Legal Efficiency and Consistency

We consider a stylized model of judicial decision making under common and civil law to study whether and why legal institutions affect economic outcomes. Judges are of two types: some judges are conservative and mechanically follow the precedent or the statute, while others maximize social welfare. The civil law and common law traditions have different centers of authority (legislatures vs. judges), but they also differ with respect to the timing of legal decisions (ex-ante vs. ex-post). As a motivating example, we study the enforcement of property rights in courts. We analyze the efficiency and consistency of courts' decisions in both legal systems. We find that legal certainty is higher under common law than under civil law. We show that common law achieves higher expected welfare than civil law regime when the proportion of conservative judges is neither too low nor too high, and judges are sufficiently forward looking. In changing economic environments, civil law courts do not respond to economic shocks. Conversely, common law courts change the law only if shocks are persistent. Shock persistence is what makes common law more likely to dominate civil law because of its greater adaptability.