The Choice of Regulatory Regimes: a Unified
Framework
Peihong Yang1
Abstract:
This paper tries to understand the choice rule of different regulatory regimes which
include norms, legal systems and regulations. We adopted an approach different from
legal origin theory and discarded the belief that one legal system was better than others
or vise versa. The costs associated with different regulatory regimes are disintegrated
into variable and fixed parts which are generated from the properties of these regulatory
regimes. By varying these costs, the choice rule is given and the convergence of these
regulatory regimes are also illustrated.
1
Unirule Institute of Economics. I am extremely grateful to Alberto Alesina, William Alford, Zhiwu Chen,
Edward Glaeser, Nica Liu, Peterpan Wang, Yushi Mao, Sam Peltzman, Kangyu Ren, Jeffery Williamson
especially Andrei Shleifer for their comments and help.
1
1. Introduction
Why some countries adopt civil law system while others common law system? At first
sight, it deserves no discussion because one may say that these regulatory regimes are
determined by historical factors or by some exogenous shocks. Thus it is beyond
reasoning. Exogenous shocks can of course affect the choice of legal systems. But in the
long-term, this explanation is not solid because under any one specific legal system, there
are enough opportunities for a country to switch into other legal systems after the impact
of those exogenous shocks fade. It is reasonable that the function of law is to regulate
human behaviors. But why there are some other regulatory regimes, such as norms,
customs and regulations. Obviously, all of these regulatory regimes are instruments
making human behavior more socially desirable. Are they substitutes or complements? In
this paper, these regulatory regimes will be put into one unified framework for us to
understand its selection.
Regulation has been a focus for economists over many decades. The traditional view on
justifying regulation was based on public interest approach [Pigou, 1938; Meade, 1948].
According to this theory, government regulations are good for curing some bad results of
market mechanism. We can find that these scholars treat regulators as fair, selfless and
primarily competent agents. It cannot be denied that some regulators behave like agents
with morality and wisdom. In most cases, however, the regulators would like to abuse
their authorities if there are no other institutional arrangements of checking and
supervising its power. This approach obviously overlooked the agency problem.
Regulators will also try to maximize their interests just like other rational agents. In many
cases, these interests maximization behavior will make regulation activities socially
undesirable. Different from this approach, economic theory of regulation, mainly
advocated by some Chicago school economists, like Stigler [1971] and Peltzman [1989].
This approach highlights the rational character of regulators. It contends that regulators
will be captured by some first movers. Regulators in this case will not only regulate for
the public interests but also deter competition. First movers will buy the authority of
regulators to deter the entrance of followers. If we consider the effect of group behavior
[Olson, 1971], the economic theory of regulation will be more realistic.
Apart from these two approaches, some economists [Glaeser and Shleifer, 2003; Djankov
et al, 2003] think that regulation works as a precautionary measure to reduce possible
damages. They contend that the incentive of defendant to bribe judges or to affect judicial
process through campaigns will grow with the increase of damages. In this sense,
regulation is socially desirable. But we may raise following critiques. First of all, it is not
appropriate to distinguish regulation from law by ax ant and ex post classification.
Regulations may appear as precautions. But we may ask why not integrate these
regulations into legal system and let courts serve as regulators. Law from any point of
view can also be viewed as precautions. Particularly in common law countries where one
agent can do whatever law doesn’t prohibit. Secondly, in comparison to law, regulations
are less authoritative. Regulations are, at best equivalent to law but are not law. When
there is a dispute, law is the final reference. Thus it is hard to view regulations as a
2
substitute of law. Last but not least, regulators are more vulnerable to bribes than judges.
All of these three doubts will indicate otherwise about the adoption of regulation.
The contribution of this paper is trying to embed regulations in legal systems. Regulation
is not a substitute or complement to law. We contend it is not right to disintegrate this
spectrum of regulatory regimes.
It will be organized like this. In part one, we briefly review the properties of regulatory
regimes, and the characteristics of regulation and major legal systems will be discussed.
We contend that written law is concise and case law is precise. In part two, a simple
model will be given to illustrate this evolution. The third part will analyze the
convergence of these regulatory regimes. And the fourth part is the concluding remarks.
