courts* simeon djankov rafael la porta f … · ment—becomes high enough. a poor society may rely...

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SIMEON DJANKOVRAFAEL LA PORTA

FLORENCIO LOPEZ-DE-SILANESANDREI SHLEIFER

In cooperation with Lex Mundi member law rms in 109 countries, wemeasure and describe the exact procedures used by litigants and courts to evict atenant for nonpayment of rent and to collect a bounced check. We use these datato construct an index of procedural formalism of dispute resolution for eachcountry. We nd that such formalism is systematically greater in civil than incommon law countries, and is associated with higher expected duration of judicialproceedings, less consistency, less honesty, less fairness in judicial decisions, andmore corruption. These results suggest that legal transplantation may have led toan inefciently high level of procedural formalism, particularly in developingcountries.

I. INTRODUCTION

A fundamental proposition in economics holds that the secu-rity of property and the enforcement of contracts are essential forinvestment, trade, and ultimately economic growth to come about[Montesquieu 1748; Smith 1776]. Many institutions serve to se-cure property and enforce contracts. Some of them are entirelyprivate, such as reputations and informal discussions amongneighbors, and do not rely on the government [Macaulay 1963;Galanter 1981; Ellickson 1991]. Other institutions securing prop-erty and enforcing contracts, such as regulators and courts, aregovernmental. Regulatory agencies restrict private conduct that

* We are indebted to Carl E. Anduri, and Melinda L. Eggenberger of LexMundi, Samuel A. Nolen of Richards, Layton and Finger, and Juan Carlos Boterofor extensive cooperation throughout this project; to Erhard Blankenburg, Rich-ard Epstein, Judge Roger Errera, Charles Fried, Oliver Hart, Roumeen Islam,Simon Johnson, Louis Kaplow, Bert Kritzer, Lord Justice Law, Atif Mian, BrianOstrom, Guy Pfeffermann, Eric Posner, Judge Richard Posner, Mark Ramseyer,Alan Schwarts, Steven Shavell, Roberta Romano, Jeremy Stein, Ivo Welch, LordWoolf, and three anonymous referees for their comments; and to Jose Caballero,Claudia Cuenca, Theodora Galabova, Mario Gamboa-Cavazos, Olga Ioffe, AlfredoLarrea, Margaret Michel, Juan Manuel Pinzon, Alejandro Ponce-Rodriguez, Stef-ka Slavova, Ekaterina Trizlova, and Lihong Wang for excellent research assis-tance. We have also received considerable input on an earlier draft from EdwardGlaeser and Lawrence Katz. This research was funded by the World Bank, theInternational Institute of Corporate Governance at Yale School of Management,and conducted with the extensive cooperation of Lex Mundi and Lex Africamember rms. The data used in this project are available at http://iicg.som.yale.edu/.

2003 by the President and Fellows of Harvard College and the Massachusetts Institute ofTechnology.The Quarterly Journal of Economics, May 2003

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might adversely inuence others, and courts resolve property andcontractual disputes.

Economic theory does not tell us which of these mechanismsof securing property and enforcing contracts is the best, and inreality they are all far from perfect. Private security and enforce-ment, while working well in some environments, often degenerateinto violence. Indeed, Smith [1776] saw a tolerable administra-tion of justice as one of the few proper functions of government,enabling an ordinary citizen to seek justice against richer andmore powerful offenders who control private enforcement.1 Publicregulation, likewise, while sometimes effective,2 is often cor-rupted and captured by the very violators, such as monopolistsand pollutants, it needs to restrain [Stigler 1971]. Economistshave been generally most optimistic about courts as the institu-tion securing property and enforcing contracts [Coase 1960], andwith few exceptions (e.g., Johnson, McMillan, and Woodruff[2002], and Bianco, Japelli, and Pagano [2001]) have devotedlittle attention to analyzing their limitations. From the point ofview of evaluating alternative institutional arrangements, how-ever, it is crucial to understand the factors that make courtsfunction more or less effectively.

In this paper we present an empirical study of the effective-ness of courts as mechanisms of resolving simple disputes in 109countries. We examine how a plaintiff can use an ofcial court toevict a nonpaying tenant and to collect a bounced check. We ndthat even these simple disputes are resolved extremely slowly bycourts in most countries, taking an average of over 200 days. Wealso nd huge variation among countries in the speed and qualityof courts.

We try to explain this variation from the perspective of threebroad theories. The development theory holds that courts, likemany other institutions, work better in countries that have richerand more educated populations [Demsetz 1967; North 1981].According to this theory, there are xed costs of setting up insti-tutions, which only become socially worth paying once the de-mand for themlargely driven by the level of economic develop-

1. Likewise, commentators on transition from socialism see the reform of thepublic legal system as an antidote to the violence associated with private enforce-ment (e.g., Hay and Shleifer [1998] and Hay, Shleifer, and Vishny 1996]).

2. Glaeser, Johnson, and Shleifer [2001] and Glaeser and Shleifer [2001,2003] describe some circumstances in which regulation is an efcient strategy forsecuring property rights.

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ment becomes high enough. A poor society may rely on informaldispute resolution; a richer one relies on more complex contractsand needs courts to resolve disputes. Similarly, a better educatedpopulation both raises the efciency of courts (if human capital isan input) and the demand for them.

The incentive theory holds that the efciency of courts isshaped by the incentives of the participants in dispute resolution,including the judges, the lawyers, and the litigants [Messick1999; Buscaglia and Dakolias 1999]. According to this theory,courts work poorly when the participants have weak or wrongincentives: judges do not care about delays; lawyers are paid toprolong proceedings; defendants seek to avoid judgment. Theimplication is that factors such as mandatory deadlines forjudges, contingency fees for attorneys, and loser pays rulesimprove court performance.

