EC516 Contracts and Organisations for Research Students: Lecture 4 Leonardo Felli LSE, D6 12 March 2009
Benjamin Cardozo — 1921 EC516 “Law never is , but is always about to Contracts and Organisations be. It is realized only when embodied for Research Students: in a judgment, and in being realized, Lecture 4 expires. There are no such things as Leonardo Felli rules or principles: there are only Civil Law vs. Common Law isolated dooms. [...] Motivation Ingredients [...] No doubt the ideal system, if it The Model The Economy were attainable, would be a code at Infinite Period Dynamic Game once so flexible and so minute, as to Observations The Evolution supply in advance for every conceivable of Case Law situation the just and fitting rule. But Moral(s) of the Story life is too complex to bring the attainment of this ideal within the compass of human powers”.
Justinian — AD 529 EC516 Contracts and 1,392 years earlier — Justinian had quite a Organisations for Research different idea of what the Law ought to be. Students: Lecture 4 Leonardo Felli Civil Law vs. Common Law The “Corpus Juris Civilis” in English Motivation Ingredients translation adds up to 5,818 pages. The Model The Economy Infinite Period Dynamic Game Observations The Evolution Table VIII — Law VIII — Where a road runs of Case Law in a straight line, it shall be eight feet, and Moral(s) of the Story where it curves, it shall be sixteen feet in width.
Code Napol´ eon — 1804 EC516 Contracts and “By virtue of its simplicity, my one code Organisations for Research was the source of more good in France Students: Lecture 4 than all the laws which preceded me.” Leonardo Felli (Bas-relief in Les Invalides, Paris.) Civil Law vs. Common Law Motivation The Code Napol´ eon (renamed the Civil Ingredients Code) was promulgated in 1804. The Model The Economy Infinite Period Dynamic Game The Code Napoleon has served as the Observations The Evolution model for the codes of law of more than of Case Law twenty nations. Moral(s) of the Story
Law of the Italian Republic — AD 2000 EC516 If the birth takes place during a railway trip, the Contracts and Organisations declaration must be rendered to the railroad officer for Research Students: responsible for the train, who will draw a transcript of Lecture 4 verbal declarations, as prescribed for birth certificates. Leonardo Felli Said railroad officer will hand over the transcript to the Civil Law vs. Common Law head of the railroad station where the train next stops. Motivation Ingredients The head of such station will transmit the documents The Model to the local registrar’s office to be appropriately The Economy Infinite Period recorded. Dynamic Game Observations The Evolution of Case Law This is Article 40 of the regulations for registrar’s offices, issued Moral(s) of as Decree Number 393 of November 3rd 2000 of the President of the Story the Republic of Italy. Regulations issued to ensure the streamlining of procedures, as prescribed by Article 2, comma 12, of Law Number 15 of May 1997 of the Republic of Italy.
Motivation EC516 Contracts and Organisations for Research There is a large empirical literature that shows that legal Students: Lecture 4 origin matters (La Porta, Lopez-de-Silanes, Shleifer, and Leonardo Felli Vishny 1997,1998, 1999, 2002, La Porta, Lopez-de-Silanes and Shleifer 2005, etc.) known as Law and Finance . Civil Law vs. Common Law Motivation Ingredients We here model in a stylized way Case Law and Statute The Model The Economy Law. Infinite Period Dynamic Game Observations The Evolution of Case Law We compare the two systems and provide conditions under Moral(s) of which one legal system dominates the other. the Story
Stylized differences between legal systems EC516 Contracts and Organisations for Research Statute Law is a legislator-made Law: judges apply the Students: Lecture 4 statute. Leonardo Felli Civil Law vs. Common Law In the Case Law, there is (implicit) delegation of the Motivation Ingredients law-making power to judges. The Model The Economy Infinite Period Dynamic Game Observations In Case-law we have the rule of precedent (stare decisis) , The Evolution of Case Law but not in Statute Law. Moral(s) of the Story
A Big Caveat EC516 Contracts and Organisations Can we reinterpret this comparison in terms of Civil Law for Research Students: vs. Common Law? Lecture 4 Leonardo Felli To some extent, clearly yes (at least historically) ... but Civil Law vs. Common Law this is controversial (Hatfield, 2006, Whitman 2006). Motivation Ingredients The Model Common Law countries have accumulated a lot of statutes The Economy Infinite Period Dynamic Game through time. Observations The Evolution of Case Law In Civil Law judges have some leeway as well and Moral(s) of the Story precedents play some role (especially in Germany).
