DP9836 Legal Evolution, Contract Evolution, and Standardization

Author(s): Nicola Gennaioli, Enrico C Perotti, Giacomo AM Ponzetto
Publication Date: December
Date Revised: July 2014
Keyword(s): contracts, imperfect enforcement, legal evolution, precedents, standardization
JEL(s): D86, K12, K40, K41
Programme Areas: Public Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9836

In a model where biased judges can distort contract enforcement, we uncover positive feedback effects between the use of innovative contracts and legal evolution that improve verifiability and contracting over time. We find, however, that the cost of judicial bias also grows over time because the unpredictable application of precedents becomes costlier as the law matures. Contract standardization avoids this cost, statically improving enforcement; but it crowds out innovative contracts, hindering legal evolution. We shed light on the large-scale commercial codification undertaken in the nineteenth century in many common-law countries during a period of booming long-distance trade.