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Financial development in adversarial and inquisitorial legal systems

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  • Massenot, Baptiste
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    Abstract

    This paper aims to understand why common law countries have more developed financial markets than civil law countries. One difference between these two legal origins is the procedure of evidence collection for a trial: It is adversarial in common law and inquisitorial in civil law. The adversarial system delegates the collection of evidence to a larger extent to lawyers than the inquisitorial system does. The paper presents a model of law and finance in which investors use courts to enforce their financial contracts with entrepreneurs. Investors are willing to lend more if courts collect evidence more efficiently. Financial markets are more developed in the adversarial than in the inquisitorial system if investors are richer than entrepreneurs or if lawyers are more productive than judges. Manipulation of evidence by lawyers has an ambiguous impact on finance.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Comparative Economics.

    Volume (Year): 39 (2011)
    Issue (Month): 4 ()
    Pages: 602-608

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    Handle: RePEc:eee:jcecon:v:39:y:2011:i:4:p:602-608

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    Web page: http://www.elsevier.com/locate/inca/622864

    Related research

    Keywords: Adversarial; Inquisitorial; Financial development; Legal origins;

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    References

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    1. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, American Finance Association, vol. 52(3), pages 1131-50, July.
    2. Jappelli, Tullio & Pagano, Marco & Bianco, Magda, 2005. "Courts and Banks: Effects of Judicial Enforcement on Credit Markets," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 37(2), pages 223-44, April.
    3. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Scholarly Articles 4554125, Harvard University Department of Economics.
    4. Andrei Shleifer & Florencio Lopez-de-Silanes & Rafael La Porta, 2008. "The Economic Consequences of Legal Origins," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 46(2), pages 285-332, June.
    5. Nicola Gennaioli & Enrico Perotti, 2012. "Standardized Enforcement: Access to Justice vs. Contractual Innovation," Working Papers, Barcelona Graduate School of Economics 652, Barcelona Graduate School of Economics.
    6. Paul R. Milgrom & John Roberts, 1985. "Relying on the Information of Interested Parties," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 749, Cowles Foundation for Research in Economics, Yale University.
    7. Mahoney, Paul G, 2001. "The Common Law and Economic Growth: Hayek Might Be Right," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 30(2), pages 503-25, Part I Ju.
    8. Rene M. Stulz & Rohan Williamson, 2001. "Culture, Openness, and Finance," NBER Working Papers 8222, National Bureau of Economic Research, Inc.
    9. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law and finance: why does legal origin matter?," Journal of Comparative Economics, Elsevier, Elsevier, vol. 31(4), pages 653-675, December.
    10. Song Shin, H, 1996. "Adversarial and Inquisitorial Procedures in Arbitration," Economics Papers, Economics Group, Nuffield College, University of Oxford 124, Economics Group, Nuffield College, University of Oxford.
    11. Nicola Gennaioli & Andrei Shleifer, 2007. "The Evolution of Common Law," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 115, pages 43-68.
    12. Nicola Gennaioli & Andrei Shleifer, 2007. "Overruling and the Instability of Law," NBER Working Papers 12913, National Bureau of Economic Research, Inc.
    13. Froeb, Luke M. & Kobayashi, Bruce H., 2001. "Evidence production in adversarial vs. inquisitorial regimes," Economics Letters, Elsevier, Elsevier, vol. 70(2), pages 267-272, February.
    14. Parisi, Francesco, 2002. "Rent-seeking through litigation: adversarial and inquisitorial systems compared," International Review of Law and Economics, Elsevier, Elsevier, vol. 22(2), pages 193-216, August.
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