2. Properties of Regulatory Regimes
At the beginning, we will point out that there is no special advantage or superiority of one
legal system over another. Common law is not necessarily better than Romano-Germanic
family of law or vise versa. The approach [Glaeser and Shleifer, 2002] from the
economic performance to justify the advantage of legal system is not valid. Different
legal system may have different impact on some specific elements of economy, such as
human rights, property rights etc. But we cannot draw the conclusion that common law is
superior in economic performance. There are many crucial factors behind economic
development. Legal system is never the most determinant one. Actually, it is political
institutions that one country choose before choose legal systems. There are indeed some
common law countries that are wealthier than civil law countries. But there are also some
common law countries that are less developed than civil law countries. In the long run, it
will be clearer. It is absurd to use the history of 19th century Germany and 13th century
Great Britain to conclude that civil law system is better or compare with 20th century
America to say common law system is better. In this regard, from a socially efficient
perspective, the costs associated with any given legal system resulted from its own
properties. There is no loss that if one country selects common law systems instead of
civil law systems or vise versa without considering its needs. In other words, selecting
different legal system only matters when it mismatches its needs.
The first regulatory regime is custom. The striking characteristic of custom is selfenforcing. Customs are developed within some specific community as common
knowledge to all. In a traditional society which migration is absent, the residents of this
society have no incentive to violate these customs because they may face severe
punishments such as being discriminated, untrusted etc. This enforcement mechanism is
strong enough to keep this community moral and stable in this context. However, with
the development of community, customs will lose its significance. In this situation, the
interactions among residents are not strong enough to make this enforcement mechanism
self-enforceable. This is also the reason that Greek philosophers emphasized the benefits
of small and homogeneous communities. Plato even calculated the optimal size of a
polity down to the precise number of households, namely 5,040 heads of families.
3
Aristotle argued that a polity should be no larger than a size in which everybody knows
personally everybody else. In fact, he argued in The Politics “experience has shown that
it is difficult, if not impossible, for a populous state to be run by good laws.” In that
period of course laws were usually local customs.
In a modern society, the role of customs as a justiciable regulatory regime is decreasing
except that we can find some traces in some Muslin law countries. Of course, we by no
means say that these customs are not important. However, in this paper, we will only treat
justiciable regulatory regimes and will skip customs.
We will focus on two major legal systems, civil law system and common law system. It is
widely held that civil law system is the written law system and common law system is the
unwritten law system. Or even one may attribute the difference between common law and
civil law system to codification or not. But in America, England and other common law
countries, there are many statutes, codes or even written constitutions. It is obvious that
this classification is not appropriate. But it is true that in common law countries, decided
cases are generally more important than statutes. It is appropriate to treat common law as
case law. In civil law countries, the first reference of judges is enacted law. So in this
paper, the core of common law will be defined as case law system, civil law as enacted
law system.
Like we stated in the above, there is no special superiority of one legal system over the
other. Thus, the costs of one given legal system are equal to its social costs. For any kind
of regulatory regime, it will face two costs. One is fixed costs that resulted from start-up
process. To establish a regulatory regime, some institutional infrastructure would incur
some costs, such as prison, police, court and the establishment of rules for adjudicating.
For simplicity, in this paper, we will restrict fixed costs of one legal system to the costs of
rule-establishment because both civil law and common law systems will have prisons,
police and other devices. This cost is not closely connected with legal systems but
correlated to the crime rate of one society2. The other cost is variable costs, which are
associated with adjudication process. This cost is a monotone increasing function of the
number of cases. In this paper, we will assume a linear cost function. Thus, for one
society, it will try to minimize the sum of these two costs.
In common law countries, if we look back at theirs history, we will find that it has some
start-up costs. Before 1066 of Norman Conquest, England was governed by County or
Hundred Courts which were the assemblies of free man. The rule for these courts to
adjudicate cases was local customs. But between Norman Conquest and the accessions of
Tudors (1485), County Courts were gradually replaced by royal courts. Royal courts of
justice revised and invented “comune ley”, an English law truly common to the whole of
England. We must bear in mind that these precedents are not necessarily the real cases,
but are fictions and inventions. They may be in some aspects similar to decided cases
under the rule of local customs. But more likely it is different from these local customs.