The third theorywhich is more novel and central to thispaperis that performance of courts is determined by how thelaw regulates their operation, what we call procedural formalismor formalism for short. The main contribution of this paper is toexplain theoretically and to measure empirically the determi-nants of procedural formalism, as well as to assess its conse-quences for the quality of dispute resolution in courts.

In a theoretical model of an ideal court, a dispute betweentwo neighbors can be resolved by a third on fairness grounds,with little knowledge or use of law, no lawyers, no written sub-missions, no procedural constraints on how evidence, witnesses,and arguments are presented, and no appeal [Shapiro 1981]. Yetin reality, all legal systems heavily regulate dispute resolution:they rely on lawyers and professional judges, regiment the stepsthat the disputants must follow, regulate the collection and pre-sentation of the evidence, insist on legal justication of claimsand judges decisions, give predominance to written submissions,and so on. We examine the reasons for procedural formalism aswell as its consequences for the performance of courts.

To this end, in cooperation with Lex Mundi, the largestinternational association of law rms, we describe the exact pro-cedures used to resolve two specic disputes in 109 countries.These are the eviction of a residential tenant for nonpayment ofrent and the collection of a check returned for nonpayment. Wedescribe the cases to a law rm in each country in great detail,and ask for a complete write-up of the legal procedures necessaryto dispute these cases in court and the exact articles of the law

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governing these procedures. We use the responses to constructmeasures of formalism, dened as the extent to which regulationcauses dispute resolution to deviate from the neighbor model.

Research in comparative law and legal history suggests thatformalism varies systematically among legal origins [Berman1983; Merryman 1985; Damaska 1986; Schlesinger et al. 1988].In particular, civil law countries generally regulate dispute reso-lution, including the conduct of the adjudicators, more heavilythan do common law countries. Our data provide a striking em-pirical conrmation of this proposition. Legal origins alone ex-plain around 40 percent of the variation in our measures offormalism among 109 countries. We also nd that adjudication ismore formalized in the less developed than in the rich countries.

We next turn to the three hypotheses on the determinants ofjudicial quality. From the participating law rms, we obtainestimates of the expected duration of our two disputes in calendardays, from the original ling of a complaint to the ultimateenforcement of judgment. In addition, we use assessments ofjudicial quality from other data sources, covering such areas asenforceability of contracts, access to justice, and corruption, aswell as data from the World Business Environment Survey ofsmall rms on the fairness, consistency, honesty, and other as-pects of the legal system. We also collect data on per capitaincome and educational level in each country, as well as severalmeasures of incentives facing judges, attorneys, and litigants.

We nd that ceteris paribus higher procedural formalism is astrong predictor of longer duration of dispute resolution. Higherformalism also predicts lower enforceability of contracts, highercorruption, as well as lower honesty, consistency, and fairness ofthe system. These results hold both in ordinary least squaresregressions, and in instrumental variable estimates where legalorigin is used as an instrument for formalism. The results hold forboth eviction and check collection. In our data there is no evidencethat formalism secures justice.

We also nd some evidence consistent with the developmenthypothesis, namely that countries with richer populations havehigher quality courts. On the other hand, we nd almost noevidence that the incentives of the participants in the legal sys-tem inuence its quality.

Our ndings advance the previous research in three distinctways. First, the paper takes the research on the quantitativemeasurement of institutions in a new direction: the study of


courts. Finding objective measures of institutional structure issometimes more useful than just focusing on survey assessmentsof quality, as is often done, because it may point to the specicdirections of efciency-improving reform. Second, with respect tothe study of courts, the paper is novel in attributing both theirefciency and their ability to deliver justice to the characteristicsof the legal procedure, rather than to general underdevelopmentof the country or to poor incentives. Third, the paper links boththe lack of efciency of courts and their inability to deliver justiceto the transplantation of legal systems. As such, it supports thehypothesis that transplantation is in part responsible for thestructure and quality of the existing institutions.

II. THEORIES OF PROCEDURAL FORMALISM

According to Shapiro [1981], the essence of an idealized uni-versal court is the resolution of a dispute among two neighbors bya third, guided by common sense and custom. Such resolutiondoes not rely on formal law and does not circumscribe the proce-dures that the neighbors employ to address their differences. Yetcourts everywhere deviate from this ideal. They employ profes-sional judges and lawyers to resolve disputes. They heavily regi-ment procedures, restricting how claims and counterclaims arepresented, how evidence is interpreted, and how various partiescommunicate with each other. Rather than holding an informalmeeting, many courts assemble written records of the proceed-ings, and allow disputants to appeal the decisions of a judge. Mostjurisdictions, in short, heavily regulate their civil procedures.

The reasons for regulating dispute resolution are similar tothose for regulation in general: the sovereign may wish to controlthe outcome. He may wish to punish some conduct to a greaterextent than a judge-neighbor would, to establish precedents, or toreduce errors relative to informal adjudication. He may also wishthat disputes be resolved in a consistent way across his domains,so as to promote trade or political uniformity. Finally, he maywish disputes to be resolved so as to favor himself and his politicalsupporters, or to punish his enemies and opponents. To achievethese goals, sovereigns regulate the judicial procedure so thatjudges are no more than the mouth that pronounces the words ofthe law, mere passive beings, incapable of moderating either itsforce or rigour [Montesquieu 1748, 1984, p. 194].

A further reason to regulate dispute resolution is that infor-

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mal triad justice is vulnerable to subversion by the powerful. Ifone of the two disputants is economically or politically morepowerful than the other, he can encourage the supposedly impar-tial judge to favor him, using either bribes or threats. The otherside of this coin is access to justice: the less advantaged membersof a society must expect justice rather than abuse from the stateor powerful opponents. As the great German jurist Rudolf vonJhering exclaimed, form is the sworn enemy of arbitrary rule,the twin sister of liberty [1898, p. 471].

