Everything about Legal Origins Theory totally explained
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.
Theory
Since, historically, most countries received their law through
colonial 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
Scandinavian 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 interventionism), 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).
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 didn't meet the basic minimum standards of
comparative law and thus crudely mischaracterized continental
European
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 it's still hotly debated, most of all among
financial economists and scholars of corporate law.
Proponents
Further Information
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