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I. Theories of Comparative Law

Legal rules and institutions in any jurisdiction generally address a common set of social issues. Here are some examples: "What promises are legally binding and with what consequences for non-performance?" "What resources may be held as property?" "How are property claims to be determined, transferred, and protected?" "How ought society to induce people to take precaution against harming others?" "What actions and intentions trigger criminal liability?" Jurisdictions that are very different in their non-legal aspects sometimes answer these questions in remarkably similar ways and at other times, in very different ways. An important task of comparative legal scholarship is to provide an explanation of these similarities and differences.

In the first part of this section I shall briefly summarize my understanding of a widely-held theory of comparative legal rules and institutions. In the second part, I shall sketch an economic theory of comparative law.

A. A legal theory of comparative law

When a legal system adopts a rule or institution for dealing with a perceived social need, it either imports the rule from another system or develops the solution from within. Comparativists have settled on the conclusion that "[most] changes in a legal system are due to legal transplants."1 Presumably this happens—in preference to developing an internal, independent solution—because it is cheaper to borrow than to experiment. Other systems have worked through the problems in the area of law concerned and have establish an efficient and equitable solution. Perhaps the internal, independent experiment would have ultimately reached the same conclusion, but there is little to be gained from this experimentation, particularly when one can simply borrow the end result.2

The fact that most legal change occurs through borrowing raises this important question: "How did the borrower decide which rule to borrow?" One possible answer is "prestige"—borrow from a legal system that you admire. According to this hypothesis, the borrowing legal system perceives the lending legal system as, legally, more developed or more highly evolved—at least, in the sense that the lending legal system has already visited the social issue that is vexing the borrower and has developed a legal solution that appears to work. Rather than re-invent the wheel, the borrower adopts the lenders' rules and institutions and, perhaps, modifies them as local needs and customs dictate. As an example, one can imagine that the countries that first developed railroads also developed many of the legal rules and institutions that were required to deal with this new technology. When another country introduced its own railroads, it might well have imported the legal rules and institutions from the original developers.3

However, "prestige" seems a slippery concept on which to ground a theory of legal transplants. One obvious problem is that prestige has no apparent metric, so that one cannot comfortably distinguish the prestige of one potential lender from another. Therefore, it is very difficult to explain or predict from whom borrowing will occur. Another problem is that we do not know the sources of "prestige." Is it due to educational contacts, to military conquest, to commercial contacts, or to other sources? Another complicating factor is that sub-parts of the same legal culture may find different legal cultures prestigious and, therefore, suitable sources from which to borrow. For instance, "German administrative lawyers are very prestigious in Japan, whereas in corporation law American legal culture has the lead[;] Italian criminal law and administrative law are still German, whereas most of more recent influence on the private law is Anglo-American." As a result, Japan may deal with new issues of administrative law by looking to Germany and new issues of corporate law by looking to the United States. Over time, as the prestige in which other legal cultures or their parts are held changes, and, as a result, as the lending legal cultures change, the borrower's legal system might become a stew of, say, two parts German, three parts Anglo-American, and one part French.4 In the end, the prestige hypothesis may amount to nothing more than the contention that each particular legal borrowing is unique and that there is no unifying theory of legal transplants.

These concerns with the prestige hypothesis are so deep that we may need to look elsewhere to explain differences and similarities across legal systems.

B. An economic theory of comparative law

The issues that we seek to explain are why some legal rules and institutions are the same across legal systems and others are different. I shall not seek here to examine macro-issues, such as the choice of legislative form, common law versus civil law, and divisions of responsibility among executive, legislative, and judicial branches—although the factors on which I shall focus could be helpful in looking at those issues. Instead, I intend to focus on what might be called micro-issues, such as a choice of liability standard for a particular wrong, the rules of compensating property owners if governmental action lowers property values, or the protections afforded to new forms of intellectual property.

Let me begin with an analogy that draws a parallel between the use of microeconomic theory to explain differences in economic issues across countries and in legal issues across countries. The same microeconomic theory explains choices by consumers, firms, resource suppliers, and governmental bodies in any country in the world. Even though the theory is the same, the actual configuration of national economies is very different. Some economies are very successful; some are not. Some have the vast majority of their resources in manufacturing industries; some, in service industries. Some have predominantly small, owner-operated businesses; some, publicly-owned multi-national corporations. Economics explains these differences by appeal to consumer tastes and (broadly-defined) resource endowments. One can imagine a legal theory that, like microeconomics, explains all the rules and institutions that any legal system might have. Legal systems would then differ—just as do national economies—because of differences in tastes and resource endowments. 5

We begin the development of an economic theory of comparative law by returning to the fundamental question, "How, in the most general terms, is a legal system to deal with a novel legal issue?" Leaving particular institutional details to one side, the legal system will choose the rule that, among the various alternatives, appears to be the most efficient, fair, and acceptable.