For these, and possibly other reasons, most jurisdictions inthe world heavily formalize legal procedures. Moreover, as legalhistorians clearly recognize, patterns of such regulation are inti-mately related to the civil versus common law origin of the coun-trys laws. These legal families originate in Roman and Englishlaw, respectively, and were transplanted to many countriesthrough conquest and colonization (by France, Germany, andSpain in the case of civil law, and England in the case of commonlaw). Although legal systems of most countries have evolved sincecolonial times, key features of legal origin are often preservedthrough the centuries [La Porta et al. 1998, 1999].

There are different theories of how legal origin has shapedlegal procedure in general, and formalism in particular. Hayek[1960] and Merryman [1985] attribute the differences to the ideasof the Enlightenment and the French Revolution. In France therevolutionaries and Napoleon did not trust the judges, and codi-ed judicial procedures in order to control judicial discretion.According to Schlesinger et al. [1988], in civil law countries theprocedural codes are meant to be essentially all-inclusive state-ments of judicial powers, remedies, and procedural devices. Con-sistent with von Jherings logic, procedural formalism was seenas a guarantee of freedom. In England and the United States, incontrast, lawyers and judges were on the right side of therevolutions, and hence the political process accommodated agreat deal more judicial independence. In the common law tradi-tion, a code is supplemental to the unwritten law, and in con-struing its provisions and lling its gaps, resort must be had tothe common law [Schlesinger et al. 1988]. As a consequence, lessformalism is required in the judicial procedure.

Dawson [1960], Berman [1983], Damaska [1986], and Glae-ser and Shleifer [2002] argue that the procedural differencesbetween common and civil law actually go back to the twelfth andthirteenth centuries. Glaeser and Shleifer [2002] attribute


greater formalism to the need to protect law enforcers from coer-cion by disputing parties through violence and bribes. This risk ofcoercion was greater in the less peaceful France than in the morepeaceful England, where neighborly dispute resolution by juries(coming closer to Shapiros ideal) was more feasible. The differentapproaches to legal proceduremotivated by the different lawand order environments of England and Francewere thentransplanted through conquest and colonization to most of therest of the world [Watson 1974; La Porta et al. 1998; Berkowitz,Pistor, and Richard 2003].

The fact that most countries inherited signicant parts oftheir legal procedures often involuntarilyis important for ouranalysis. At the econometric level, it suggests that legal origincan be used as an instrument for the degree of formalism of thelegal procedure. At the substantive level, the nature of transplan-tation enables us to distinguish two hypotheses. If countriesselect their legal procedures voluntarily, then one can argue thatgreater formalism is an efcient adaptation to a weaker law andorder environment. However, if legal procedures are transplantedthrough conquest or colonization, the efcient adaptation modeldoes not apply. Rather, we can attribute the consequences of legalformalism to the exogenously determined features of the legalprocedure, and in this way consider the efciency of alternativerules.

III. DATA

III.A. Collection Procedures

Our data are derived from questionnaires answered by attor-neys at Lex Mundi and Lex Africa member rms. Lex Mundi andLex Africa are international associations of law rms, whichinclude as their members law rms with ofces in 115 countries.Of these 115 countries, Lex Mundi members in six did not acceptour invitation to join the project, and these six jurisdictions(Burkina Faso, Cambodia, Nicaragua, Northern Ireland, Scot-land, and St. Kitts and Nevis) were removed from the sample. Wehave received and codied data from all the others.

The 109 cooperating law rms received a questionnaire de-signed by the authors with the advice of practicing attorneys fromArgentina, Belgium, Botswana, Colombia, Mexico, and theUnited States. The questionnaire covered the step-by-step evolu-

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tion of an eviction and a check collection procedure before localcourts in the countrys largest city. The focus on these two specicdisputes has a number of advantages. First, they representtypical situations of default on an everyday contract in virtuallyevery country. The adjudication of such cases illustrates theenforcement of property rights and private contracts in a givenlegal environment. Second, the case facts and procedural assump-tions could be tailored to make the cases comparable acrosscountries. Third, the resolution of these cases involves lower levelcivil trial courts in all countries (unless Alternative Dispute Reso-lution is used). Because these are the courts whose functioning ismost relevant to many of a countrys citizens, the focus on thequality of such courts is appropriate in a development context.For more complex disputes, additional issues arise, and it maynot be appropriate to generalize our ndings. For example, com-mercial arbitration is available in many countries to large com-panies, though not to ordinary citizens. Perhaps even more im-portantly, formalism may be essential for justice in complexdisputes even when informality is adequate for the simple caseswe consider.3

In presenting the cases, we provided the respondent rmwith signicant detail, including the amount of the claim, thelocation and main characteristics of the litigants, the presence ofcity regulations, the nature of the remedy requested by the plain-tiff, the merit of the plaintiffs and the defendants claims, and thesocial implications of the judicial outcomes. Furthermore, to un-derstand how courts work, we specied that there is no settle-ment. These standardized details enabled the respondent lawrms to describe the procedures explicitly and in full detail, andallowed us to get around the problem that different proceduresarise in different circumstances.4

The questionnaires provided to law rms were divided intotwo parts: (1) description of the procedure of the hypothetical casestep by step, and (2) multiple-choice questions. The followingaspects of the procedure were covered: (1) step-by-step descrip-

3. The collection of a bounced check also gets us away from the concern thatrules governing the eviction of a nonpaying tenant are shaped by a nationssocialist sentiment. The fact that the structures of dispute resolution for evictionand check collection are so similar is inconsistent with the view that socialismdrives the results.

4. We have discovered that attorneys in even the largest law rms in mostcountries are familiar with eviction and check collection procedures, generallybecause they have worked on such cases for their clients.


tion of the procedure, (2) estimates of the actual duration at eachstage, (3) indication of whether written submissions were re-quired at each stage, (4) indication of specic laws applicable ateach stage, (5) indication of mandatory time limits at each stage,(6) indication of the form of the appeal, and (7) the existence ofalternative administrative procedures. Multiple-choice questionswere used both to collect additional information and to check theanswers at the initial stage. In addition, we asked questionsabout the incentives of judges, attorneys, and the litigants.

