Chapter 2Convergence and Divergence, in Lawand Economics and Comparative LawFilomena Chirico and Pierre LaroucheContents2....
2.4 What can be Done About Divergence?........................................................................... 252.4.1 ...
Secondly, this chapter also takes into account a broader range of dynamic toolsto address convergence and divergence. As m...
downsides (disadvantages, costs) of the current situation and the upsides(advantages, benefits) of the envisaged change whe...
2.1.1 Divergence as a Rational but Not Deliberate PhenomenonUnder this line of reasoning, divergence can be explained rati...
more members of the legal epistemic community subscribe to a given opinion, themore attractive it becomes, sometimes irres...
2.1.2 Divergence as a Rational, Deliberate and BenignPhenomenonThe explanations above assume that divergence does not resu...
influencing the production of law (here administrative procedure) rather than thegreater general good.One of the most power...
2.2 When is There Divergence?In the light of the foregoing, there appears to be ample reason for divergence(explicit or co...
On a proper view, one must consider keywords as shorthand labels and lookbeyond them to the subset of the legal system whi...
Yet ascertaining differences in legal concepts, reasoning and ‘‘culture’’ shouldnot be enough to warrant a finding of diver...
reach different outcomes, then the systems are functionally equivalent. Differencesin the path to that outcome matter of c...
preference’’ argument—the second one—provides a stable (and strong) explana-tion for divergence. Still, local preferences ...
throughout the EU, lest it lose its effectiveness. After all, the ECJ has construed theTreaties in a very purposive fashio...
2.3.2 The Costs Associated with Divergence2.3.2.1 Starting Point: Benefits, but No CostsThe benefits of divergence flow from ...
by another jurisdiction, in which case the choice of the first jurisdiction is notbased on a complete picture of costs and ...
In addition, a third type of cost could be associated with conceptual divergenceonly, namely costs arising from informatio...
First of all, if parties can influence the law through contract, they will likely doso. In commercial contracts, for one, p...
2.4.2 Top-Down HarmonisationJurists tend to be less sanguine than economists about divergence between legalsystems, and th...
On that count, harmonisation will always be beneficial and indeed jurists wouldbe right to focus solely on the costs of the...
courts and writers to the introduction of State liability for breaches of EU law viathe Francovich and Brasserie du Pêcheu...
will provide an incentive to move away from a law based strictly on localpreferences.49Law and economics scholars have tri...
Legal emulation can help explaining the move towards convergence in the fieldof competition law: Member States of the EU ha...
or because regulators have been exposed to (or forced to take into account) a legalrule in force in a different jurisdicti...
Lemley MR, McGowan D (1998) Legal implications of network economic effects. Cal L Rev86:479Liebowitz SJ, Margolis SE (1994...
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National legal systems and globalization

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  • 1. Chapter 2Convergence and Divergence, in Lawand Economics and Comparative LawFilomena Chirico and Pierre LaroucheContents2.1 Why Would Divergence Occur?...................................................................................... 122.1.1 Divergence as a Rational but Not Deliberate Phenomenon ............................... 132.1.2 Divergence as a Rational, Deliberate and Benign Phenomenon ........................ 152.1.3 Divergence as a Rational, Deliberate but Less Benign Phenomenon ................ 152.1.4 Concluding Note................................................................................................... 162.2 When is There Divergence?............................................................................................. 172.2.1 The Keyword Trap ............................................................................................... 172.2.2 A Functionalist Methodology to Ascertain Divergence...................................... 182.3 What is Wrong with Divergence? ................................................................................... 202.3.1 Convergence as a Value in and of Itself............................................................. 212.3.2 The Costs Associated with Divergence ............................................................... 23Filomena Chirico is an official at the European Commission, Directorate General Competition(DG COMP). Her contributions reflect her views and not those of the European Commission.At the time of her contribution to the project, she was Assistant Professor, and a member of theTilburg Law and Economics Centre (TILEC). Pierre Larouche is Professor of CompetitionLaw, Tilburg Law School, Tilburg University and a founding director of TILEC. A version ofthis chapter was published as ‘‘Conceptual divergence, functionalism and the economics ofconvergence’’, in Prechal et al. 2008, 463–494. The authors want to acknowledge thecontributions made by Arnald Kanning (on regulatory competition) and the comments receivedfrom Eric van Damme, Michael Faure and participants at seminars held in Amsterdam (ACLE),Tilburg (TILEC) and the National University of Singapore, as well as the conferences held inUtrecht in the course of the ‘‘Binding Unity / Diverging Concepts’’ project.F. ChiricoEuropean Commission, Brussels, Belgiume-mail: filomena.chirico@ec.europa.euP. Larouche (&)Tilburg Law School, Tilburg University, Tilburg, The Netherlandse-mail: pierre.larouche@tilburguniversity.eduP. Larouche and P. Cserne (eds.), National Legal Systems and Globalization,DOI: 10.1007/978-90-6704-885-9_2,Ó T.M.C. ASSER PRESS, The Hague, The Netherlands, and the author(s) 20139
  • 2. 2.4 What can be Done About Divergence?........................................................................... 252.4.1 Do Nothing and Leave the Market to Deal with it............................................. 252.4.2 Top-Down Harmonisation.................................................................................... 272.4.3 Bottom-Up Alternatives: ‘‘Legal Emulation’’ and the Marketplaceof Legal Ideas ....................................................................................................... 292.5 Conclusion ........................................................................................................................ 31References.................................................................................................................................. 