Working Paper: CEPR ID: DP8478
Authors: Nicola Gennaioli; Enrico C. Perotti
Abstract: We model the different ways in which precedents and contract standardization shape the joint development of markets and the law. In a setting where more resourceful parties can distort contract enforcement, we find that the introduction of standard contracts reduces enforcement distortions relative to precedents, exerting two effects: i) it statically expands the volume of trade, but ii) it hampers commercial and legal innovation by crowding out the use of innovative contracts. We offer a rationale for the large scale commercial codification that occurred in Common Law systems in the XIX century during a period of booming commerce and long distance trade.
Keywords: Imperfect Judicial Enforcement; Optimal Contracts
JEL Codes: K00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Laissez faire (P10) | Enforcement distortions (H31) |
| Enforcement distortions (H31) | Contracting among unequal parties (D86) |
| Equal parties writing innovative contracts (L14) | Creation of new precedents (K41) |
| Creation of new precedents (K41) | Reduction of enforcement distortions (H31) |
| Reduction of enforcement distortions (H31) | Contracting among unequal parties (D86) |
| Standard contracts (K12) | Reduction of enforcement distortions (H31) |
| Standard contracts (K12) | Contracting among unequal parties (D86) |
| Standard contracts (K12) | Crowding out of innovative contracts (O36) |
| Laissez faire (P10) | First-best outcomes (H21) |