At each rm, the answers were prepared by a member of theLitigation Department, and reviewed by a member of the GeneralCorporate and Commercial Department. Two lawyers in each lawrm, from different departments, were required to read, approve,and sign the questionnaire. As an additional check, the law rmswere required to indicate when a particular law governed therelevant stage of the procedure, and to provide a copy of that law.The answers provided by member law rms were coded using thedescriptions of the procedures and answers to multiple-choicequestions. In most cases, coding was followed by an additionalround of questions to the completing attorneys aimed to clarifythe inconsistencies in their answers.

III.B. Measuring Formalism

Comparative law textbooks and manuals of civil procedurepoint to several areas where the laws of different countries regu-late dispute resolution differently. In our choice of the areas ofsuch regulation, we were guided by the 1994 International Ency-clopaedia of LawsCivil Procedure published by Kluwer LawInternational. The Encyclopaedia covers seventeen countriesfrom different legal origins, and discusses such broad areas ofcivil procedure as judicial organization, jurisdiction, actions andclaims, nature of proceedings, legal costs, evidence, enforcementof judgments, and arbitration. Some of the areas covered in theEncyclopaedia were not relevant to the simple disputes we con-sidered. Others, such as Alternative Dispute Resolution, are cov-ered briey in our survey, although we focus on courts. Appendix1 presents the relationship between the topics covered in theEncyclopaedias volume on Civil Procedure for France and theindices used in this paper.

We focus on seven areas of formalism, and codify the answersprovided by Lex Mundi rms from the perspective of the neighbormodel. Below, we briey describe our approach to organizing

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these data. The exact denitions of the variables are contained inTable I.

The rst area covers the required degree of professionalismof the main actors in the judicial process, namely judges andlawyers. This covers three specic areas. First, a basic jurisdic-tional distinction is between general and specialized courts. Forthe simple cases we consider, access to specialized courts gener-ally entails procedural simplication aimed at mass production(similar to trafc courts in the United States). We therefore takethe resolution of disputes in specialized courts to be closer to theneighbor model than that in a general jurisdiction court.

Second, we distinguish between judges who have undergonecomplete professional training, and arbitrators, administrativeofcers, practicing attorneys, merchants, or any other laypersonswho may be authorized to hear or decide the case. In somecountries (e.g., New Zealand, United Arab Emirates) all disputesbetween landlords and tenants are resolved by housing tribunalscomposed of neighbors or by representatives of associations oflandlords and tenants. Such nonprofessional judges are closer tothe neighbor model.

Third, in some countries it is mandatory to have an attorneyto appear before the judge, while in others it is entirely voluntaryor even prohibited. Evidently, the absence of legal representationis closer to the neighbor model. Indeed, in the absence of suchrepresentation, the judge frequently assumes the position of amediator guiding the parties to an agreement.

Using the data provided by law rms, we combine these threepieces of information to construct the professional versus lay-men index for each of the two disputes for each country.

The second area we consider is the preeminence of writtenversus oral presentation at each stage of the procedure, includingling, service of process, defendants opposition, evidence, nalarguments, judgment, notication of judgment, and enforcementof judgment. We take oral presentation to be closer to the neigh-bor model, and aggregate this information for each country andeach case into the index of written versus oral elements.

The third area is the need for legal justication (meaningreference to the legal reasons and articles of the law) in thecomplaint and in the judgment, as well as the necessity of basingthe judgment in the law as opposed to equity. In many countriesa judgment must be justied by statutory law or settled prece-dents. In other countries judgment must still be justied, but in


TABLE IDESCRIPTION OF THE VARIABLES

This table describes the variables in the paper. Unless otherwise specied, thesource for the variables is the survey of law rms and the laws of each country. Allthe data for each country can be found at http://iicg.som.yale.edu/.

Variable Description

Professionals versus laymen

General jurisdiction court The variable measures whether a court ofgeneral or of limited jurisdiction would bechosen or assigned to hear the case undernormal circumstances. We dene a court ofgeneral jurisdiction as a state institution,recognized by the law as part of the regularcourt system, generally competent to hear anddecide regular civil or criminal cases. A limitedjurisdiction court would hear and decide onlysome types of civil cases. Specialized debt-collection or housing courts, small-claimscourts, and arbitrators or justices of the peaceare examples. Equals one for a court of generaljurisdiction, and zero for a court of limitedjurisdiction.

Professional versusnonprofessional judge

The variable measures whether the judge, or themembers of the court or tribunal, could beconsidered as professional. A professional judgeis one who has undergone a completeprofessional training as required by law, andwhose primary activity is to act as judge ormember of a court. A nonprofessional judge isan arbitrator, administrative ofcer, practicingattorney, merchant, or any other laypersonwho may be authorized to hear and decide thecase. Equals one for a professional judge, andzero for a nonprofessional judge.

Legal representation ismandatory

The variable measures whether the law requiresthe intervention of a licensed attorney. Thevariable equals one when legal representationis mandatory, and zero when legalrepresentation is not mandatory.

Index: professionals versuslaymen

The index measures whether the resolution ofthe case relies on the work of professionaljudges and attorneys, as opposed to other typesof adjudicators and lay people. The index is thenormalized sum of (i) general jurisdiction court,(ii) professional versus nonprofessional judge,and (iii) legal representation is mandatory. Theindex ranges from zero to one, where highervalues mean more participation byprofessionals.

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http://iicg.som.yale.edu/


Written Versus Oral

Filing Equals one if the complaint is normallysubmitted in written form to the court, andzero if it can be presented orally.

Service of process Equals one if the defendants rst ofcial noticeof the complaint is most likely received inwriting, and zero otherwise.