32It is common knowledge amongst legal academics and practitioners that legalsystems sometimes diverge. Over the years, law and economics scholarship haspaid attention to that phenomenon, under the heading of ‘‘comparative law andeconomics’’ or ‘‘regulatory competition’’. That scholarship often assumes thatconvergence or divergence between legal systems is easily perceptible, i.e. that itcan be seen in the face of the formal sources of law. For example, the applicablelegislation of legal system A states that ‘‘title to the goods sold passes to the buyerupon the conclusion of a valid contract’’, whereas the applicable legislation insystem B states that ‘‘title to the goods sold passes to the buyer upon delivery ofthe goods to the buyer’’. Divergence is explicit and open. Economic actors can beexpected to behave accordingly. As a consequence, the literature considers that,through their conduct, economic actors will also influence the evolution of legalsystems in order to reach an efficient outcome as regards the appropriate level ofconvergence or divergence. If needed, legislative action (ranging from mildcoordination to outright unification) can also address explicit divergence.This chapter takes a broader perspective on issues of convergence and diver-gence between legal systems.First of all, it takes a more complex view of convergence by relaxing theassumption that language is unequivocal: the same words can mean differentthings to different people, what we will call ‘‘conceptual divergence’’. In the caseof explicit divergence mentioned in the previous paragraph, divergence literallysprings to the eye, and actually in a number of cases it reflects a deliberate choiceto diverge.1In contrast, ‘‘conceptual divergence’’ often lurks below the surface andis neither immediately perceptible nor entirely deliberate.2In a case of explicitdivergence, there is no doubt in the minds of the agents that there is divergence,whereas in the case of conceptual divergence, it can be that the agents believe thatthey are indeed using the same concept, since they label it with the same term,while they are in fact using diverging concepts. We will come back to this pointduring this chapter: sometimes the standard analysis must be adapted to deal withconceptual divergence, but very often it makes no difference whether the diver-gence is explicit or conceptual.1Between different legal orders or within a single order which allows this practice under certaincircumstances, like a federation.2Prechal et al. 2008.10 F. Chirico and P. Larouche
  • 3. Secondly, this chapter also takes into account a broader range of dynamic toolsto address convergence and divergence. As mentioned in the outset, the literatureso far (perhaps reflecting a private law bent) tends to rely primarily on the choiceof economic actors as regards the law governing, or applicable to, their legalrelationship as a tool to reach an efficient outcome. Whilst this tool is undeniablyavailable and effective, it is also limited: economic actors cannot influence the lawat will and moreover legal issues are often peripheral in the choices made byeconomic actors. In this chapter, we want to suggest that there is also—or ought tobe—a ‘‘marketplace of legal ideas’’, i.e. a market-like process where legal ideasare central and where members of the legal community are the main actors. Undercertain conditions, this marketplace of ideas can provide more wide ranging andeffective tools to deal with convergence and divergence.Against this background, this chapter deals with a number of basic issues,explained hereunder. At the same time, it also illustrates a number of basicpropositions arising from the economic analysis of the law.First of all, this chapter examines why different legal systems would diverge(2.1). That part illustrates the basic proposition that the existing state of affairs isnot fortuitous and will usually turn out to be in equilibrium. In other words, it is theoutcome of various forces. The ‘‘spontaneous’’3ordering of law (and of society)must at least be carefully studied on its merits, and if it is indeed in equilibrium,then it might be adequate. Note that in the context of this chapter, the existing stateof affairs is the legal systems as they exist at a given moment, with whateveramount of divergence or convergence might be present. We are therefore notdealing with an issue of ‘‘unbridled’’ market forces versus ‘‘discipline’’ from thelaw, but rather with the higher level issue of variety amongst legal systems (eachof which had to solve the first-level issue of whether and if so which law isappropriate to deal with various economic and social problems) and legal inter-vention to constrain that variety.Secondly, this chapter touches upon methodology, i.e. what is divergence andhow it can be detected (2.2). This part is not so much concerned with the economicanalysis of the law, but rather with comparative law methodology. It illustrates amore general proposition arising from any multi-disciplinary (‘‘Law +’’) approachto the law, namely that it is crucial that the law be seen in a broader context, i.e.including both the policy choices underlying it and its practical outcome.Thirdly, this chapter explains under which conditions divergence should beseen as a problem (2.3). Finally, it explores possible solutions to the problem (2.4).The last two parts rest on another fundamental proposition from economics: almostevery change involves a trade-off. In the words of Friedman, ‘‘there is no suchthing as a free lunch’’. Jurists are notoriously weak here. We tend to focus on the3Of course, there is no such point of reference as a ‘‘spontaneous’’ market economy at the scaleand level of our large industrialsed societies, as economists would sometimes claim. Economicstend to take for granted a set of basic law which enables the market economy to work in the firstplace (usually the basic legal disciplines as they would be reflected in codes or the common law).‘‘Spontaneous’’ should perhaps be better read as ‘‘bottom-up’’ in the context of this project.2 Convergence and Divergence 11
  • 4. downsides (disadvantages, costs) of the current situation and the upsides(advantages, benefits) of the envisaged change when deciding whether to change(Table 2.1), often ignoring the upsides of the current situation and the downsidesof the envisaged change.Obviously, change should only be done if the benefits of change minus the coststhereof exceed the benefits of the current situation minus the costs thereof. Informal terms, change would be justified if and only ifBafter À Cafter [ Bnow À Cnowand not merely becauseBafter [ CnowThe cost/benefit analysis just outlined extends to all sorts of costs and benefits,4not just to economic costs and economic benefits, which might be more easilyquantifiable. Non-economic costs and benefits are equally important, and the merefact that a choice also has non-economic implications—which is actually the rulemore so than the exception—does not render a cost-benefit analysis superfluous,quite to the contrary.2.1 Why Would Divergence Occur?When browsing through the legal literature, one cannot escape the impression thatjurists are slightly (at least) biased against divergence. Convergence, harmonisa-tion and even stronger phenomena like unification are often perceived as positivedevelopments in and of themselves. Even those who write in praise of divergencepresent it in such a fashion—calling upon irreducible cultural differences beyondapprehension5—that it seems to border on the irrational, a line of argument whichultimately feeds into the bias against divergence.Without dismissing the cultural argument as a whole, it seems more satisfactoryto investigate what is behind certain choices of legal rules.Why would divergence occur at all? With the use of economic theory, diver-gence can be rationally explained with at least three lines of reasoning.Table 2.1 Costs and benefits of legal changeComplete decision matrix Costs BenefitsCurrent Cnow BnowChange Cafter Bafter4The discussion on the goals of regulating is very wide. From the perspective of the economicanalysis of law, see Kaplow and Shavell 2001.5Legrand 1996, 2004, 245; Teubner 1998.12 F. Chirico and P. Larouche