We know that after the collapse of Roman Empire, Saxons, Jutes, Danes and Angles
2
It is possible that some countries have more prisons and police etc given the same crime rate because of
different political institutions. But in this paper, this variance will be neglected.
4
divided up England. These tribes have their own customs and rules in adjudicating
disputes. How can we expect a rule common to these different tribes without invention
and reconstruction? These inventions will of course induce some costs; at least it will try
to make it enforceable in different tribes. Fixed cost is also associated with another
character of common law. In common law system, not all cases are binding. For instance
in England “Only selected cases are published [as precedent]: 75 percent of the decisions
of the House of Lords, 25 percent of those of the Court of Appeal and 10 percent of the
High Court of Justice will be selected as precedents” [David and Brierley, 1985]. This
shows that precedent is not arbitrarily established but carefully selected.
In civil law countries, laws are enacted by legislative organs and laws are in written
forms. We will anticipate that there are enacting costs of these written laws. This cost
varies according to the difference of political structure. In a totally dictatorial country, the
words of dictators are laws. It will be of very low costs to enact one law. But in a
democratic country, there are many different political groups. These groups may
negotiate and bargain on one specific provision or article of law. This bargaining process
in some cases can prohibit the enactment of one law. We can conclude that the start up
costs of law in a democratic civil law country will increase with the growing number of
political groups. More political groups will make the start-up costs higher. There is
another kind of country called authoritarian country that is the mixture of dictatorial
country and a democratic country. It has the elements of both a democratic regime and
dictatorship, such as some partial elections, controlled market economy etc. In
authoritarian countries, the start-up costs of written law will be greater than those in
dictatorial countries but it will be less than that in democratic countries.
For regulations, its start-up costs will be smaller than written law because regulatory
bodies are authorized to pass specific regulatory rules as long as they are not
contradictory to laws and constitutions. In common law countries, regulations are
generally conducted by commissions that are controlled by legislative branch. It is called
administrative power, the fourth power distinct from the three traditional powers. In civil
law countries, regulations will generally go through executive branch. But in both legal
systems, regulatory bodies have jurisdictions to enact rules by themselves. In comparison
to law enacted by legislative branch, regulations have smaller start-up costs because there
is no need to go through formal political process.
After one legal rule is established, we will face its enforcement costs. How to apply
established rule to different cases? Application costs have huge difference under different
regulatory regimes. For simplicity, we assume a linear form of this variable cost function
that is the product of number of cases and unit cost. Of course, the unit cost will vary in
different legal systems.
In common law countries, although decided cases are binding, judges will also try to
search suitable cases. It can be expected that no case will be completely the same to the
decided cases. Judges will choose distinguishing cases and make a new rule or following
different precedents that are similar to the current case from different aspects. With the
growth of precedents, both judges and lawyers will have to look into more cases to find
5
the most suitable precedent. Considering the adversary system in common law countries,
it will be more difficult to find a suitable precedent that are persuasive to both defendant
and plaintiff.
We must bear in mind that in common law countries procedure is given the primary
attention. It is “not a law of universities, or a law of principles; it is a law shaped by
proceduralists and practitioners”. In this context, if two cases are similar, the results
should be also similar, but there may be obvious deviations if one party finds a more
favorable precedent and changes this expectation through procedures. From it, we can
draw the conclusion that in common law countries, the adjudication costs of cases will be
higher. This adjudication costs may take the form of higher lawyer charges, longer court
time, and the piecemeal like of adjudication etc.