When a system adopts a rule as "efficient," I assume that it has compared the alternatives and chosen the rule that has the greatest net social benefit. As Professor Mattei has pointed out, using the example of the governmental taking of private property for public use, every society develops rules for determining when and how much compensation is owed to the property owner whose property the government has taken, and will choose those rules that lead to the most efficient use of private property and the most efficient provision of governmental services.

This does not mean that efficiency necessitates the same legal rule in every legal system. One government may determine that the costs of compensating a private property owner whose property has been taken for public use are prohibitively high, and, therefore, that jurisdiction may decide never to compensate the private property owner. Another government may choose to compensate in a narrow class of instances, while a third may choose to compensate in an expansive class of takings.6

The economic efficiency hypothesis proposes that different legal systems may compute the costs and benefits of legal rules for the same situation differently because real economic factors (such as resource endowments and tastes) are different. What real economic factors could explain the legal differences with respect to compensation for taking (assuming there are some, as-yet-unspecified differences)? One possibility is that the public's taste for the government's undertaking projects differs systematically across countries. Where the public is eager to have the government act, the law may not require compensation for taking, or require it in only a very narrow category of instances, so as to subsidize governmental action.7 Alternatively, the public's taste may be for less governmental action, and so compensation may be required in a broad category of instances. This requirement acts as a high price on government taking of private property, causing relatively less of it. Another real economic factor that may influence the law of compensation has to do with the pattern of private property ownership and the desired scope of governmental action. If private property tends to be held in small parcels and if the proposed public uses (such as hydro-electric dams and lakes) require the aggregation of large parcels of land, then the costs to the government of assembling the large parcel through a series of arm's-length transactions may be prohibitively high. Allowing the government to compel the sale or lowering the amount or likelihood of compensation due to a private property owner will further the government's ability to complete the large-scale project. Societies where land-ownership is not so diffuse or where the scale of governmental projects is small may have different rules for taking and for compensation.

Consider another example. Suppose that two different societies need to develop rules about the rights of downstream riparian owners to the use of an uninterrupted flow of running water. In one society population is relatively sparse and rivers are scarce. In the other society, population is dense, and rivers, plentiful. The society where population is sparse and rivers scarce should have a greater desire to protect downstream users: water is relatively scarce and, therefore, is more valuable. Upstream users will have a strong incentive to capture as much of the flow as they are able, both for their own uses and as a method of extracting rents from downstream users. In these circumstances, one might well expect the legal system to require upstream users not to diminish the flow over-much. By contrast, the society where population is dense and rivers plentiful should care less, legally, about preserving the rights of downstream users. Water is relatively abundant and its price, low.8

Nonetheless, one should not conclude that differences in legal rules between two legal cultures necessarily signal differences in social costs and benefits or in resource endowments.9 The legal differences may be more apparent than real. Professor Mattei gives this example. Suppose that A is the owner of Blackacre and that B is the owner of Greenacre, a neighboring parcel. A builds a structure on his property but inadvertently trespasses a few inches onto Greenacre for his support wall. B asks A to remove the wall or to pay him compensation for the loss of his property. In Italy, Germany, the United States, and Great Britain the legal systems hold that if A built in good faith, believing that he was entirely on his own property and if the trespass is not substantial, A should be allowed to maintain the building.10 In contrast, France holds that A has unjustly taken some of B's property and that, therefore, B may exclude A.

At first blush, it may appear that there are two very different legal rules at work in this example. But Professor Mattei argues that the appearance is deceptive. The bargaining costs between neighbors may be so low that the Coase Theorem holds: that is, the land will be used by the higher-valuing user, regardless of the assignment of right. Thus, the ultimate effect of the French rule (a property rule for B) may be identical to that in Italy, Germany, the United States, and Great Britain (a property rule for A). We may conclude that, where transaction costs are very low, apparent differences in legal rules and institutions are not economically significant.

As to issues of fairness and acceptability, I merely state that different legal systems may have different tastes for what is just and acceptable. Even if efficiency argued for an identical legal rule in two different legal systems, different notions of justice could lead to different legal rules. In the term "acceptability," I include historical, social, and political constraints.11 As the collapse of communism and the subsequent six years illustrate, societies do not change their legal systems quickly. Legal change, not just in the common law countries, is usually incremental.