Opposition Equals one if under normal circumstances thedefendants answer to the complaint should besubmitted in writing, and zero if it may bepresented orally to court.

Evidence Equals one if evidence is mostly submitted to thecourt in written form, in the form ofattachments, afdavits, or otherwise, and zeroif most of the evidence, including documentaryevidence, is presented at oral hearings beforethe judge.

Final arguments Equals one if nal arguments on the case arenormally submitted in writing, and zero if theyare normally presented orally in court beforethe judge.

Judgment Equals one if the judge issues the nal decisionin the case in written form, and zero if heissues it orally in an open court hearingattended by the parties. The dening factor iswhether the judge normally decides the case ata hearing. If the judge simply reads out apreviously made written decision, the variableequals one. Conversely, for an orallypronounced judgment that is later transposedinto writing for enforcement purposes, thevariable equals zero.

Notication of judgment Equals one if normally the parties receive theirrst notice of the nal decision in written form,by notice mailed to them, publication in a courtboard or gazette, or through any other writtenmeans. The variable equals zero if they receivetheir rst notice in an open court hearingattended by them.

Enforcement of judgment Equals one if the enforcement procedure ismostly carried out through the written courtorders or written acts by the enforcementauthority, and zero otherwise.


TABLE I(CONTINUED)

Index: Written versus oralelements

The index measures the written or oral nature ofthe actions involved in the procedure, from theling of the complaint until the actualenforcement. The index is calculated as thenumber of stages carried out mostly in writtenform over the total number of applicablestages, and it ranges from zero to one, wherehigher values mean higher prevalence ofwritten elements.

Legal justication

Complaint must be legallyjustied

The variable measures whether the complaint isrequired, by law or court regulation, to includereferences to the applicable laws, legalreasoning, or formalities that would normallyrequire legal training. Equals one for a legallyjustied complaint, and zero when thecomplaint does not require legal justication(specic articles of the law or case-law).

Judgment must be legallyjustied

The variable measures whether the judgmentmust expressly state the legal justication(articles of the law or case-law) for thedecision. Equals one for a legally justiedjudgment, and zero otherwise.

Judgment must be on law(not on equity)

The variable measures whether the judgmentmay be motivated on general equity grounds,or if it must be founded on the law. Equals onewhen judgment must be on law only, and zerowhen judgment may be based on equitygrounds.

Index: legal justication The index measures the level of legal justicationrequired in the process. The index is formed bythe normalized sum of (i) complaint must belegally justied, (ii) judgment must be legallyjustied, and (iii) judgment must be on law(not on equity). The index ranges from zero toone, where higher values mean a higher use oflegal language or justication.

Statutory regulation of evidence

Judge cannot introduceevidence

Equals one if, by law, the judge cannot freelyrequest or take evidence that has not beenrequested, offered, or introduced by the parties,and zero otherwise.

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TABLE I(CONTINUED)


Judge cannot rejectirrelevant evidence

Equals one if, by law, the judge cannot refuse tocollect or admit evidence requested by theparties, even if she deems it irrelevant to thecase, and zero otherwise.

Out-of-court statementsare inadmissible

Equals one if statements of fact that were notdirectly known or perceived by the witness, butonly heard from a third person, may not beadmitted as evidence. The variable equals zerootherwise.

Mandatory prequalicationof questions

Equals one if, by law, the judge must prequalifythe questions before they are asked of thewitnesses, and zero otherwise.

Oral interrogation only byjudge

Equals one if parties and witnesses can only beorally interrogated by the judge, and zero ifthey can be orally interrogated by the judgeand the opposing party.

Only original documentsand certied copies areadmissible

Equals one if only original documents andauthentic or certied copies are admissibledocumentary evidence, and zero if simple oruncertied copies are admissible evidence aswell.

Authenticity and weight ofevidence dened by law

Equals one if the authenticity and probativevalue of documentary evidence is specicallydened by the law, and zero if all admissibledocumentary evidence is freely weighted by thejudge.

Mandatory recording ofevidence

Equals one if, by law, there must be a written ormagnetic record of all evidence introduced attrial, and zero otherwise.

Index: statutory regulationof evidence

The index measures the level of statutory controlor intervention of the administration,admissibility, evaluation, and recording ofevidence. The index is formed by thenormalized sum of the following variables: (i)judge cannot introduce evidence, (ii) judgecannot reject irrelevant evidence, (iii) out-of-court statements are inadmissible, (iv)mandatory prequalication of questions, (v)oral interrogation only by judge, (vi) onlyoriginal documents and certied copies areadmissible, (vii) authenticity and weight ofevidence dened by law, and (viii) mandatoryrecording of evidence. The index ranges fromzero to one, where higher values mean a higherstatutory control or intervention.


TABLE I(CONTINUED)

Control of superior review

Enforcement of judgmentis automaticallysuspended untilresolution of the appeal

Equals one if the enforcement of judgment isautomatically suspended until resolution of theappeal when a request for appeal is granted.Equals zero if the suspension of theenforcement of judgment is not automatic, or ifthe judgment cannot be appealed at all.

Comprehensive review inappeal

Equals one if issues of both law and fact(evidence) can be reviewed by the appellatecourt. Equals zero if only new evidence orissues of law can be reviewed in appeal, or ifjudgment cannot be appealed.

Interlocutory appeals areallowed

Equals one if interlocutory appeals are allowed,and zero if they are always prohibited.Interlocutory appeals are dened as appealsagainst interlocutory or interim judicialdecisions made during the course of a judicialproceeding in rst instance and before the nalruling on the entire case.

Index: control of superiorreview

The index measures the level of control orintervention of the appellate courts review ofthe rst-instance judgment. The index isformed by the normalized sum of the followingvariables: (i) enforcement of judgment isautomatically suspended until resolution ofappeal, (ii) comprehensive review in appeal,and (iii) interlocutory appeals are allowed. Theindex ranges from zero to one, where highervalues mean higher control or intervention.

