Judicial Rulemaking in Western Law

1. Judicial Rulemaking in Western Law Benito ARRUÑADA (UPF) Veneta ANDONOVA (ITAM)

2. 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

3. 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 areasof trade-offs: • Self-interest (1) • Information (2) • Cognitive: Rationality (allegedly decisive) • Bias and heuristics (3) • Unnaturalness of markets (4)

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

5. 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

6. 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

7. 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)

8. ‘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

9. 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

10. 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

11. 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?

12. 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)

13. 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

14. 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?