Edward L. Glaeser & Andrei Shleifer Legal origins Octavia Foarta October 2007

Introduction Protection of property rights is generally regarded as the state’s main role in the economy This requires a functional legal system, that protects law enforcers from being bullied through either violence or bribes In many countries, the legal system has been heavily influenced by either English common law or French civil law 2 "Legal Origins"

The English Common Law Originated in England in the twelfth and thirteen century (Henry II) Trials by an independent jury Broad legal principle and standards Relies of oral argument and evidence Trials play an important role Appeal is less frequent The French Civil Law Has its roots in the Roman law and developed between the eleventh and thirteenth century (Philip Augustus and Louis IX) State-controlled judges Clear bright-line rules Relies of written evidence Trials don’t play such an important role Appeals are frequent 3 "Legal Origins"

The Facts In a sample of 109 countries, 42 countries in the English common law tradition and 40 countries in the French civil law tradition (Djankov et al. 2002) At the same level of development, French civil law countries have higher regulation, less secure property rights, more corrupt governments and less developed financial markets than common law countries (La Porta et al. 1997, 1998, 1999) 4 "Legal Origins"

The Questions Why did such different legal systems evolve in France and in England? Why are these differences in the organization of legal systems associated with such different social and economic outcomes? 5 "Legal Origins"

The Hypothesis The effects of coercion and corruption must be limited for a legal system to work properly When bullying is moderate, it is more efficient to have independent local decision makers (juries) When bullying is extreme, it is better to leave adjudication to state-employed judges who are less vulnerable to local pressure France royal justice more efficient England efficient to resolve disputes locally "Legal Origins" 6

The Model Royal Judge – Less vulnerable to bullying – Incentivized by the king – Reflects the preferences of the king Local Jury – Vulnerable to local pressures – Faces no incentives – Preference are closer to the community’s "Legal Origins" 7 Trade-off between:

The Setup D = severity of the violation (want to punish if D>0) R = how much the king wants to punish (+ or -) Ө= the degree to which the kings preferences don’t match those of the community (ө>0) R and D indep. distributed with cdf’s F(D) and G(R); E(D)>0, E(R)=0 U community =D U king =D+өR Social Utility from each conviction : U=D+λөR Total Social Welfare: "Legal Origins" 8

The Jury Case U jury = βD-A A= pressure put on by the magnate β=how much the jury cares about doing justice So, the jury convicts if βD>A Social welfare with jury: "Legal Origins" 9

The Social Losses from Jury "Legal Origins" 10

The Royal Judge Case U judge =β j (D+θ j R)-A With incentives from the king: U judge =β j (D+θR) Convict when R>-D/θ So, for any D, 1-G(-D/θ) of cases reach conviction For λ=0, social welfare is: "Legal Origins" 11

The social losses from judge "Legal Origins" 12

Efficient choice of legal system "Legal Origins" 13 France → local nobles were able to subvert justice → civil law system England → local nobles less able to subvert justice→ common law system

Adoption of bright line rules Codification was adopted to allow kings to control the judges We modify the previous model: – Codification: convict if – R and D are no longer observed – The king only knows: 1) was and 2) did the judge convict Suppose the kings institutes incremental payments for conviction P v (for cases when) and P nv (for when ). Judge convicts when β j (D+θ j R)+P i > A, i=v, nv "Legal Origins" 14

Bright line rules (II) So king chooses P v to maximize his utility: "Legal Origins" 15

Convergence Consider the degree of overlap between BLR and common law The 2 regimes lead to different decisions when for In developed countries, A is lower and is closer to 0. This leads to convergence between civil and common law. The situation is different in developing countries, where “bad” governments can use the civil law for their leaders’ goals, thus less secure property rights, heavier intervention, corruption etc. "Legal Origins" 16

Conclusion Efficient solutions for protecting property rights may lead to very different answers in different environments The civil and common law lead to different procedural and social outcomes Civil law is especially vulnerable to abuse by “bad” government "Legal Origins" 17

THANK YOU! "Legal Origins" 18