Engagement formalities

Mandatory pretrialconciliation

Equals one if the law requires plaintiff toattempt a pretrial conciliation or mediationbefore ling the lawsuit, and zero otherwise.

Service of process byjudicial ofcer required

Equals one if the law requires the complaint tobe served to the defendant through theintervention of a judicial ofcer, and zero ifservice of process may be accomplished byother means.

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TABLE I(CONTINUED)


Notication of judgment byjudicial ofcer required

Equals one if the law requires the judgment to benotied to the defendant through theintervention of a judicial ofcer, and zero ifnotication of judgment may be accomplishedby other means.

Index: engagementformalities

The index measures the formalities required toengage someone in the procedure or to holdhim/her accountable of the judgment. Theindex is formed by the normalized sum of thefollowing variables: (i) mandatory pretrialconciliation, (ii) service of process by judicialofcer required, and (iii) notication ofjudgment by judicial ofcer required. The indexranges from zero to one, where higher valuesmean a higher statutory control or interventionin the judicial process.

Independent procedural actions

Filing and service The total minimum number of independentprocedural actions required to complete ling,admission, attachment, and service.

Trial and judgment The total minimum number of independentprocedural actions required to completeopposition to the complaint, hearing or trial,evidence, nal arguments, and judgment.

Enforcement The total minimum number of independentprocedural actions required to completenotication and enforcement of judgment.


TABLE I(CONTINUED)

Index: independentprocedural actions

An independent procedural action is dened as astep of the procedure, mandated by law orcourt regulation, that demands interactionbetween the parties or between them and thejudge or court ofcer (e.g., ling a motion,attending a hearing, mailing a letter, or seizingsome goods). We also count as an independentprocedural action every judicial oradministrative writ or resolution (e.g., issuingjudgment or entering a writ of execution)which is legally required to advance theproceedings until the enforcement of judgment.Actions are always assumed to be simultaneousif possible, so procedural events that may befullled in the same day and place are onlycounted as one action. To form the index, we(1) add the minimum number of independentprocedural actions required to complete all thestages of the process (from ling of lawsuit toenforcement of judgment); and (2) normalizethis number to fall between zero and one usingthe minimum and the maximum number ofindependent procedural actions among thecountries in the sample. The index takes avalue of zero for the country with the minimumnumber of independent procedural actions, anda value of one for the country with themaximum number of independent proceduralactions.

Formalism index

Formalism index The index measures substantive and proceduralstatutory intervention in judicial cases atlower-level civil trial courts, and is formed byadding up the following indices: (i)professionals versus laymen, (ii) written versusoral elements, (iii) legal justication, (iv)statutory regulation of evidence, (v) control ofsuperior review, (vi) engagement formalities,and (vii) independent procedural actions. Theindex ranges from zero to seven where sevenmeans a higher level of control or interventionin the judicial process.

469COURTS

TABLE I(CONTINUED)


Incentives of parties

Mandatory time limit foradmission

Equals one if the judge is required by law toadmit or reject the lawsuit within a certainperiod of time, and zero otherwise.

Mandatory time limit topresent evidence

Equals one if the period in which the parties maycollect or present evidence is xed by law to acertain number of days after service or numberof days before hearing, and zero otherwise.

Mandatory time limit topresent defense

Equals one if the defendant is required by law tole the opposition within certain time limit,either in terms of number of days from serviceor number of days before the hearing. Thevariable equals zero otherwise.

Mandatory time limit topresent defense

Equals one if the defendant is required by law tole the opposition within certain time limit,either in terms of number of days from serviceor number of days before the hearing. Thevariable equals zero otherwise.

Mandatory time limit forjudgment

Equals one if the judge is required by law toenter judgment within a specied period oftime after the conclusion of the hearing or thenal pleadings, and zero otherwise.

Mandatory time limit fornotication of judgment

Equals one if the court is required by law tonotify the parties within a specied period oftime after judgment is entered, and zerootherwise.

Index: mandatory timelimits

The presence of mandatory time limits in theprocedure. The index is calculated as theaverage of (i) term for admission, (ii) term topresent evidence, (iii) term to present defense,(iv) term for judgment, (v) term for compliance,(vi) term for notication of judgment. Theindex ranges from zero to one, where highervalues mean more mandatory deadlines.

Quota litis prohibited The variable equals one if quota litis orcontingent fee agreements are prohibited bylaw in all cases, and zero otherwise.

Loser pays rule The variable equals one if the loser is required topay all the costs of the dispute, and zerootherwise.


TABLE I(CONTINUED)

Duration in practice

Duration until completionof service of process

Estimated duration, in calendar days, betweenthe moment the plaintiff les the complaintuntil the moment of service of process to thedefendant.

Duration of trial Estimated duration, in calendar days, betweenthe moment of service of process and themoment the judgment is issued.

Duration of enforcement Estimated duration, in calendar days, betweenthe moment of issuance of judgment and themoment the landlord repossesses the property(for the eviction case) or the creditor obtainspayment (for the check collection case).

Total duration The total estimated duration in calendar days ofthe procedure under the factual and proceduralassumptions provided. It equals the sum of (i)duration until completion of service of process,(ii) duration of trial, and (iii) duration ofenforcement.

Other judicial quality measures

Enforceability of contracts The relative degree to which contractualagreements are honored and complicationspresented by language and mentalitydifferences. Scale for 0 to 10, with higherscores indicating higher enforceability. Source:Business Environmental Risk Intelligence.Exact denition in Knack and Keefer [1995].

Legal system is fair andimpartial

In resolving business disputes, do you believeyour countrys court system to be fair andimpartial? The scale ranges from 1 to 6, wherehigher scores mean a fairer and more impartiallegal system. Source: World BusinessEnvironment Survey [2000, 2002].