However, civil law countries adopt inquisitorial system. Judges focus on substantive
aspect of justice. As a matter of fact, judges have bigger discretion in comparison to its
counterparts in common law countries because the results of one case will more depend
on the interpretation on law by judges, not through court adversaries. It is widely believed
that common law is law made by judges. But this is not to say common law judges have
more discretion in adjudicating cases. In fact, common law system endogenously has one
reputation mechanism to guarantee its judges will not abuse this power. The philosophy
difference in these two legal systems is also reflected in the structure of law. Because of
the procedural consideration, statutes in common law countries are longer and described
in more detail. But in civil law countries, because of the substantive justice consideration,
the enacted law is shorter and concise. The advantage of these concise laws is its wider
and easier applications. We take contract law as an example. Common law countries
highlight procedures. A contract will be valid once the acceptance party signs it and gives
it to the postal office. In civil law countries, three elements: offer, adequate consideration
and acceptance must be satisfied. It can be duplicated to different territories by just
focusing on these three elements. But for common law, if the offer party wants to cancel
and the contract happens to lose during delivery, it will take lots of time to adjudicate this
dispute. There are also other possibilities. Each possibility may be different and it has to
be adjudicated from a proceduralist perspective. It will cost more in comparison to civil
law system when facing the same category of cases. But for regulations, the duplication
cost will be lower than that of case law because it is concise. In comparison to written
law, regulations have higher application cost because the final resort is still law. A
regulation will be invalid if it contradicts law.
3. The Choice of Regulatory Regimes
Based on above analysis, we conclude that there is no special superiority of common law
over civil law or vice versa. The cost of one legal system comes from start-up costs and
application costs. Thus from social efficiency perspective, it will try to adopt a legal
system that minimizes the sum of these two costs. We assume the start-up costs for
common law, civil law and regulation are a p , al and ar respectively. a p ar al ,
a , a , a  R 

p
r
l
. The unit costs of application are c p , cl and cr . With
6
cp
cr
cl , c p , cr , cl  R   . Thus the cost function of common law will be p  a p  c p n ,
n is the number of cases. The cost function of civil law is l  al  cl n and r  ar  cr n
for regulation.
At the beginning, we consider a static situation that one given country is open to
al  a p
selections of legal system. In order to minimize social costs, when n
, where
c p  cl
according to the above assumptions we know n 0 , this country will select common law
system because in this situation p l . But with the growth of cases needing adjudicating,
al  a p
the comparative advantage of common law is losing. When n
, it is no longer
c p  cl
efficient for this country to adopt common law system. On the contrary, civil law will be
al  a p
more efficient. We take N  n 
as the critical number of cases that determines
c p  cl
the selection of legal systems if there is a new country having no legal system beforehand
and free to select legal system.
This means that common law generally has a smaller jurisdiction in comparison to civil
law system. It is not difficult to understand that even in modern world, common law
countries are smaller than civil law countries. In common law family, America is a big
country. But we should bear in mind that America is a federal state. The amendment X to
the American constitution enacted in 1791 states “ the powers not delegated to the United
States by the constitution, nor prohibited by it to the States, are reserved to the States
respectively or to the people”. We can find from this statement that States have the
residual authority. In the case of Erie Railroad Company V. Tompkins, Justice Brandeis
stated:
“ [e]xcept in matters governed by the Federal Constitution or by Acts of Congress, the
law to be applied to any case is the law of the state. And whether the law of the State
shall be declared by its Legislature in a statute or by its highest court is not a matter of
federal concern. There is no federal common law”
Since then, the United States Supreme Court has frequently had occasion to re-affirm and
to apply the principles formulated in Erie R.R. Co. V. Tompkins and it is now a well
established principle of American law [David and Brierley, 1985].
Besides America, other big countries in common law family, such as Canada, Australia
and India, are federal countries. Under the federal system, states or provinces have great
jurisdiction in determining their own affairs except for sovereignty and other very limited
fields.
Now, we consider a dynamic situation when the number of cases exceeds the critical
number N . One point should be noticed is that once one legal system is selected; it will
7
be more difficult to switch into another one because of the rigidity of legal system. For
those countries of legal transplantation, we can generally find that there are many
confrontations between the old and new legal system. Sometimes, this confrontation is
very harsh, such as the military confrontation in colonization process. Historically, there
are very few legal system changes except for revolution, colonization. It is rare for one
country to switch into other legal systems in peaceful times.
So in this section, we will assume that one specific legal system is given and to see what
will happen if the number of cases exceeds this critical point. Firstly, we will look at one
common law country.
In the above, we know that if n  N , the optimal choice is to adopt common law system.
