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4 - The Legal Origins’ Theory

Published online by Cambridge University Press:  09 December 2022

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Summary

Much literature suggests that the legal family that countries developed, imported or had involuntarily imposed on them had profound long-term effects on a range of economic outcomes. This approach is called “legal origins.” This literature arose from the scholarly work of four economists known under the acronym LLSV—Rafael La Porta, Florencio López-de-Silanes, Andrei Shleifer and Robert Vishny.

On a broader level, the legal origins’ approach can be understood as being part of the more general quest by economists for institutional explanations for economic performance, particularly growth and development, following the seminar work by Douglas North (1990) and other economic historians.

The economic literature has proposed six factors to explain why a legal system could matter for economic growth: (1) the costs of identifying and applying efficient rules, (2) the system's ability to restrain rent-seeking in rule formulation and application, (3) the cost of adapting rules to changing circumstances, (4) the transaction costs to parties needing to learn the law, (5) the ease of contracting around rules and (6) the costs of transitions between systems. At the heart of the debate about the legal origins’ theory is how these six factors relate in a meaningful way to legal families, though it remains largely undertheorized and generally, unanswered.

LLSV heavily relied on the categories devised by comparative law scholars to overcome the endogeneity problem that plagues most attempts to determine the causal relationship between law on the one hand and economic outcomes on the other. That is, in view of the statistical correlation (as shown by many studies) between “effective” legal institutions and economic development, one may be tempted to conclude that law causes economic development. However, the reverse is equally plausible, with effective legal institutions being a superior good whose desirability increases as countries become richer.

In LLSV's econometric model, legal rules and institutions derived from certain legal families, which resulted from involuntary processes of conquest and colonization that took place in the distant past. Legal families could be deemed to be exogenous, which permitted the authors to conclude that legal institutions had a causal impact on economic outcomes, and not the other way around.

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Publisher: Anthem Press
Print publication year: 2022

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