  • 5. 2.1.1 Divergence as a Rational but Not Deliberate PhenomenonUnder this line of reasoning, divergence can be explained rationally, but it does notnecessarily result from a deliberate choice on the part of those concerned. Twodifferent strands of economic theory can be brought to bear here.2.1.1.1 Informational ImperfectionsFirstly, divergence can be explained by informational imperfections (or asym-metries) as between various jurisdictions. The law progresses in great part as aresult of outside pressure, which takes the form of new information about theworld outside the law (e.g. a new case never seen before, technological devel-opments, social evolution, etc.) that the law must then process. Legal systemsevolve within different informational environments. The comparative scholar willoften observe that certain areas of the law are more developed in certain juris-dictions as a result of specific historical occurrences.6Similarly, larger jurisdic-tions tend to run ahead of cutting-edge legal developments because, statistically,novel cases will tend to arise there first. Furthermore, there will rarely be anobvious ‘‘perfect solution’’ to a given legal problem that can immediately besingled out. Therefore, much like in economic activity, when it comes to thedevelopment of the law, decisions taken under asymmetric (and imperfect)information may lead different actors onto different paths.2.1.1.2 Network EffectsSecondly, network economics can also help to explain divergence. The startingpoint is the notion of network effects7(also presented as demand-side scaleeffects): for certain products, the value of the product to the individual userincreases as the number of users increases. The classical example is telecommu-nications: in the absence of interconnection, the value of a subscription to anetwork with 1000 subscribers is much less than that of a subscription to anotherwise identical service provided over a network with 1 million subscribers. Intelecommunications, network effects are strong, but the theory can also be appliedmore loosely to other phenomena, including fashion and language. It can beventured that the ‘‘market’’ for legal ideas is also subject to network effects8: the6For instance the doctrine of Wegfall der Geschäftsgrundlage in Germany as a result of theGreat Depression.7Shy 2001; Lemley and McGowan 1998; Liebowitz and Margolis 1994; Katz and Shapiro 1985.8Anthony Ogus argued, for instance that ‘‘the acknowledged characteristics of ‘legal culture’, acombination of language, conceptual structure and procedures, constitute a network which,because of the commonality of usage, reduces the costs of interactive behaviour’’. See Ogus2002.2 Convergence and Divergence 13
  • 6. more members of the legal epistemic community subscribe to a given opinion, themore attractive it becomes, sometimes irrespective of its inherent validity.9Theeffect is not as strong as in telecommunications, of course, since some jurists—fortunately so in many circumstances—can still decide not to be swayed by themere fact that the majority holds a certain view, and try to reverse network effectsby convincing their peers to espouse another view.More specifically, two specific properties associated with network effects canexplain divergence. The first one is called tipping10: a small movement in demandcan trigger a snowball effect.11In the case of legal ideas, a single leading decisionor a leading article at a given point in time can quickly lead to the emergence of amajority view. The second one is called path dependency: once network effectshave worked to the advantage of one firm, it becomes very difficult to ‘‘change thecourse of history’’.12In the case of legal ideas,13here as well once certain choiceshave been made and are deeply imbedded in the shared knowledge of the legalcommunity, they are difficult to reverse. Path dependency can show itself also in aslightly different manner: when faced with a new kind of problem that needs animmediate remedy, legal systems tend to choose solutions that are ‘‘familiar’’ tothem; hence, different systems easily end up choosing different solutions.14Accordingly, legal systems can evidence divergence as a result of discretechoices made differently in the past. Indeed on many issues (for instance, therelationship between contract and tort law), if one goes sufficiently far back intime, the same or very similar debates can be found in each system until a choicewas made. Network effects (including tipping and path dependency) amplify theconsequences of these choices. Sometimes it sufficed that a single leading authoror court chose option A in one system and B in the other for these two systems toevidence ‘‘irreconcilable divergences’’ later on, after network effects have donetheir work. The choices made at that time might have been the best possible at thatparticular time in that particular legal system. Later on, however, this impliesneither that such choices are still the best ones, nor that it pays to reverse them,without assessing the costs brought about by such change.9Hence the practice of pointing to the majority and minority views when there is a controversy.10Katz and Shapiro 1994.11This lies at the heart of the commercial strategy of most firms active in sectors affected bynetwork effects.12The classical example (David 1985) is the QWERTY keyboard that once established itself as astandard, could not be replaced by a more efficient alternative: the users had been trained in theQWERTY system and could not easily switch all together to the other system. See Brian 1989;Liebowitz and Margolis 1999.13For earlier applications of these economic concepts to developments in legal rules, seeHataway 2001, Gillette 1988, Roe 1995. For a study of the effects of path dependency incorporate law, see Heine and Kerber 2002.14Mattei 2001.14 F. Chirico and P. Larouche
