Conglomerate Blog: Business, Law, Economics & Society

Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer recently published a new working paper The Economic Consequences of Legal Origins. These three are the core authors of what is referred to as LLSV which at times has also included Robert Vishny (the “V” of LLSV), Simon Djankov, Christian Pop-Eleches, Ed Glaesser, and Daniel Wolfenzon. This is an important paper in which the authors summarize their extensive work on legal institutions and development. In the past decade, LLSV papers have made perhaps the largest scholarly and policy impact in how we think about law, finance, legal origins and development. Some of this work has come under attack because of the various assumptions that LLSV make on both what and how they measure law related variables. Some of the critiques are right on the money. Nevertheless, I think that there is still much to learn from ten years of LLSV. One of the main LLSV arguments is that the common law does a better job than civil law (and in particular French civil law) in terms of investor protection. Civil law also is more associated with more government ownership than common law and more judicial formalism and less judicial independence. These papers overall concluded that common law was better at enforcement of property rights than civil law. I would suggest that the transplant effect/legal origin of many systems is not very clean and changes over time. For example, countries may in certain areas base their company law on the UK, their trusts and estates law on Germany and their antitrust law based on the EU. What then is the legal origin of the country? In other cases, the law on the books does not reflect law in practice. For example, Argentine antitrust law was modeled on the EU but in its approach for many years followed the US antitrust tradition of the Chicago School over that of the Europe. Moreover, when in practice I would see a number of deals involving Latin America where the origin seemed a hybrid of the host Latin American country and NY law, in part because as practitioners in Latin America had all spent lots of time in the offices of NY firms like Cleary, Sullivan and Cromwell and Shearman & Sterling as well as studying for LLMs in the US, some of the US common law approach got incorporated into the fabric of the deals. One practitioner in Chile told me once, “I specialize in Chilean-NY law and in the area of corporate law. I think that this is the dominant approach in the country.”

I believe that LLSV makes certain assumptions about history and political economy in legal origins that are not exactly supported by the underlying historical record. A number of scholars have attacked LLSV on these grounds. Nevertheless, I still find myself strangely attracted to LLSV. In many ways, the results are what you would intuitively expect if you were on your own to attempt to rank countries based on investor protection or other similar features. More importantly, a number of the variables that LLSV uses are a bit squishy but we have yet to come up with better cross country measurements. Indeed, as a result of the critiques, LLSV have gotten better as to how they measure shareholder protection. From a policy perspective, the key to change to various bottlenecks requires not merely a top down approach in the change of the legal system but a bottom up approach by the users of these legal systems to overcome various bottlenecks that are regulatory. This makes me believe that over time the common law/civil law distinction will be seen as a rather false one where instead you will find countries lumped into categories based on their ability to respond to local and changing conditions (even the United States, which in recent years may have created increased regulatory bottlenecks such as SOX). This evolutionary approach is what I believe holds the key to understanding how to think about law and institutions.

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Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer recently published a new working paper The Economic Consequences of Legal Origins. These three are the core authors of what is referred to as LLSV which at times has also included Robert Vishny (the “V” of LLSV), Simon Djankov, Christian Pop-Eleches, Ed Glaesser, and Daniel Wolfenzon. This is an important paper in which the authors summarize their extensive work on legal institutions and development. In the past decade, LLSV papers have made perhaps the largest scholarly and policy impact in how we think about law, finance, legal origins and development. Some of this work has come under attack because of the various assumptions that LLSV make on both what and how they measure law related variables. Some of the critiques are right on the money. Nevertheless, I think that there is still much to learn from ten years of LLSV. One of the main LLSV arguments is that the common law does a better job than civil law (and in particular French civil law) in terms of investor protection. Civil law also is more associated with more government ownership than common law and more judicial formalism and less judicial independence. These papers overall concluded that common law was better at enforcement of property rights than civil law. I would suggest that the transplant effect/legal origin of many systems is not very clean and changes over time. For example, countries may in certain areas base their company law on the UK, their trusts and estates law on Germany and their antitrust law based on the EU. What then is the legal origin of the country? In other cases, the law on the books does not reflect law in practice. For example, Argentine antitrust law was modeled on the EU but in its approach for many years followed the US antitrust tradition of the Chicago School over that of the Europe. Moreover, when in practice I would see a number of deals involving Latin America where the origin seemed a hybrid of the host Latin American country and NY law, in part because as practitioners in Latin America had all spent lots of time in the offices of NY firms like Cleary, Sullivan and Cromwell and Shearman & Sterling as well as studying for LLMs in the US, some of the US common law approach got incorporated into the fabric of the deals. One practitioner in Chile told me once, “I specialize in Chilean-NY law and in the area of corporate law. I think that this is the dominant approach in the country.”

I believe that LLSV makes certain assumptions about history and political economy in legal origins that are not exactly supported by the underlying historical record. A number of scholars have attacked LLSV on these grounds. Nevertheless, I still find myself strangely attracted to LLSV. In many ways, the results are what you would intuitively expect if you were on your own to attempt to rank countries based on investor protection or other similar features. More importantly, a number of the variables that LLSV uses are a bit squishy but we have yet to come up with better cross country measurements. Indeed, as a result of the critiques, LLSV have gotten better as to how they measure shareholder protection. From a policy perspective, the key to change to various bottlenecks requires not merely a top down approach in the change of the legal system but a bottom up approach by the users of these legal systems to overcome various bottlenecks that are regulatory. This makes me believe that over time the common law/civil law distinction will be seen as a rather false one where instead you will find countries lumped into categories based on their ability to respond to local and changing conditions (even the United States, which in recent years may have created increased regulatory bottlenecks such as SOX). This evolutionary approach is what I believe holds the key to understanding how to think about law and institutions.

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