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University of Toronto Law Journal 56.3 (2006) 151-184
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Law-Making In Small Jurisdictions‡
Kevin E. Davis*
Recently, increasing attention has been devoted to the question of whether there are economic justifications for having the design of legal institutions vary across countries. Some of that interest has been spurred by a desire to explore the legal implications of political and economic integration.1 However, this article is inspired primarily by the literature that has emerged as an outgrowth of a revived interest in the design of legal institutions in developing countries, defined broadly here to include the formerly Communist countries. This literature addresses a topic that is of tremendous practical importance, as there is now considerable – though not uncontested – evidence suggesting that the quality of a country's legal institutions is an important determinant of its prospects for development.2
It is almost an article of faith among many analysts that achieving the 'rule of law' in developing countries will entail adopting laws that take the form of simple, bright-line rules, particularly when it comes to laws that govern the conduct of business activities.3 This belief seems to be [End Page 151] based in part upon the idea that simple, bright-line rules are optimal in virtually any context. It is widely believed that laws that take this form are desirable because they tend to minimize uncertainty about the content of the law and so are particularly well suited to guiding behaviour. The antecedents of this view can be traced back to the work of Max Weber, but the same view features prominently in the writings of a wide range of noted contemporary scholars and policy makers.4
The consensus in favour of simple, bright-line rules in developing countries is also based in part upon an argument that these sorts of legal norms are particularly suitable in societies where legal institutions are weak. This second argument is premised on the notion that the principal determinant of the design of legal institutions ought to be institutional competence. As Edward Glaeser and Andrei Shleifer put it, 'a key goal in the design of a legal system is to control law enforcers.'5 Starting from this premise, it is arguably reasonable to conclude that simple, bright-line rules are typically optimal for developing countries because laws of this type facilitate the monitoring and control of incompetent and corruptible judges, who are more likely to be found in developing countries than in their more developed counterparts.6
Here we will adopt a different approach. First, we will reject the assumption that the optimal form of laws can be determined independently of the context in which those laws are being adopted and applied. Second, instead of presuming that the key goal in the design of laws is the control of law enforcers, this article assumes, at least for the sake of argument, that lawmakers' key goal ought to be to control the activities [End Page 152] of members of society. Consequently, instead of emphasizing how countries vary in terms of the quality of their legal institutions, this article focuses on the fact that countries vary in terms of the nature of the activities that will be regulated by any given law. Specifically, we will, at least at the outset, assume that lawmakers are reasonably competent and well intentioned and focus upon the legal implications of the fact that there are variations across countries in terms of the volume of activity governed by any given law.
The central argument here is that jurisdictions that experience relatively low volumes of any given activity ('small jurisdictions') should find it relatively attractive to adopt laws in relation to that activity that take the form of standards rather than rules and should not be particularly attracted to standards that are simple rather than complex. I will also show that, to the extent that they should adopt rules, small countries ought to be relatively willing to copy them from large countries. In economic terms, the intuition underlying all of these claims is that, for a variety...