  • 7. 2.1.2 Divergence as a Rational, Deliberate and BenignPhenomenonThe explanations above assume that divergence does not result from deliberateaction. The more classical and traditional explanation for divergence, however,involves deliberate choices made by the members of a community as regards theirlegal system, in other words local preferences. Because it is intuitive and well-researched, this explanation is only briefly summarised here, but this should nottake away any of its power.In essence, the legal system reflects the consensus of the community (or at leastof the ruling class) on the balance to be reached among competing policy interests.Some trade-offs are involved, and they are not always resolved in the same mannerfrom one community to the other. For instance, in a given community, moreemphasis will be put on ensuring that injured persons receive compensation, whilein another one, the need not to overburden economic actors with liability claimswill prevail. The laws of these respective communities will then most likelydiverge.2.1.3 Divergence as a Rational, Deliberate but Less BenignPhenomenonA third line of argument builds on the previous one, but adds a twist. Whereas theprevious account assumes deliberate decisions taken in good faith and with a viewto the public interest, public choice theory15would consider the production of lawas a market responding to general economic principles, for instance demand andsupply models, pricing theory and so on. Accordingly, the production of law willfavour the interests who are best able to articulate their demand and offer avaluable counterpart to the producer of law. Public choice theory can be used toexplain lawmaking in complex settings involving interest groups, lobbying andother features of modern-day democracies.Public choice theory can account for divergence as a rational and deliberatephenomenon. However, the outcome in each jurisdiction might be affected bymarket imperfections, including the presence of market power on the part ofcertain interest groups vying for the production of law, or information asymmetries(the interest groups know more than the lawmakers and choose to disclose onlythat information which serves their interest). The outcome is thus not necessarilyin line with the general public interest in that jurisdiction. It could be ventured thatthe presence in certain jurisdictions of very developed systems of admissibilitycontrol in public law claims, for instance, reflects success by the administration in15Stigler 1971; Becker 1983; Mueller 1989; Farber and Frickey 1991.2 Convergence and Divergence 15
  • 8. influencing the production of law (here administrative procedure) rather than thegreater general good.One of the most powerful interest groups is the legal profession: it can beargued that it represents, in fact, the main driving force for maintaining diver-gences, especially under the pretence of ‘‘legal culture’’. The conceptual device of‘‘legal culture’’ allows the legal profession to keep the tensions and debates alludedto above within its ranks, and hide behind a monolithic façade, which moreover ismade opaque to outsiders by being presented as a ‘‘culture’’. The legal professioncan then protect and perpetuate its ‘‘monopoly’’ on its legal ‘‘culture’’.16This alsohelps explaining the lawyers’ asymmetric attitude towards ‘‘importing’’ foreignlegal rules, as compared to ‘‘exporting’’ his or her own legal solutions.172.1.4 Concluding NoteThree different lines of argument were explored, all of which would explain whythe law could be different from one place to the other, and would do so in a moreconvincing fashion than endless invocations of irreducible differences among legalcultures: it is inaccurate to consider that the state of a legal system at a givenmoment is the single and unavoidable outcome of a monolithic legal culturepertaining to that system. Rather, each legal system is rife with tensions anddebates (at least at an academic level). Legal systems are open to many potentialdirections, and their state at a given moment is simply the outcome of certainpolicy choices—deliberate or not—that are neither pre-determined nor irreversibleover time.It will be noted that these lines of argument do not require a specific level ofcomparison. They can explain differences between legal systems, of course, butthey could also explain differences within a single legal system. Their point ofreference is not a geographical territory or a hierarchical entity (legal system), butrather a legal epistemic community.More importantly, these three lines of argument can explain conceptualdivergence equally well as explicit divergence. It makes no difference whether acommon term is used or not.16Ogus 1999, 2002; Hadfield 2000.17To be sure, if it can be argued that national lawyers prefer divergence for the sake of their ownlocal interest, the same way and on the basis of the same public choice arguments, it can also beobserved that comparatist lawyers represent another—albeit far less powerful—pressure groupwith the opposite interest in favouring harmonisation.16 F. Chirico and P. Larouche
  • 9. 2.2 When is There Divergence?In the light of the foregoing, there appears to be ample reason for divergence(explicit or conceptual) to appear. A foray into methodology is then necessary, toensure that divergence will only be found where it really exists. First of all, aspecific remark is made concerning conceptual divergence specifically and the‘‘keyword trap’’ (2.2.1), before going more generally into the methodology used toassess divergence (2.2.2).2.2.1 The Keyword TrapIn the case of conceptual divergence, there could be a methodological trap at work,having to do with the focus on keywords (including short key phrases of a fewwords). Jurists like to work with keywords, since it simplifies their task consid-erably by enabling them to put a shorthand label on subsets of the law in a givenlegal system. A whole piece of legal architecture is subsumed in one keyword: forinstance, the set of rules and concepts concerning cases where a decision makerhas some degree of freedom in reaching an outcome becomes ‘‘discretion’’. Themeaning of ‘‘discretion’’ as a keyword can only be found by retrieving the subsetof the law which it is meant to represent. Accordingly, that meaning will be linkedwith the rest of the legal system in question (and the broader context within whichthis system operates).Unfortunately, keywords tend to take a life of their own. They then cease to betreated as shorthand labels whose meaning is to be found by looking at theunderlying subset of law which the keyword is meant to represent. Instead, juristswill then believe that the keyword has an inherent meaning in and of itself, i.e. thatthe meaning of the keyword resides in the keyword itself.18Under those circumstances, there is a fair chance that misunderstandings canoccur. Two persons from different legal systems use the same keyword—or bettereven, what appears to be the same keyword in different linguistic versions—andexpect it to mean one and the same thing, since it is assumed that the meaning is inthe keyword. Yet they fail to realise that, on a proper view where the meaning israther found by referring to the subset which the keyword represents, the samekeyword can have different meanings. Conceptual divergence lurks.It is, therefore, crucial that jurists beware of the keyword trap. The mere factthat the same keyword, the same shorthand label, is found in two different systems(or appears to be found once translated), does not imply convergence. To use theexample given above, ‘‘discretion’’ as a keyword is found in most administrativelaw systems. It does not take extensive research to notice that it has significantlydifferent meanings from one system to the other.18See on this point Hart 1954; Ross 1957.2 Convergence and Divergence 17
