Law & Entrepreneurship: Do Courts Matter?

Abstract:     
In this essay, we sketch the outlines of a research agenda exploring links between courts and entrepreneurship. Our conception of "law and entrepreneurship" encompasses the study of positive law (including constitutions, statutes, and regulations), common law doctrines, and private ordering that relate to "the discovery and exploitation of profitable opportunities by new firms."

We briefly survey the economics literatures that relate to law and entrepreneurship, including the "law and finance" literature launched by the work of Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny ("LLSV"). Relying on the suggestive work of LLSV and other economists who have labored over the connections between entrepreneurship and law, we suspect that courts may play an important role in facilitating or hindering entrepreneurial activity.

We are particularly interested in the possibility that courts may facilitate the evolution of legal rules to address novel issues raised by entrepreneurial firms. This "adaptability hypothesis" may be subject to empirical testing, thus shedding light on the otherwise perplexing divide between common law and civil law countries identified by LLSV. The motivation for such a test lies in the conjecture that common law countries update their laws more frequently than civil law countries through judicial intervention. Adaptability in this sense is said to encourage entrepreneurship because outmoded laws allow for opportunism, thus discouraging capital formation. The adaptability hypothesis implies that judges in common law systems have more room to maneuver than judges in civil law systems, and we describe the method by which we intend to approach our future study of adaptability.

Keywords: law and entrepreneurship, legal origins, common law, civil law, judicial adaptability

JEL Classifications: G32, G34, K22, L26

Accepted Paper Series