Document Type

Working Paper

Publication Date

2005

Center/Program

Center for Law and Economic Studies

Abstract

Two parallel literatures have explored differences across legal and economic systems,noting that countries can be loosely grouped into liberal vs. coordinated market economies on the one hand, and common law vs. civil law countries on the other. These two groups largely overlap. Liberal market economies (LMEs) tend to have a common law tradition, while coordinated market economies (CMEs) belong to the civil law family (French or German). This paper argues that this overlap is not coincidental. The link between legal and economic systems are social preferences reffected in basic norms, or ground rules, found in substantive and procedural laws of different countries. These ground rules are more pervasive than their specific incarnation, such as codetermination in Germany, or shareholder primacy in the United States. The paper develops a typology of ground rules, distinguishing between substantive ground rules that allocate decision making rights to either individuals or to the state/collective; and procedural ground rules that determine whether the individual or a collective (or the state) have the primary or exclusive power to seek judicial remedies. The paper uses examples from contract and corporate law to illustrate these ground rules focusing on German law, as an example for the civil law family and a CME, and the US as an example for a common law jurisdiction and LME.

An important implication of this analysis is that each system is highly path dependent and that, therefore, marginal changes of specific incarnations of social preferences are unlikely to fundamentally alter the nature of each system.

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