  • 10. On a proper view, one must consider keywords as shorthand labels and lookbeyond them to the subset of the legal system which they are meant to represent.Only then can a conclusion be reached as to whether there is convergence or not.Presumably, the same keyword used in two different legal systems will oftenactually represent a different subset respectively in each system. Does that thennecessarily imply conceptual divergence?2.2.2 A Functionalist Methodology to Ascertain DivergenceAt this juncture, it is interesting to digress briefly into a comparison with eco-nomics. Jurists work only with language, which suffers from an inherent degree ofindeterminacy. Economists, on the other hand, rely on more formal tools—namelymathematical models, empirical measurements, etc.—in addition to language.Nevertheless, language remains the prime means of communication betweeneconomists, and like jurists, economists use keywords to simplify communica-tions. When two economists differ in opinion when discussing with each other(using language), they go back to the underlying theories and models (and formalmathematical language). They check their conclusions against these theories andmodels, verifying that assumptions are satisfied and that the theories and modelsbeing used are really applicable to the situation at hand. In the end, perceiveddivergences at the so-called ‘‘intuitive’’ level, using language and keywords, canbe tested against theories and models whose formalism enables a conclusion to bereached. Either the divergence is removed, or it is attributed to gaps or open issuesin economics. These can then be addressed as such.Coming back to law, there is no set of formal tools which could be used to reacha conclusion on a perceived divergence across legal systems. Nevertheless, juristshave developed comparative law methods to test for divergence (and, in the case ofconceptual divergence, to avoid the keyword trap).Sometimes, comparative law would take a point from within the law (typicallya keyword) as a basis for comparison. Each legal system will be entered into fromthat point. Typically, that point will be put in context with its immediate sur-roundings and even with the whole legal system.19Very often, a finding ofdivergence will be returned. The conclusion will tend to be that (even if there is anapparent similarity in keywords), the underlying legal concepts and the legalreasoning differ. An even more radical approach would go further into ‘‘legalcultures’’ as a source for irreducible divergences. Very often, the civil law/com-mon law divide will bear the blame for this (when the sample of legal systemsunder study allows for it).19In the case of conceptual divergence, this amounts to looking beyond the keyword andretrieving the subset which this keyword represents.18 F. Chirico and P. Larouche
  • 11. Yet ascertaining differences in legal concepts, reasoning and ‘‘culture’’ shouldnot be enough to warrant a finding of divergence. After all, such an inquiry offersno objective test to support its conclusion. A more solid methodology is needed.Such a methodology was developed in comparative law, namely functionalism.20Even if functionalism suffers from serious limitations,21for the purposes of thecurrent discussion they are not material. Functionalism involves looking beyondthe ‘‘rules and principles’’ layer of legal concepts and reasoning to incorporate alsothe ‘‘lower layer’’ of practical outcomes. Instead of beginning the inquiry via anendogenous point in the law, the starting point is rather found outside the law, byway of a practical problem, for instance. That practical problem is common to alllegal systems under study (e.g. ‘‘two cars collide at an intersection’’). The aim ofthe inquiry is then to ascertain whether legal systems, seen broadly with theirrespective three layers, produce the same or a similar outcome. Whether the legalconcepts and reasoning used in doing so are similar should not be of prime rel-evance. Only when the outcomes differ is there a sufficient basis for a finding ofdivergence.22Such a functionalist approach enables an objective test. Indeed the startingpoint is not an unreliable endogenous point within the law, but rather a constantexogenous point (a practical problem arising in each legal system). Furthermore,the conclusion is reached on the basis of outcomes, which are usually easier toquantify and compare (it is either one or the other outcome) than rules and con-cepts. In the end, if a difference in outcome is measured for the same starting point,then one cannot escape the conclusion that the legal systems do diverge. If theyoriginally appeared to converge because of common or similar keywords, then wehave a proven case of conceptual divergence: despite common keywords, the legalsystems produce different outcomes when examined from a single commonstarting point.It is true that functionalism covers a number of different and sometimes con-flicting concepts, as was pointed out by Michaels.23Yet what is put forward here isa methodology, without any teleological element: in this sense, it falls under whatMichaels describes as ‘‘equivalence functionalism’’, namely the idea that ‘‘similarfunctional needs can be fulfilled by different institutions’’.24Only through afunctionalist method, which seeks to ascertain how various legal systems deal witha similar functional need, can the scope of convergence or divergence be properlyassessed: if legal systems reach different outcomes (as mentioned above, oftenbecause of different policy choices), then there is truly divergence. If they do not20The functionalist method is discussed in greater detail infra, in Chap. 10 of this book,Sect. 10.3.21Ibid., Sect. 10.3.2.22As is discussed further in Chap. 10 of this book, Sect. 10.3.2.1., differences in outcome areoften to be explained by policy differences, and functionalist comparative law has tended not topay enough attention to the policies and principles underlying the law.23Michaels 2006, 339.24Ibid., 357.2 Convergence and Divergence 19