Legal system is honest oruncorrupt

In resolving business disputes, do you believeyour countrys court system to behonest/uncorrupt? The scale ranges from 1 to6, where a higher score signals a more honestand uncorrupt system. Source: World BusinessEnvironment Survey.

471COURTS

TABLE I(CONTINUED)


Legal system is affordable In resolving business disputes, do you believeyour countrys court system to be affordable?The scale ranges from 1 to 6, where a higherscore means a more affordable legal system.Source: World Business Environment Survey.

Legal system is consistent In resolving business disputes, do you believeyour countrys court system to be consistent?The scale ranges from 1 to 6, where a higherscore means a more consistent legal system.Source: World Business Environment Survey.

Condence in legal system The questionnaire asks the managers the degreeto which they believe the system will upholdcontracts and property rights in a businessdispute. The scale ranges from 1 to 6, where ahigher score means a higher degree ofcondence on the system. Source: WorldBusiness Environment Survey.

Corruption A composite index for the year 2000 that drawson fourteen data sources from seveninstitutions: the World Economic Forum, theWorld Business Environment Survey of theWorld Bank, the Institute of ManagementDevelopment (in Lausanne),PricewaterhouseCoopers, the Political andEconomic Risk Consultancy (in Hong Kong),the Economist Intelligence Unit and FreedomHouses Nations in Transit. The score rangesbetween 10 (highly clean) and 0 (highlycorrupt). Source: Transparency International(www.transparency.org).

Law and order Integrity of legal system in 2000. This componentis based on the Political Risk Component 1(Law and Order) from the PRS GroupsInternational Country Risk Guide (variousissues). Rankings are modied to a ten-pointscale. Source: Economic Freedom of the World[Gwartney, Lawson, and Block 2001].


TABLE I(CONTINUED)

http://www.transparency.org

equity rather than in law. In still other countries, judicial deci-sions require no justication whatsoever. Since the neighbormodel presumably does not call for such legal justications, weaggregate this information into an index of legal justication.

The fourth area is statutory regulation of evidence. The rulesof evidence are sometimes considered to be a key factor in differ-entiating the overall efciency of legal procedures among coun-tries [Langbein 1985]. First, in some countries the judge cannot

TABLE I(CONTINUED)


Other variables

Log of GNP per capita Logarithm of GNP per capita in 1999, Atlasmethod, expressed in current US dollars. When1999 income data in US dollars were notavailable, the latest available number was used(1996 for Kuwait, 1997 for Cayman Islands,Gibraltar, Turks and Caicos Island, 1998 forAnguilla, Bahrain, Netherlands Antilles,United Arab Emirates). Income for Anguilla,the British Virgin Islands, the CaymanIslands, Gibraltar, Monaco, the NetherlandsAntilles, and the Turks and Caicos Islands isGDP per capita (PPP) from the CIA WorldFactbook. Source: World DevelopmentIndicators [2001].

Legal origin Identies the legal origin of the company law orcommercial code of each country (English,French, Socialist, German, Scandinavian).Source: La Porta et al. [1999].

Latitude The absolute value of the latitude of the capitalof the country, scaled to take values betweenzero and one. Source: CIA Factbook.

Average years of schooling Average number of years of schooling receivedper person aged 25 and over in 1992 (lastavailable). Source: Human Development Report[1994].

Ethnic fractionalization Ethnic fractionalization is computed as oneminus the Herndahl index of ethnic groupshares. This calculation considers theprobability that two persons, randomly chosen,from a population belong to different groups.Source: Alesina et al. [2003].

473COURTS

request evidence not requested by the parties, a restriction on theneighbor model. Second, the judge in some countries cannotrefuse to collect or admit evidence requested by the parties, evenif the judge feels this evidence is irrelevant to the case. This, too,presents a restriction on the discretion of the judge in the neigh-bor model. Third, hearsay evidence is not admissible in somecountries while, in others, the judge can weigh it. Presumably,the inadmissibility of out-of-court statements is a restriction onjudicial freedom in the neighbor model. Fourth, in some jurisdic-tions the judge must prequalify a question before it is posed to thewitness while, in others, parties may ask witnesses questionswithout such prequalication. We take the latter scenario asmore compatible with the neighbor model. Fifth, in some juris-dictions, only original documents and certied copies are admis-sible, a restriction not present in other jurisdictions. Presumably,the neighbor model would not have these restrictions. Sixth, insome countries authenticity and the weight of evidence are de-ned by law; in others they are not. In the neighbor model, wewould not expect the evidence to be subjected to rigid rules onadmissibility and weight. Seventh, in some countries, but notothers, there is mandatory recording of evidence, designed tofacilitate the superior authoritys control over the judge. We donot take such recording to be consistent with the neighbor model.As before, we aggregate these seven dimensions into the index ofstatutory regulation of evidence.

The fth area of regulation of formalism is the control of thesuperior review of the rst instance judgment. The scope of ap-pellate review determines the level of sovereign control over thetrial court proceedings [Damaska 1986]. In general, we take thecontrol of a judge by a superior court as inconsistent with theneighbor model, and consider a variety of mechanisms of superiorreview. First, in some countries the enforcement of judgment isautomatically suspended until the resolution of the appeal, whichsubstantially reduces the importance of the rst instance judg-ment. In others, the suspension of enforcement is either nonau-tomatic, or even not allowed. We take the automatic suspensionas being inconsistent with the neighbor model. Second, in somecountries the review and appeal of judicial decisions are compre-hensive. In others, more compatibly with the neighbor model,only new evidence or issues of law can be reviewed on appeal, orthe judgment cannot be appealed at all. Third, some countries,but not others, allow interlocutory appeals (those of interim ju-


dicial decisions), which we take to be incompatible with the neigh-bor model. We aggregate these three aspects of review into anindex of control of superior review.