The Question EC516 Contracts and Organisations Is the pragmatism of Case Law simply always superior to for Research Students: the rigidity of Statute Law? Lecture 4 Leonardo Felli Are there universes in which Statute Law is instead Civil Law vs. Common Law superior? Motivation Ingredients The Model The Economy Or is it the case that the ascent of Case Law is like a Infinite Period Dynamic Game scientific discovery? Observations The Evolution of Case Law It just was not known before the 11 th or 12 th century, and Moral(s) of the Story those who discovered it and started using it became unambiguously better off.
Case Law vs Statute Law: A First Answer EC516 Contracts and Organisations Premise: “[...] life is too complex [...]” Laws are bound to for Research Students: be Incomplete (impossible to fully describe/conceive Lecture 4 ex-ante). Leonardo Felli Civil Law vs. Common Law Leaving things to the Courts is a way to delay the decisions Motivation to when more detailed information is available: ex-post. Ingredients The Model The Economy Infinite Period What are the Courts’ objectives? They are “ruling over Dynamic Game Observations others” so we should be sure they have “social welfare” in The Evolution mind. of Case Law Moral(s) of the Story If the Courts’ motives are “right” then the Case Law regime ought to be superior.
Punch-Line EC516 Contracts and We show that in some cases Statute Law is instead Organisations for Research superior. Students: Lecture 4 Leonardo Felli This is because the Case Law advantage — ex-post decisions — may also be a disadvantage. Civil Law vs. Common Law Motivation Case Law Courts may suffer from time inconsistency Ingredients The Model (present bias) due to the timing of their decisions. The Economy Infinite Period Dynamic Game In a dynamic framework this time-inconsistency problem is Observations The Evolution unavoidable. of Case Law Moral(s) of When cases are sufficiently homogeneous, the draw-backs the Story of incompleteness (Statute Law) are outweighed by the costs of time-inconsistency (Case Law).
Laws EC516 Contracts and Organisations With “fully contingent” (complete) Laws, “[...] a code at for Research Students: once so flexible and so minute, as to supply in advance for Lecture 4 every conceivabe situation the just and fitting rule [...]” Leonardo Felli the Statute Law is clearly the ideal regime. Civil Law vs. Common Law Motivation “[...] But life is complex [...]” hence laws are not flexible, Ingredients The Model at least not as much as Courts decisions that occur after The Economy Infinite Period the fact and hence can depend on the details of the Dynamic Game Observations realized contingency. The Evolution of Case Law Moral(s) of We model incomplete laws as fix rules that do not depend the Story on the realized contingencies.
Time Inconsistent Courts: Examples EC516 Contracts and Organisations Patent policy: wide breadth is optimal ex ante to give for Research Students: incentives, but inefficient ex post. Lecture 4 Leonardo Felli Investor Protection: ex ante borrowers are in favor of Civil Law vs. strong investor protection to have cheap credit, but not ex Common Law post. Motivation Ingredients The Model Long Sentences deters crime ex ante. Ex post, the The Economy Infinite Period Dynamic Game deterrent effect does not play any role (three strikes you Observations are out). The Evolution of Case Law Moral(s) of Our model: Court’s decision may induce the parties to the Story disclose their private information at the ex-ante stage (Anderlini, Felli, Postlewaite 2006).
Relation to ”Rules vs. Discretion” Literature EC516 Contracts and Organisations for Research Statute Law is rule-based. Students: Lecture 4 Leonardo Felli Case Law is not a regime of full discretion; precedents Civil Law vs. sometimes bind. Common Law Motivation Ingredients The Model Precedents are a commitment device. The Economy Infinite Period Dynamic Game Observations Unlike Athey Atkeson Kehoe (2005), or Amador Angeletos The Evolution of Case Law Werning (2006)) the constraints on discretion (the Moral(s) of precedents) arise endogenously and are not imposed by an the Story external (optimal) mechanism designer.
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