  • 12. reach different outcomes, then the systems are functionally equivalent. Differencesin the path to that outcome matter of course, but they do not result in a significantdivergence. Beyond enabling a more accurate assessment of convergence ordivergence, the functionalist method advocated here cannot provide guidance at amore normative level, as regards what should be done about the divergence.25Thisis a weakness of functionalism, which is dealt with elsewhere in this book.26Some critics deny the very possibility of defining an exogenous starting pointfor the comparison. According to that view, problems do not exist in the abstract.Either functionalism is circular, in that its exogenous point is not truly exogenousbut actually a construct of the same community of meaning which administers alegal system to deal with that problem.27On that account, it is impossible to find astarting point which would be common to different communities. Alternatively,functionalism is value-laden and simply substitutes an exogenous rationality to theone which would be found within the system28: it is then impossible to deliver onthe promise of a comparison which would allow each system to ‘‘express itself’’and would separate significant divergence from functional equivalence.On the one hand, this criticism stands as a warning to, and a challenge for, theresearcher. The functionalist method must be used cautiously, and great care mustbe taken to ensure that the exogenous starting point is stripped as bare as possiblefrom any influence from the legal systems to be studied. Yet on the other hand,when taken to its logical extreme, this criticism would deny functionalism andultimately comparative law altogether.If the methodology just described is used, we venture that the number of casesof divergence—explicit or conceptual—is likely to be lower than might appear atfirst sight.2.3 What is Wrong with Divergence?In the previous two parts, we have seen that divergence can be explained ratio-nally, and that, on a proper methodological approach, it is probably less frequentthan suspected.Once there is a finding of divergence, the discussion is naturally drawn to themore normative question of whether it is undesirable.In the first part of this chapter, three lines of argument were set out to explainwhy divergence can occur. It can be noted that of the three, only the ‘‘local25A point which Michaels, Ibid., who also considers equivalence functionalism as the mostrobust version of functionalism, also underlines at 373 and ff.26Infra, Chap. 10.27This would be in line with the autopoeitic theory put forward by Teubner 1993 on the basis ofthe work of N. Luhmann.28See for instance the criticism directed at Marxist functionalism by Castoriadis 1975, 159 and ff.20 F. Chirico and P. Larouche
  • 13. preference’’ argument—the second one—provides a stable (and strong) explana-tion for divergence. Still, local preferences can evolve. The first line of argument(rational but not deliberate) implies that divergence can disappear over time, ifinformation imperfections are removed. Network effects can work in favour of oneor another outcome and would not prevent divergence from disappearing.29Thethird line of argument (rational, deliberate but not benign) implies that divergenceresults in part from different power configurations which are not necessarilystable.Even then, the mere fact that divergence is not stable over time does not meanthat it is undesirable. Beyond purely legal arguments against divergence (2.3.1),which are not conclusive, there are some economic reasons why divergence shouldbe addressed (2.3.2).2.3.1 Convergence as a Value in and of ItselfHere, we jurists sometimes fall into the classical trap of thinking that convergence(and ultimately unity) in the law is a value in and of itself.First of all, convergence has enormous intellectual appeal, but that of course isnot a sufficient justification.Secondly, jurists sometimes put forward rights-based arguments for conver-gence: it would be everyone’s right to have similar situations be treated in thesame way across legal systems or communities. Given the arguments made aboveto explain why there might be divergence, we do not think that a mere assertion ofrights is sufficient to trump the cards.30In the same line of reasoning, it is equallysomewhat hasty to advance the political argument that the call for a uniform law isdictated by the need to support a common European identity.31A third but related argument is very present in EU law, namely the need toensure the effectiveness of the law (here, EU law). This argument pertains more toconceptual divergence within a larger system such as EU law: it would be essentialto ensure that EU law is interpreted, applied and enforced the same way29In fact, in network markets, network effects can be overcome and a new solution can replacethe one previously in place, not necessarily by means of a top–down intervention, but alsothrough bottom-up provision of incentives to transition.30Bhagwati 1996, 9 and ff., a survey of the arguments against diversity is presented, byhighlighting (1) the philosophical arguments (basic human rights beyond national borders,distributive justice and fairness), (2) the structural arguments (globalisation), (3) the economicarguments (domestic decisions impairing international trade; distributive concerns and predation)and (4) the political arguments (protectionism and the need for a common set of standards withinan integrated union).31A discussion of this point with respect to drafting a European Civil Code can be found inGrundmann and Stuyck 2002.2 Convergence and Divergence 21
  • 14. throughout the EU, lest it lose its effectiveness. After all, the ECJ has construed theTreaties in a very purposive fashion, which naturally leads to emphasisingeffectiveness.At the same time, throughout its case law, the ECJ is also willing to accept adegree of divergence in the laws of the Member States. For instance, it mightappear that the case law on the internal market is naturally favourable toconvergence, given the ease with which the ECJ will conclude, often withoutempirical evidence, that a specific provision in a given Member State constitutes abarrier to the free movement of goods, workers, services, capital or the freedom ofestablishment of firms and self-employed persons. At the same time, the ‘‘rule ofreason’’ developed to save restrictions on the free movement of goods in Cassis deDijon32and subsequently extended to other freedoms enables vast areas of law toremain divergent across Member States. Similarly, in the line of case-lawincluding Keck33and Gourmet International,34the ECJ retreats on its earlierstatements and leaves potentially divergent Member State laws outside of therealm of Article 34 TFEU.In addition, the judgment in the Tobacco Advertising case35provides a usefulreminder that convergence is not a value in and of itself. Writing about theavailability of Article 114 TFEU as a legal basis, the Court stated that36:[i]f a mere finding of disparities between national rules and of the abstract risk of obstaclesto the exercise of fundamental freedoms or of distortions of competition liable to resulttherefrom were sufficient to justify the choice of Article [114] as a legal basis, judicialreview of compliance with the proper legal basis might be rendered nugatory.In Tobacco Advertising, the ECJ laid down the bases for a more economicapproach to the use of Article 114 TFEU as a legal basis. Indeed from an economicperspective, the mere fact of divergence is not undesirable.In order to come to a normative conclusion, the assessment must look morebroadly at the costs and benefits of divergence (and in a later step, discussed belowunder part IV, at the costs and benefits of removing divergence).3732ECJ, 20 February 1979, Case 120/78, Rewe-Zentral v. Bundesmonopolverwaltung fürBranntwein [1979] ECR 649.33ECJ, 24 November 1993, Cases C-267/91 and C-268/91, Keck [1993] ECR I-6097.34ECJ, 8 March 2001, Case C-405/98, Konsumentombudsmannen (KO) v. Gourmet Interna-tional Products AB (GIP) [2001] ECR I-1795.35ECJ, 5 October 2000, Case C-376/98, Germany v. Parliament [2000] ECR I-8419. Followinga series of cases where that judgment seemed to have been weakened, the ECJ (Grand Chamber)has reaffirmed its approach on 12 December 2006, Case C-380/03, Germany v. Parliament [2006]ECR I-11573.36Ibid., at Rec. 84.37An obvious point for economists. See, for example, in the context of discussions concerningharmonisation: Sun and Pelkmans 1995.22 F. Chirico and P. Larouche