But in this country when n N , it will not change into civil law system when
c p (n  N ) al . This means that if the start-up cost of civil law system is greater than the
inefficiency when the number of cases exceeds critical number, the optimal choice for
this country is to maintain its legal systems because
pn  a p  c p N  c p (n  N )  pN  al  pn  al . This condition can be stated as: if
n
al
 N , a common law country should not change its legal system.
ap
al
 N N which means the number of cases
ap
adjudicated by common law system is greater than its optimal number. There will be
some inefficiency, such as the overload of judges, the shortening of court time, and
higher probability of injustice etc. But if c p (n  N ) ar  cr (n  N ) , that means if
But the distortion happens because
ar
 N , there will be some efficiency improvement if this country adopts some
c p  cr
regulation. In order to make this condition reasonable, we should assume that
c
ar al (1  r ) . Thus in one common law country, if the number of cases is smaller than
cp
ar
 N , it will be better to adopt the pure common law. If the number of cases is
c p  cr
a
ar
greater than
 N but smaller than l  N , this country should adopt common law
c p  cr
cp
a
and regulation together. But when the number of cases exceeds l  N , there by no
cp
means that this country should maintain its legal system. It should adopt civil law
system.(See Figure One)
n
8
Figure One:
Case Law (Common Law)
/
/
0
N
Regulation
/
ar
N
c p  cr
Written Law (Civil Law)
/
al
N
ap
It may be dismal that from the above analysis that finally all common law countries will
be replaced by civil law system. It is true that if there are no reforms, common law
system will be more and more inefficient with the growth of number of cases. There are
some possible ways to get out of this situation. Primarily, it should reduce the number of
cases to be adjudicated by common law system. The other one is to reduce the application
cost of common law.
With the expansion of economic activities and human interactions, one country will be
more and more heterogeneous; the number of cases will surely grow. But if there are
some cases which are resolved by regulatory bodies or its people behaves better, it is still
possible that the number of cases will not grow so fast even the last resort is still law. For
regulations, we already know that its application costs are smaller than that of case law
systems. The underlying reason behind it is that regulation will not focus too much on
procedural justice. The officers will mainly look at substantive justice. And if both
disputed parties don’t want to shoulder the cost when this case moves to court and the
result by regulatory bodies doesn’t deviate from their expectations too much, both parties
have incentive to resolve their disputes through regulations, not courts.
However, the bad thing for regulation is also its deviation from procedural justice.
Sometimes, substantive justice is so elusive and depends on interpretation, just like in
civil law countries; regulators may seek their own interests rather than a fair and just
resolution. Actually, opportunistic behavior of regulators in many countries is pervasive,
particularly in civil law countries because regulations in civil law countries are generally
in the form of directives and they very concise. In comparison to regulations in common
law countries, regulations in civil law countries are shorter and more abstract. It leaves
too much discretion to regulators. But even in common law countries, regulatory bodies
are more likely to be bureaucratic and inefficient. It is also more likely that regulators are
captured than judges.
The good thing is that non-governmental regulations can play a bigger role. In terms of
the function of regulation, it can be divided into two categories: standard-related
regulation and liability-related regulation. For standard-related regulation, government
should not be the only source. As a matter of fact, some associations, society and clubs
can play this role. We can expect that this kind of regulation will increase. From the
competition perspective, more and more firms want to set some standards because it may
give them some monopoly power to deter the low-cost duplication of their products. If
there are clear and enough standards, as a matter of fact, the workload of regulatory
9
bodies will reduce. For example, if there is a clear requirement that a firm on the security
market should disclose its information, have a given amount of independent member in
the board etc, then it will be easier for regulators to adjudicate related disputes. In terms
of liability-related regulations, with the development of financial market, there will be
more financial derivatives to distribute these risks.
The other means is to reduce the application costs of common law. Historically, some
jurists like Coke recognized the shortcomings of putting too much attention to procedural
justice. It may also hurt substantive justice. So in England, it developed out equity law
system to correct the defects of common law. In some cases, some minor deviation away
from procedural justice will make common law more applicable. But of course, there will
be some dangers of dictatorship.
