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Financial development in adversarial and inquisitorial legal systems

  • Massenot, Baptiste
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    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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    File URL: http://www.sciencedirect.com/science/article/pii/S0147596711000400
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    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
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622864

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    10. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law and finance: why does legal origin matter?," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 653-675, December.
    11. Massenot Baptiste, 2010. "Contract Enforcement, Litigation, and Economic Development," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 10.14, Université de Lausanne, Faculté des HEC, DEEP.
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