  • 15. 2.3.2 The Costs Associated with Divergence2.3.2.1 Starting Point: Benefits, but No CostsThe benefits of divergence flow from the lines of argumentation put forwardearlier. They are strongest when divergence is explained by local preferences.Each legal system is then better attuned to its respective reality: when they reflectdifferences in preferences of different communities, divergences are in principlepreferable to a unified solution since the latter will not, by definition, match everycommunity’s needs equally well.38Since variety increases utility, social welfare isenhanced.Moreover, since the most suitable solution is hardly, if ever, known in advance,the existence of different solutions can enable a learning process toward the dis-covery of the most appropriate one.39In principle, divergence as such does not create costs. To be sure, in presence ofa divergence among legal systems, acknowledging it and being aware of alter-native solutions can help highlighting the possible costs associated with a certainlegal choice within a given legal system. However, in such cases, costs are not dueto divergence but are caused by unsatisfactory choices made in the past. This isespecially true when divergence is explained not by local preferences but rather bynon-deliberate factors (information asymmetries, network effects) or via publicchoice theory (pressure of interest groups).40In such cases, the existence ofdivergence does not constitute a ground for harmonisation, but may prompt adomestic revision of one’s own inefficient legal choices and eventually lead to achange.2.3.2.2 The More Realistic Case: Benefits but Also CostsPositive costs are usually generated, however, when diverging systems are actuallycommunicating with each other. Communication can take place through variousmeans, be it trade in goods, movement of persons and so on. Certainly this kind ofcommunication can be considered as an increasingly recurrent feature whenmarkets are integrating.More specifically, when diverging systems communicate, the following costsmight arise:1. Externalities: Normally, the state of the law should reflect the choices made in agiven jurisdiction, in the light of the various tradeoffs involved. It is possible,however, that the choices made in a jurisdiction impose costs which are borne38Save for what is discussed in the subsequent section.39Hayek 1978, 179.40See supra, Sect. 2.1.2 Convergence and Divergence 23
  • 16. by another jurisdiction, in which case the choice of the first jurisdiction is notbased on a complete picture of costs and benefits (tradeoffs) involved. A typicalexample is environmental legislation in the presence of cross-border effects(water and air flows across boundaries). In the presence of externalities, there isno reason to respect divergence arising from local preferences (e.g. minimalpollution controls upstream), since they can result in sub-optimal results overall(e.g. unwanted pollution downstream). A similar problem may arise if a statehas a lax competition policy that allows the formation of cartels which thennegatively affect consumers in other jurisdictions to the benefit of domesticfirms.2. Transaction costs: When there is trade between jurisdictions, divergencecreates transaction costs. Indeed participants in trade—sellers as well asbuyers—must acquire knowledge about the legal situation in other jurisdictionsin order to engage into trade efficiently (otherwise, they incur risks). They mustincur the costs necessary to draft contracts according to each legal system inwhich they are doing business and they must incur the costs of possible liti-gation under multiple legal regimes. The risks associated with unexpectedchanges in each of the legal systems concerned by the transaction also representcosts for cross-border economic actors and so on.41On the seller side, for example, this means that products, terms and conditions,etc., must be adapted to meet the legal requirements of a number of jurisdic-tions, thereby increasing the cost of production and consequently the price. Onthe buyer side, not only is the price higher due to the just mentioned extra costs,but also the cost of buying can be increased; more likely, however (especiallywith consumers), buyers would refrain from buying outside of their jurisdiction.The same applies to business transactions other than sale and even to personalendeavours (employment, family matters). Besides these ‘‘static’’ effects, alsodynamic ones can be identified on a macroeconomic level, namely the reduc-tion in the international trade volume, in the level of investment, consumptionand income and ultimately in the economic growth.42Transaction costs offer a very powerful argument against divergence. Withrespect to consumers and persons in general, transaction cost analysis canreinforce rights-based arguments: the right of a person to be treated the sameway irrespective of the legal system in question can be justified because it isdeemed unacceptable that persons should bear the transaction costs associatedwith divergent legal systems.Externalities and transaction costs are the standard arguments used to supportthe conclusion that a given instance of divergence is undesirable. These argumentsapply equally to conceptual or explicit divergence. Presumably, transaction costsare higher in the case of conceptual divergence, since the precise scope of thedivergence is harder to ascertain.41On the costs of diversity, see Ribstein and Kobayashi 1996, 138 and ff.42More extensively on this, see Wagner 2005.24 F. Chirico and P. Larouche