Now, we turn to civil law countries. From the analysis on the nature of civil law, it has
comparative advantage when the number of cases is greater than N . So, in civil law
system, it is not efficient to change into common law system when facing a growing
number of cases. But we can find some interesting phenomena from a political
perspective.
We already know that if one country selects civil law system because of its large number
of cases, then in this county for n  N cases, it is still adjudicated by civil law system.
We will now consider that if this country is a democratic country, there are many
opposition parties, political groups, interests groups etc. And these political groups are
very difficult to compromise. The direct implication is that the start-up costs of one
enactment will be very high. Taking a ' which is the start-up of enactment in a
l
democratic country, which means that al'
cases will be N ' 
al . In this situation, the critical number of
al '  a p
al  a p
which is greater than N 
. Comparing these two
c p  cl
c p  cl
terms, we can find if one enactment will go through a bargaining political process, the
critical number of cases will go from N to N ' . This means a distortion because at least
N '  N cases will have to be adjudicated not by new laws but by old laws.
If this country is dictatorial, it will have low start-up costs because the words of dictators
are law but it will face higher application costs because this law is totally not selfenforceable. It is against the will of its people and few will respect it. This will lead to
higher application costs in dictatorial regimes and will also increase the critical number
a  ap
of cases because N ''  l
is greater N . Thus for dictatorial county, there will be
c p  cl '
N ''  N cases be adjudicated partially by law because of the chaos associated with the
disrespect of law which is also a distortion.
It is appropriate to assume that both in democratic countries and dictatorial countries,
enough and suitable regulations are desirable. It will be easy to understand this for a
10
democratic country but may be doubtful for a dictatorial country. For dictators, they also
want society well regulated, not by law of public will but by the will of dictators.
However, when considering political process, there will be N ''  N and N '  N cases
cannot be efficiently adjudicated by law in dictatorial and democratic regimes
respectively.
In this situation, the optimal response is to adopt some regulations to fill these gaps.
Because regulation has a lower start-up costs in comparison to law, it will have
comparative advantage when the compromise is very difficult to reach. But the
application costs of regulation will be smaller than the application costs of law in a
dictatorial regime though it is greater than that in a normal country. Thus, in civil law
countries, N ''  N and N '  N cases should be governed by regulations. (See Figure Two)
Figure Two:
A: Democratic Country
Regulation
/
N
/
al '  a p
c p  cl
B: Dictatorial Country
Regulation
/
N
/
al  a p
c p  cl '
3. Convergence
In recent years, the trend of convergence between different legal systems is speeding up.
It is difficult, if not impossible, to find the pure common law or civil law system in the
world today. Legal systems are presenting a mixture. One hundred years ago, Walton
[1907] gave one classic definition of a mixed jurisdiction: "Mixed jurisdictions are legal
systems in which the Romano-Germanic tradition has become suffused to some degree
by Anglo-American law." From this definition, we will find that the direction of
suffusion is the reception of common law elements in former Romano-Germanic tradition,
not the opposite direction. In this section, we will briefly state the mechanism of this
convergence.
11
From section two, we find that if n  N , the optimal choice for one country is to adopt
common law system. In a civil law country, generally the total number of cases will
exceed this critical number because of large population, big territories and heterogeneity.
However, we must bear in mind in a pure civil law system, there are no common law
elements. That means that for cases fall in (0, N ] , it is still adjudicated by civil law
system, although from the efficiency perspective, it should be adjudicated by common
law. It is appropriate to assume that in a civil law country, if there are more cases to be
adjudicated, the start-up costs of law will be higher because it will need more laws to
satisfy the social needs. We assume al  al  (1  )al , 0  1 , when the number of
cases n exceeds the critical number N ,
ln  al  cl n  al  cl N '  (1 )al  cl (n  N ' ) .
We know in this case N ' 
al  a p
c p  cl
N . It means that  0, N '  should be adjudicated by
precedent rule. And ln pN '  L' (n  N ' ) , this condition says that it is more efficient for a
civil law country to adopt a mixed legal system. At the same time, we will find that
N ' N , this means that in a civil law country, the function of precedent is limited.
Furthermore, it is negatively correlated to the start-up costs of civil law system. With the
decrease of al , the comparative advantage of precedent will also decrease.
