Faculty of Economics and Business Administration Publications Database

Financial development in adversarial and inquisitorial legal systems

Volume: 39
Number: 4
Pages: 602 - 608
Month: December
ISSN-Print: 0147-5967
Link External Source: Online Version
Year: 2011
Keywords: Adversarial; Inquisitorial; Financial development; Legal origins

This paper aims to understand why common law countries have more developed financial markets than civil law countries. One difference between these two legal origins is the procedure of evidence collection for a trial: It is adversarial in common law and inquisitorial in civil law. The adversarial system delegates the collection of evidence to a larger extent to lawyers than the inquisitorial system does. The paper presents a model of law and finance in which investors use courts to enforce their financial contracts with entrepreneurs. Investors are willing to lend more if courts collect evidence more efficiently. Financial markets are more developed in the adversarial than in the inquisitorial system if investors are richer than entrepreneurs or if lawyers are more productive than judges. Manipulation of evidence by lawyers has an ambiguous impact on finance.