Legal Stability and Economic Growth

Abstract

The value of stability in the law is reflected in the common law principle of stare decisis. Legal stability provides guidance to future and lower courts. Further, it allows litigants (potential and actual) and their attorneys to make informed decisions about litigation. Adherence to the principle of stare decisis may also produce other positive returns that are external to the legal system. In particular, economic growth may be the beneficiary of the legal stability engendered by adherence to precedent. The logic is that a stable legal environment provides a context in which economic agents may be more willing to engage in activities (including long-term investment) that will foster economic growth. In this paper, we set ourselves to the task of investigating the relationship between legal stability (as represented by stable precedent) and economic growth. To do so, we exploit the comparative advantage of the American states for theory building and theory testing, relying on original data on state court adherence to precedent and a wealth of state-level political and economic information. Our intention is to contribute to scholarly understanding of the interconnection between the legal and economic systems by evaluating the extent to which the rule of law contributes to economic prosperity across the fifty states.