference between common law and French civil law remains highly statistically significant.
- None of this is to say that politics is unimportant for either legal rules or economic outcomes. Indeed, political change may provide the impetus for countries to revise their laws and regulations. But the thrust of Legal Origins Theory is that, even in response to political demands, countries will design reforms consistently with their legal traditions.
- So, “Legal origins are not proxies for leftist politics” (La Porta et al. 2008)
3.5 What is the effect of legal origins on economic growth? (7)
- From 1960-2000, compared to common law countries, GDP per capita in the French legal origin countries grew 0.6% slower per year. On the other hand, German legal origin countries grew faster than the common law countries (La Porta et al. 2008)
- Similar differences in the growth rates of GDP per worker, capital stock per worker, and productivity
- Growth effects of legal origins become weaker once we control for human capital such as average years of schooling in 1960. Indeed, from 1960-2000, years of schooling are sharply higher in common law countries than in French legal origin ones
- Glaeser & Shleifer- Most countries adopted legal systems from occupiers and colonisers rather than developed indigenously. French civil and English common transported around the world. If the logic of this paper is correct and civil law can become a control instrument of a bad government, the transplantation of civil law can have adverse consequences for the security of property rights.
- This is consistent with cross-country evidence on government intervention, security of property rights, and governance
- CRITICISM: no thorough regression where they screen out other causal factors
- Most obvious influence of legal origins on growth is financial development
o Rajan and Zingales (2003) show that common law countries moved sharply ahead of civil law ones in financial development and investor protection over the course of the twentieth century
3.6 Conclusion on legal institutions
- Legal institutions or highly persistent systems of social control of economic life have significant consequences for the legal and regulatory framework of society and for economic outcomes
- Implications:
o Legal rules and regulations differ systematically across countries
o Differences in legal rules and regulations are accounted for to a significant extent by legal origins e.g. common law or civil law traditions
o Basic historical divergence – the policy-implementing focus of civil law versus the market-supporting focus of common law explains why legal rules differ
o Measured differences in legal rules matter for economic and social outcomes