The sixth area is engagement formalities that must be ob-served before a party is legally bound by the court proceedings. Insome countries a lawsuit cannot be initiated unless a formalpretrial conciliation is attempted between the parties. The noti-cation procedures also vary markedly among countries. In someplaces, the complaint can be notied to the defendant by theplaintiff himself or by his attorney, or simply by mailing a letter.In others, the defendant cannot be held accountable unless he isserved the claim by an appointed court ofcer. Finally, in somecountries the judgment is deemed notied to the parties whenpronounced in open court; in others it must be personally notiedto the parties by a duly appointed court employee. We submit thatentirely voluntary pretrial conciliation and exible rules of noti-cation of process and judgment are more compatible with theneighbor model. These three dimensions are aggregated into theindex of engagement formalities.

The seventh area is the count of independent proceduralactions involved in pursuing a claim through a court, covering theling and service of a complaint, trial and judgment, and enforce-ment. An independent procedural action is dened as every stepin the procedure, mandated by the law or by court regulation,which demands interaction between the parties or between themand the judge or court ofcer, such as ling a motion or attendinga hearing. We also count as an independent procedural actionevery judicial or administrative writ or resolution, such as issuingjudgment or entering a writ of execution, which is legally re-quired to advance the proceedings until the enforcement of judg-ment. Actions are always assumed to be simultaneous if possible,so procedural events that may be fullled in the same day andplace are only counted as one action.5 In the idealized neighbormodel, there would be only three procedural actions: (1) a claim-ant would request the judges intervention, (2) the judge and theclaimant would together meet the defendant and the judge would

5. We only count the minimum number of independent procedural actionsrequired to bring the case to completion. Thus, the appointment of a lawyer is onlycounted as a step if legal representation is mandatory. Notications of interlocu-tory decisions that do not require further interaction between the parties and thejudge or court ofcer (as when the clerk makes an entry into the notication book)are not counted as separate steps since they are ancillary to the decision.

475COURTS

issue a decision following a discussion, and (3) the judgmentwould be enforced. As the evidence below shows, in some coun-tries checks can be collected and tenants evicted in just 8 or 9steps, while in others it takes 40 to 45 stepsa far cry from theneighbor model. We aggregate these counts into an index ofindependent procedural actions and normalize the index to fallbetween zero and one based on the minimum and the maximumnumber of actions among countries.

Having assembled the data, we combine the seven subin-dexes into the index of formalism. We scale each subindex to fallbetween zero and one, so the formalism index falls between zeroand seven, with seven representing, according to our conception,the greatest distance from the neighbor model. The exact methodof the construction of the formalism index is not crucial, since thevarious subindexes generally point in the same direction as towhich countries regulate adjudication more heavily.

III.C. Other Variables

Our data contain information on the quality of dispute reso-lution. One measure of quality is an estimatein calendardays of duration of dispute resolution by the lawyers who com-pleted the questionnaires. Duration is measured as the number ofcalendar days counted from the moment the plaintiff les thelawsuit in court, until the moment of actual repossession (evic-tion) or payment (check). This measure includes both the dayswhere actions take place and waiting periods between actions.The participating rms make separate estimates of the averageduration until the completion of service of process, the issuance ofjudgment (duration of trial), and the moment of payment or repos-session (duration of enforcement).6 To the extent that we are inter-ested in the ability of ordinary persons to use the legal system, theseestimates of duration are highly relevant for efciency.

In addition to the data from the questionnaires, we use datafrom surveys of business people on the quality of the legal system.These include measures of the enforceability of contracts, corrup-tion, and law and order. In addition, we use information fromsmall rm assessments of various aspects of the quality of thelegal system, including consistency, honesty, and fairness, con-

6. Law rms also provide us with estimates of the minimum and the maxi-mum amount of time in calendar days each case could take given its specics. Thisrequest helped lawyers to focus on the average length of time and not just thinkabout the worst or best case they had encountered.


tained in the World Business Environment Survey. These datawill be used to shed light on the crucial question: does formalismsecure justice?

Finally, we assemble some data to examine alternative hy-potheses concerning the determinants of judicial quality. FromLex Mundi member rms, we get data on whether judges facemandatory time deadlines, whether lawyers are allowed tocharge contingency fees, and whether losers in civil disputes mustpay the winners legal fees. We also obtain data on 1999 percapita income in each country, the average years of schooling, andethno-linguistic and religious fractionalization. Fractionalizationmeasures are used as controls because studies nd that fraction-alization has adverse consequences for institutional performance[La Porta et al. 1999; Alesina et al. 2003].

IV. FORMALISM AND ITS DETERMINANTS

Table II presents our data on procedural formalism, withsubindexes and the overall index. Table IIa focuses on eviction,and Table IIb on check collection. Countries are arranged by legalorigin, and we report the means for each legal origin and the testsof the differences in these means. For both check collection andeviction, common law countries have least formalized, andFrench civil law countries most formalized, dispute resolution,with other legal origins in the middle. For eviction, the differ-ences hold for all subindexes, but are stronger in some areas(legal justication, number of independent procedural actions)than in others (evidence, superior review). The differences informalism among civil law countries (French, German, socialist,and Scandinavian) are less pronounced, and typically not asstatistically signicant (except that German and Scandinavianorigin countries regulate less heavily than socialist and Frenchones). For check collection the pattern of results is similar, exceptthat one of the subindexes is lower in French civil law countries thanin common law countries. The rankings of legal origins hold alsowithin per capita income quartiles. These ndings are broadly con-sistent with the thrust of the comparative law literature.

Table III examines the consistency of this evidence across thevarious subindexes measuring alternative aspects of proceduralformalism, as well as across the two cases. The evidence shows aclear picture of consistency. The various subindexes are positivelycorrelated with the overall index within each case. Moreover,

477COURTS

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courts* simeon djankov rafael la porta f … · ment—becomes high enough. a poor society may rely...

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