There are several significant implications of this sketchy economic theory.12 First, in contrast to the prestige hypothesis, the economic theory draws attention to measurable factors, and, therefore, makes predictions that may be confirmed or refuted by appeal to systematic evidence. Second, the economic theory does not distinguish between importation and domestic innovation as sources of legal change. Presumably, the choice between importation and innovation has to do with the same cost-benefit, fairness, and acceptability factors that I have identified. Legal transplants will be systematically favored over innovation only when they always have a greater net social benefit or are always deemed more just or more acceptable. I indicated above, in my summary of the legal-transplant hypothesis, that there are economic reasons for expecting legal innovation always to come from borrowing. In that sense the prestige (or legal-transplant) and the economic theories seem to make precisely the same prediction. But the economic theory also provides an analysis of when borrowing might not happen—e.g., where internal innovation is cheaper than importation. The legal transplant theory cannot easily explain why that would ever happen.

In summary, this sketch of the economic theory of comparative law draws attention to the following factors in explaining differences and similarities among legal systems:

(1) Legal cultures will choose legal rules and institutions, whether from their own system or from another system, that seem to them to be efficient—i.e., that have the highest net social benefit.

(2) Legal cultures will compare the social costs and benefits of different possible legal rules and institutions.

(3) A given legal culture may have a legal rule for a particular situation that is different from that in another legal culture if

(a) the perceived costs and benefits of the rules are different from what they are in the other legal culture; or

(b) the resource endowments in the cultures are very different; or

(c) what is deemed fair is different in the two cultures; or

(d) what is deemed acceptable in the society (historically, socially, or politically) is different in the two cultures.

In what follows we shall apply this theory to the issues of differences in federalism. Before we get to differences between federations, I first propose an economic theory of the factors that may induce the formation of a federation and the federation's particular characteristics.

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1 The insight is due to Alan Watson, Legal Transplants: An Approach to Comparative Law (1974). See also Alan Watson, Society and Legal Change (1978), "Comparative Law and Legal Change," -- Cambridge L. J. 313 (1978) and The Evolution of Law (1985). 2 Note the clear analogy to the firm's decision about whether to develop a new production process on its own or to borrow someone else's innovation. 3 As Professor Mattei and others note, this borrowing by lesser-developed jurisdictions from more-developed jurisdictions occurs not just across national boundaries but also within countries. The new United States explicitly borrowed law from England, and then later the western states borrowed law from the eastern states. 4 This is not unlikely, nor is it fatal to the prestige hypothesis. It merely makes the application of that hypothesis extremely complicated. Until the prestige hypothesis is more precisely specified, it is unlikely to be possible to predict from whom or when a legal borrowing will occur. 5 An important break in this analogy between microeconomic theory and a legal theory has to do with trade across international borders. International trade allows more efficient resource use as nations and regions specialize to make use of comparative advantage. Trade in law across national borders is, to say the least, novel (although some choice-of-law clauses in international commercial arbitration would seem to qualify as examples). (The prestige hypothesis of legal transplants imagines a trade in legal ideas but of a different sort.) 6 There is also the possibility that the government has miscalculated the costs or benefits. I assume that those miscalculations are self-correcting over time. 7 There is, of course, a possibly inefficient effect on the behavior of private property owners. Because compensation is unlikely, they may be reluctant to invest in or to make improvements to resources that the government might take. 8 These suggestions about the relationship between legal rules and resource endowments are, of course, subject tot he usual "all other things equal" disclaimer. The differences in law described in the text with regard to riparian water rights is a caricature of the differences between the eastern United States, where water and population were plentiful, and the western United States, which was arid and scarcely populated. The legal rules developed in the East were inappropriate for the West, so that a very different set of riparian rights came to hold in the western United States from those that held in the East. 9 As we shall shortly see, these differences may signal differences in societal ideas of justice or of acceptability. Here I confine myself to strictly economic factors accounting for similarities and differences in legal systems. 10 The four legal systems differ markedly in how, if at all, they would require A to compensate B. 11 This might also include Professor Mattei's "legal parochialism," which makes legal decision-makers in one jurisdiction highly reluctant to go outside their own system for answers to novel legal issues. As Professor Mattei notes and I indicated in n. 6 supra, it may be easier for goods and services to cross international borders than for legal ideas to do so. 12 There is, of course, an extensive theory of change in the common law system. See, e.g., Rubin, "Why Is the Common Law Efficient?," 6 J. Legal Stud. 51 (1977); Goodman, "An Economic Theory of the Evolution of the Common Law," 7 J. Legal Stud. 393 (1978); Cooter & Kornhauser, "Can Litigation Improve the Law Without the Help of Judges?," 9 J. Legal Stud. 139 (1980); and Hadfield, "Bias in the Evolution of Legal Rules," 88 Geo. L. J. 583 (1982). The thrust of this literature is that private litigants have incentives to challenge inefficient common-law rules and not to challenge efficient rules so that there is a tendency for the common law to evolve towards more-efficient rules.