Paper #801

Title:

Market institutions and judicial rulemaking

Authors:

Benito Arruñada and Veneta Andonova

Date:

December 2004

Abstract:

Assuming that the degree of discretion granted to judges was the main distinguishing feature between common and civil law until the 19th century, we argue that constraining judicial discretion was instrumental in protecting freedom of contract and developing the market order in civil law. We test this hypothesis by analyzing the history of Western law. In England, a unique institutional balance between the Crown and the Parliament guaranteed private property and prompted the gradual evolution towards a legal framework that facilitated market relationships, a process that was supported by the English judiciary. On the Continent, however, legal constraints on the market were suppressed in a top-down fashion by the founders of the liberal state, often against the will of the incumbent judiciary. Constraining judicial discretion there was essential for enforcing freedom of contract and establishing the legal order of the market economy. In line with this evidence, our selection hypothesis casts doubts on the normative interpretation of empirical results that proclaim the superiority of one legal system over another, disregarding the local conditions and institutional interdependencies on which each legal system was grounded.

Keywords:

Legal Systems, Institutional Development, Law Enforcement

JEL codes:

K40, N40, O10

Area of Research:

Management and Organization Studies

Published in:

Claude Ménard and Mary M. Shirley, eds., Handbook of New Institutional Economics, Dordrecht, Springer, 2005, 229-250

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