Judicial Rulemaking in Western Law

Benito ARRUÑADA (UPF)

Veneta ANDONOVA (ITAM)

Motivation

▪ Previous work on property rights (JLEO’03): ♦ Courts end up conditioning market transition♦ Pro-market intent & nature of civil law reform

in 1800s—(e.g., mortgage market) ♦ Common / civil law divide nonexistent

▪ Reinvigorated efficiency claims of common law (La Porta, Shleifer et al.)

▪ GOAL: Explore an adaptation hypothesis for explaining modern Western law

Analytical framework

▪ A key design difference b/w common & civil law: allocation of rule making power to judges:♦ Rule making power of the whole judiciary♦ ‘Centralization’ of this power—binding precedent

▪ Four areas of trade-offs:♦ Self-interest (1)♦ Information (2)♦ Cognitive: Rationality (allegedly decisive)

• Bias and heuristics (3)

• Unnaturalness of markets (4)

Drivers of rulemaking inefficiency (1): Self-interest

▪ Parties♦ Legislators retain rulemaking supremacy♦ Judges do not need rules to be corrupt♦ Rent-seeking by parties to contracts require

biased rule-maker

▪ Depends on fields of law (?)♦ In private law, less legislative rent seeking♦ Choice of field temporary and endogenous

Drivers of rulemaking inefficiency (2): Lack of information

▪ Geographic scope of markets advantage for centralized standards (?)♦ But, in any case, binding precedent enough

(especially if centralized)

▪ Speed of technical change need faster adjustment♦ But unclear which system adapts faster

Drivers of rulemaking inefficiency (3): Rationality—Biases & heuristics

▪ Guthrie, Rachlinski & Wistrich (2001), judges fail♦ The same in Hindsight, Anchoring & Egocentrism advises

constraining judicial ruling—e.g., liability standards♦ Less in Framing & Representativeness

▪ Doubt how judges process key experimental info♦ Is a defendants’ move for dismissal irrelevant when testing for

anchoring effects?

▪ Hindsight: applicable, more than to negligence, to:♦ Emphasis on balanced compensation ex post ♦ Prejudice against asymmetric contracting

▪ But affects equally judges from all jurisdictions

Drivers of rulemaking inefficiency (4): Rationality—Unnaturalness of markets

▪ Sharing redistributive rulemaking

▪ Identifiable persons tendency to ignore rule-setting effects of individual sentences (justice vs. efficiency)

▪ Greater bias against abstract transactions (capital, intangibles, perhaps trade)

‘Cognitive gap’ between continental legislators and judges in 19th century

▪ Legislators♦ Aristocratic democracy made ‘political leadership’

possible instead of ‘political agency’ (20th) more ‘rational’ (pro-market) elites

♦ Also had market experience & profit opportunities?

▪ Judiciary♦ Continent: judicial nobility, more Canon law♦ England: former barristers

Hypothesis: Western law as pro-market adaptation

▪ Common law evolved within a slow transition to the market economy

▪ Civil law changed from above, as part of a pro-market liberal revolution, by constraining judges rulemaking powers

▪ Historical ‘test:’ ♦ 19th and ♦ 20th centuries

Test: Western law in the 19th century

▪ Few changes in common law♦ Needed Roman law introduced w/o codification♦ Binding precedent—national markets

▪ Pro-market revolution of the civil law♦ Freedom of contract achieved by combining:

• Codification Default rules

• Minimal judicial discretion: Sentence according to law & bound by centralized precedents

• Also: Codification doctrinal changes diluting Canon law influence: credit, penal clauses, ‘lesion’, ‘cause’

♦ Mandatory law to reduce transaction costs—e.g., land titling

Test: Anti-market trends in Western law

▪ Changes: statue law in ‘new’ fields and:♦ Common law: courts interfere with contractual

freedom—e.g., unconscionability (= Canon Law)♦ Civil law: greater judicial discretion

▪ Cognitive hypotheses♦ Increased uncertainty in 1910-30s ‘sharing’

• Why not before?

♦ Political change: Elites as political ‘agents’ instead of leaders• Exogenous?

Alternative perspectives

▪ The efficiency debate is not a comparative exercise analyses internal consistency, not efficiency

▪ Comparative performance—La Porta et al.♦ Self-selection♦ Measurement nightmare♦ Correlation ≠ Causation

▪ Need to ♦ Consider self-selection♦ Use institutional dimensions as independent variables (e.g.,

judicial discretion) instead of labels (civil & common law)

Concluding remarks (1)

▪ How to create market friendly institutions—the rule of law—in transition & developing economies♦ Adaptation♦ Constrain judges—but does a cognitive gap exist?

• Lack of market-wise judges

• But political elites more often agents (South America) than leaders (Asian tigers)

♦ Self-enforcing institutions• Example: community mortgage systems

Concluding remarks (& 2)

▪ How to preserve market friendly institutions in developed economies♦ A doses of redistribution required b/c of the

cognitive anti-market bias?