DP8478 Standardized Enforcement: Access to Justice vs Contractual Innovation

Author(s): Nicola Gennaioli, Enrico C Perotti
Publication Date: July 2011
Keyword(s): imperfect judicial enforcement, optimal contracts
JEL(s): K00
Programme Areas: Public Economics, Financial Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8478

We model the different ways in which precedents and contract standardization shape the joint development of markets and the law. In a setting where more resourceful parties can distort contract enforcement, we find that the introduction of standard contracts reduces enforcement distortions relative to precedents, exerting two effects: i) it statically expands the volume of trade, but ii) it hampers commercial and legal innovation by crowding out the use of innovative contracts. We offer a rationale for the large scale commercial codification that occurred in Common Law systems in the XIX century during a period of booming commerce and long distance trade.