Aaron L. Bodoh-Creed (Cornell University)
Cornell University: Working Paper, June 30 (2009)
We develop a model of competition between legal systems with overlapping jurisdictions based on Hotelling competition that suggests that, absent institutional reform, courts with overlapping jurisdictions will be driven to adopt divergent legal doctrines in order to extract rents from agents with heterogeneous preferences over which doctrine is applied to their case. This has the effect of weakening the ability for relational contracting to be self-enforcing and lowers the volume of trade possible. This article provides an historical overview of the source and nature of some of these overlapping jurisdictions in the medieval era and the variety of legal regimes active across jurisdictions. Several institutional reforms, such as the system of merchant law that developed in continental Europe, are discussed as potential solutions to the problem of legal competition.
Legal enforcement of contracts has long been recognized as a principal component of effective economic relations. In modern applications of contract theory, it is often taken for granted that a single, unified legal system will enable the agents to enforce the terms of the contracts as written. In practical terms, faith that the terms of a contract can be enforced via coercive governmental authority serves as the basis for trade in which the exchange of goods and money is separated over time or geography. For many economic endeavours, such as principal-agent relations, the very nature of the goods being exchanged entails such a separation.