When Does Legal Origin Matter?

Abstract

This paper takes another look at the extent of business regulation in civil law versus common law countries. In contrast to existing studies that find a heavier role of government in the civil law countries, we show that this holds only for a subset of civil and common law countries that have well developed political institutions but not otherwise. In short, it is the interaction between legal origin and the quality of political institutions and not legal origin alone that can explain differences in the level of regulation across countries. For example, focusing on entry regulations, our results show that the number of procedures required to start a business are lower in common law compared with civil law countries by 2.5 procedures or 24.3% of the sample mean. However, this difference varies sharply across the sample of countries with high and low levels of political accountability. It equals a large 3.4 procedures (37% of the sample mean) for the former and a mere 1.1 procedures (9.7% of the sample mean) for the latter. We provide plausible explanations for these findings based on recent contributions to the literature on political and legal institutions.