Market Institutions and Judicial Rulemaking

The proper functioning of a market economy requires that freedom of contract be protected effectively. This can be achieved in different ways. A major design decision concerns the rulemaking discretion that the legislator delegates to the courts. When taking this decision, the legislator should take into account the specialization advantages and transaction costs that come with more or less specialized rulemaking. Factors influencing this trade-off explain the different solutions adopted in the two main legal traditions of the West. Common law evolved keeping more rulemaking powers in the judiciary, and thus was characterized by unspecialized rulemaking. The civil law tradition, however, was transformed during the 19th century, reserving greater rulemaking power for the legislative branch and thus reducing the discretion that judges had enjoyed during the Ancient Regime.