Legal origins theory

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 did not 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 is still hotly debated, most of all among financial economists and scholars of corporate law.

Proponents

* Andrei Shleifer
* Robert W. Vishny