Choice of Law and Legal Evolution: Rethinking the Market for Legal Rules
In this paper we follow an evolutionary approach to explain the observed patterns of legal harmonization and legal competition. Countries choose their legal system with the aim to minimize legal differences worldwide (which fosters international trade). Firms choose the rules for their domestic and international contracts, trying to use the ones that maximize revenues from trade and minimize transaction costs. Our model presents multiple steady states. Some of them predict the universal diffusion of a single legal system. However, the legal principle becoming universally diffused is not necessarily the efficient one. When choice-of-law rules are sufficiently permissive, the evolutionary process might end up in a steady state where all countries adopt the inefficient legal system but all firms use the efficient rule, even if that is not the national law of any country anymore. We show that universal adoption of a unique rule and possibly its universal diffusion are the only type of steady - state equilibrium when countries and firms are relatively homogeneous. When heterogeneity is introduced, a steady state where legal systems coexist and firms use rules from all of them appears. This might explain the existence of legal families not as a transitory phenomenon but as a long-run equilibrium.