How about common law countries? If common law countries receive civil law system,
then the efficiency improvement must exceed the start-up costs. For a common law
country, this start-up cost is very high because of the difference in the understanding of
law, the shortage of professional judges to interpret substantive justice, the difference of
legal structure etc. Thus it is inefficient for one common law country to receive civil law
system. The possible solution to maintain common law tradition but cope with increasing
number of cases is to enact some statutes, the elements of civil law tradition. It should be
pointed out that legislature or statutes are not the fundamental difference between civil
law and common law system.
In common law system procedure is especially important, so statutes are detailed, precise
and specific. However, in civil law countries, substantive justice relies on the
interpretation of judges, so statutes are generally shorter, concise and abstract. Thus in
common law countries, it is more efficient to keep its legal system but enact more statutes
a
because pn  pN  pn N  pN  ln  N , if n  l  N .
ap
Now we will show that there will be efficiency improvement if both legal systems adopt
some regulation. In a civil law country:
ln  lN 0  lN 1  N 0  ln  N 1  pN 0  rN 1  N 0  ln  N 1
Given N 0 
al  a p
c p  cl
, N1 
 al  a p
c p  cl
,
1, 
0, 
0, and al
ar  a p That means
the combination of (0, N 0 ] cases adjudicated by precedent, ( N 0 , N 1 ] cases adjudicated by
regulation and the remaining cases adjudicated by its original civil law system will be
12
more efficient than any single legal system. This condition and conclusion from section
two also show that if the start-up costs of civil law system are not large enough to cover
the start-up costs of case law and regulation, then it will be more efficient to have only
regulation and civil law, and not to introduce case law.
al
 N this legal system should
ap
be replaced by civil law system. Otherwise, this legal system cannot function well. But
a
N '  l  N is greater than N . This means that although common law system should be
ap
maintained in the perspective of legal system rigidity, but there are some distortions
because it exceeds the optimal number of cases it can efficiently and fairly adjudicate.
In a common law country, we already know that if n 
al
. This means
ap
that if the regulation cost exceeds the welfare lose from keeping case law unchanged, it is
better not to introduce regulation. Otherwise, some regulation will improve efficiency.
We will see from this condition that if the start-up cost of civil law system is very high,
and there are increasing number of cases to be adjudicated, the comparative advantage for
regulation will be higher.
If regulation is introduced, it must satisfy the condition that rN '  N  c p
The convergence of regulatory regimes can be showed by following graph:
13
Common Law
IPF’
IPF
A
IPF1
G
E
Regulation Premium
E’
K
Case Law
F
O
B
Written Law
Regulation
(IPF: Institutional Performance Frontier)
B’
Civil Law
The old constraint without regulation is curve AB. Under this constraint, at equilibrium E,
there is OF cases be adjudicated by civil law and OK cases by common law. After
regulation is introduced, the new constraint is AB’, equilibrium becomes E’. KG is
regulation premium that reflects the impact of regulation on common law system.
From this graph, we can find that the institutional performance curve of any pure legal
system is lower than a mixed one. In graph, IPF1 is always lower than IPF. And there will
be some efficiency improvement if regulation is adopted, because IPF’ is higher than IPF.
4. Concluding Remarks
The logic in this paper is purely theoretical. From some given period of history, the
mechanism revealed in this paper may be contradicted. But from the long-term
perspective, this logic captures the evolution of legal system. This explains why large
countries generally adopt civil law systems, smaller countries adopt common law systems,
14
and norms and customs will govern the daily behaviors in a community. For big common
law countries, they generally adopt federal system to diversify the jurisdiction and
delegate authorities to local political units.
We can also expect that the number of cases will grow when economic activities expand.
It really proposes a challenge to common law system. But there are also some possible
solutions, such as federalization, delegate more authority to local political units, adopting
regulations, enacting statutes and others. For civil law countries, the challenge is to
balance the possibility of dictatorship and chaos [Shleifer, 2005]. But for these two legal
systems, referring more cases to non-state regulators will be always desirable because the
final resort is still court thus it will not hurt justice of one society but can reduce the load
of judicial sectors.
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