The Case for Common Law
Both formal and informal institutions affect individual behavior. However, unlike informal institutions, formal rules are a policy variable. Formal rules are constitutions, statutes, common laws and other governmental regulations. They usually take a written form and are externally enforced. They define the political system (the hierarchical structure, decision-making powers, the individual’s rights); the economic system (property rights, freedom of contract, open entry into all markets); and the protection system (judiciary, police, military). Formal rules could be institutionalized customs and traditions, whereby they serve the function of making informal rules more uniform, predictable, enforceable and transparent. Formal rules are also enacted in order to accommodate changes in the economic conditions of life, in which case they reduce the transaction costs of playing the game. Finally, formal institutions can also be the outcome of a top-down decision-making process in response to the majority rule, lobbying and the pressure from rent-seeking groups. I conjecture that the first two reasons for making formal rules are consistent with the interaction thesis; that is, they have low transaction costs of integration with the prevailing informal institutions. By implication, those two reasons for enacting formal rules are consistent with institutional change within the structure of tradition. The issue to discuss is the incentives and constraints under which the carriers of change (i.e. makers of law and regulations) work in common law and civil law countries. The point of departure for analysis is the Public Choice School assumption that the carriers of change pursue self-interest. This means that...
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