The Economics of Legal Harmonization

The global legal landscape is undergoing substantial transformations, adapting to an increasingly global market economy. Differences between legal systems create obstacles to transnational commerce. Countries can reduce these legal differences through non-cooperative and cooperative adaptation processes, fostering networks of trade that link diverse legal traditions. In this article, we study the process of legal adaptation, looking at non-cooperative and cooperative solutions that can alternatively lead to legal transplantation, harmonization and unification. The presence of adaptation and switching costs renders unification extremely difficult. In the general case, cooperative solutions reduce differences to a greater extent than non-cooperative solutions, but rarely lead to complete legal unification. We consider the case of endogenous switching costs and show that when countries have the possibility to reduce their own switching costs to facilitate harmonization, they may actually choose to raise them. This may lead to the paradox that countries engaging in cooperative harmonization end up with less harmonization than those that pursued non-cooperative strategies. This explains why differences are often bridged by private codifications and by the evolving norms of the lex mercatoria.