Legal origins theory
Encyclopedia
In economics
, the legal origins theory states that many aspects of a country's economic state of development are the result of their legal system, most of all where a particular country received its law from. The first papers on the theory were published from 1997 onwards by a group of researchers around Andrei Shleifer
.
transplantation
, law is considered to be exogenous to the analysis. Some economists have thus classified countries on whether they adhere to common law
or whether their legal system is based on French
civil law
, German
civil law or Scandinavia
n civil law and done empirical research finding correlations between economic indicators and that classification.
The basic thrust of the theory is that common law, as opposed to French civil law, and to a lesser degree to German and Scandinavian civil law, is associated with more orientation towards institutions of the market (instead of state intervention), which is why, according to proponents of the Legal Origins Theory, common law countries tend to be economically more developed.
While the theory originally started out in corporate law
, where common law was found to be correlated with better shareholder protection and more developed financial markets, the theory has in the meantime been extended to many other fields, such as whether or not a country is likely to have military service
(common law countries are least likely to).
and thus crudely mischaracterized continental Europe
an corporate governance
systems. Because of this, the papers' authors were met with hostility from European corporate law scholars. However, indexes made in later papers somewhat improved on this point.
The question of whether the Legal Origins Theory adequately describes reality is still hotly debated, most of all among financial economists
and scholars of corporate law.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, the legal origins theory states that many aspects of a country's economic state of development are the result of their legal system, most of all where a particular country received its law from. The first papers on the theory were published from 1997 onwards by a group of researchers around Andrei Shleifer
Andrei Shleifer
Andrei Shleifer is a Russian American economist. From its inauguration in 1992 until it was shut down in 1997, Shleifer served as project director of the Harvard Institute for International Developments Russian aid project...
.
Theory
Since, historically, most countries received their law through colonialColonialism
Colonialism is the establishment, maintenance, acquisition and expansion of colonies in one territory by people from another territory. It is a process whereby the metropole claims sovereignty over the colony and the social structure, government, and economics of the colony are changed by...
transplantation
Legal transplant
The term legal transplant was coined in the 1970s by the Scottish-American legal scholar W.A.J. 'Alan' Watson to indicate the moving of a rule or a system of law from one country to another...
, law is considered to be exogenous to the analysis. Some economists have thus classified countries on whether they adhere to common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
or whether their legal system is based on French
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
civil law
Civil law (legal system)
Civil law is a legal system inspired by Roman law and whose primary feature is that laws are codified into collections, as compared to common law systems that gives great precedential weight to common law on the principle that it is unfair to treat similar facts differently on different...
, German
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
civil law or Scandinavia
Scandinavia
Scandinavia is a cultural, historical and ethno-linguistic region in northern Europe that includes the three kingdoms of Denmark, Norway and Sweden, characterized by their common ethno-cultural heritage and language. Modern Norway and Sweden proper are situated on the Scandinavian Peninsula,...
n civil law and done empirical research finding correlations between economic indicators and that classification.
The basic thrust of the theory is that common law, as opposed to French civil law, and to a lesser degree to German and Scandinavian civil law, is associated with more orientation towards institutions of the market (instead of state intervention), which is why, according to proponents of the Legal Origins Theory, common law countries tend to be economically more developed.
While the theory originally started out in corporate law
Corporate law
Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law...
, where common law was found to be correlated with better shareholder protection and more developed financial markets, the theory has in the meantime been extended to many other fields, such as whether or not a country is likely to have military service
Military service
Military service, in its simplest sense, is service by an individual or group in an army or other militia, whether as a chosen job or as a result of an involuntary draft . Some nations require a specific amount of military service from every citizen...
(common law countries are least likely to).
Criticism
Early papers developing the theory in particular faced a good deal of criticism. Most of all, the research underlying the indexes on specific legal rules used in the earlier papers on corporate law did not meet the basic minimum standards of comparative lawComparative law
Comparative law is the study of differences and similarities between the law of different countries. More specifically, it involves study of the different legal systems in existence in the world, including the common law, the civil law, socialist law, Islamic law, Hindu law, and Chinese law...
and thus crudely mischaracterized continental Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
an corporate governance
Corporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
systems. Because of this, the papers' authors were met with hostility from European corporate law scholars. However, indexes made in later papers somewhat improved on this point.
The question of whether the Legal Origins Theory adequately describes reality is still hotly debated, most of all among financial economists
Financial economics
Financial Economics is the branch of economics concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment"....
and scholars of corporate law.
Proponents
- Simeon DjankovSimeon DjankovSimeon Djankov is a Bulgarian economist and Deputy Prime Minister and Minister of Finance of Bulgaria in the government of Boyko Borisov. Prior to his cabinet appointment, Simeon Djankov was a Chief economist of the finance and private sector vice-presidency of the World Bank...
- Edward GlaeserEdward GlaeserEdward Ludwig "Ed" Glaeser is an economist at Harvard University. He was educated at The Collegiate School in New York City before obtaining his B.A. in economics from Princeton University and his Ph.D. in economics from the University of Chicago...
- Andrei ShleiferAndrei ShleiferAndrei Shleifer is a Russian American economist. From its inauguration in 1992 until it was shut down in 1997, Shleifer served as project director of the Harvard Institute for International Developments Russian aid project...
- Robert W. VishnyRobert W. VishnyRobert Ward Vishny is an American economist and is the Myron S. Scholes Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. He was the Eric J. Gleacher Distinguished Service Professor of Finance at the University of Chicago Booth School of Business.He...