  • 17. In addition, a third type of cost could be associated with conceptual divergenceonly, namely costs arising from information imperfections. Indeed conceptualdivergence differs from explicit divergence in that, on the surface, the same term isused, but with diverging concepts. Ideally, if acquiring information was costless,individuals and firms would dedicate sufficient resources to ascertain the legalsituation and they would come across conceptual divergences as well. Since,unfortunately, obtaining information is costly, parties will invest resources in suchactivity only until its marginal cost equals the marginal benefit.43There is there-fore a risk that they will not look beyond the surface and will then take decisionsbased on the assumption that the same term is conceptualised in the same way inevery jurisdiction, only later to find out that their assumption was wrong (at theircost, but perhaps also to their benefit). They could thus be misled into takingdecisions which they would not have taken with complete information on thestatus of the law. This can lead to inefficiencies, in the form of unsuspected lossesor extra costs to undo mistakes. In the end, the uncertainty and the risk of hiddenconceptual divergences arising only after the transaction has been entered into, iftoo extensive, could result in economic actors refraining from cross-border trade.In sum, divergence is not undesirable as such. Yet in many cases it engenderssignificant costs, such as externalities, transaction costs and (in the case ofconceptual divergence) costs arising from information imperfections. These costscan exceed the benefits from divergence and thus justify the conclusion thatdivergence should be addressed. However, the inquiry does not end here. It muststill be ascertained whether change would lead to an improvement.2.4 What can be Done About Divergence?A number of options are available to deal with a situation in which divergencewould be undesirable.2.4.1 Do Nothing and Leave the Market to Deal with itAt the outset, it must be remembered that markets typically provide ‘‘private’’solutions to deal with certain costs associated with diverging legal systems. Suchsolutions do not in fact eliminate divergences but constitute a way to factor theminto the choices of economic actors.43This is referred to as rational ignorance: I will spend on information only to the point when thelast bit of information I have acquired allows me to reap net additional benefits.2 Convergence and Divergence 25
  • 18. First of all, if parties can influence the law through contract, they will likely doso. In commercial contracts, for one, parties can either opt for one or the otherlegal system (or a third one) or define the law inter partes themselves.Secondly, the legal profession can assist market players in reducing the costs ofdivergence by providing accurate advice, thereby minimising transaction costs andthe costs of information imperfections linked with conceptual divergence. In fact,through their work, legal professionals contribute to identifying cases of concep-tual divergence. Over time, once these cases become common knowledge, theinformation imperfections are eliminated and conceptual divergence becomesequivalent to explicit divergence in economic terms.Thirdly, in commercial but also in consumer relationships, the insurance marketcan offer a possibility to translate divergence into quantitative terms, i.e. aninsurance premium. In the case of liability laws, in particular, insurers havesuperior knowledge of the state of the law in each market and can provide a lowercost alternative to endless inquiries, product modifications and so on. If a firmwants to keep relatively uniform prices, it can then equalise the cost of insuranceover all of its customers.Fourthly, large and multinational companies are generally familiar with dealingwith multiple legal systems and have developed the necessary structures for cost-minimising information gathering, thanks also to economies of scale. In fact, theymight find worthwhile to develop international standards for contracts and prod-ucts; those standards could bring about some sort of ‘‘harmonisation’’.44In suchcases, the interest of Member States (or of the European Commission) wouldrather lie in making sure that such standard-setting activities do not concealcompetition law infringements.These solutions can only work in certain cases: for instance, divergences inadministrative procedure cannot be compensated via contract or insurance.Moreover, for SMEs45and consumers, such solutions might be less affordable orpracticable. In situations where they are available, however, these market-basedsolutions can be attractive, especially if there are no externalities involved and thecosts associated with divergence (transaction costs, information imperfections asthe case may be) are limited in comparison with the value of the overall activity.Market-based solutions apply equally to explicit and conceptual divergence. Itcan be added, however, that when parties themselves draft in the contract the lawapplicable to their transaction, they must be aware of the existence of a conceptualdivergence and explicitly address the problem; otherwise, the contract will becomeitself the source of the hidden divergence, instead of removing it.44In this sense, see Wagner 2005, and the references contained therein.45It has been noted, however, that in the debate launched by the Commission on theharmonisation of contract law at the European level, some associations of SMEs have expressedtheir opposition to full harmonisation.26 F. Chirico and P. Larouche
  • 19. 2.4.2 Top-Down HarmonisationJurists tend to be less sanguine than economists about divergence between legalsystems, and they readily see it as a problem. What is more, they often propose toremedy that problem with a fairly drastic solution, namely harmonisation or evenunification of the law. In such a process, the respective laws of each legal system,on the area when divergence is deemed problematic, are replaced by a single lawcommon to all systems.Looking back at the costs associated with divergence, as they were identifiedabove, the case for harmonisation is most compelling when divergence leads toexternalities. In such cases, given that market players and national legislators areunable to decide on the basis of a complete picture of costs and benefits, it isunlikely that an efficient outcome will be reached. Indeed, externalities are atypical form of market failure which requires intervention by public authorities.The benefits of (successful) harmonisation, including uniform implementation,are that the costs of divergence are removed:• externalities are addressed and removed;• transaction costs are eliminated, since cross-border activities will be subject tothe same set of rules in all the relevant legal systems;• information imperfections disappear, since parties can rely on the common legalframework thus established.As a consequence, cross-border activity would be boosted and so would alsoinvestment, consumption and growth.Furthermore, there might be occasions where economies of scale are possible,thus justifying the need of a uniform solution. This might be the case of problemsof complex technical nature that are more cheaply dealt with in a one-stop-shopsetting.As mentioned at the outset, however, jurists tend to ignore the benefits of thecurrent situation and the costs associated with change. Even if divergence leads tocosts, it is conceivable that harmonisation would generate even higher costs.462.4.2.1 A Superficial Cost-Benefit Analysis of HarmonisationAt a superficial level, harmonisation removes the benefits associated with diver-gence, first and foremost that the law is better attuned to local preferences.Presumably, if divergence was found to be a problem, it is because the costsflowing from divergence exceed the benefits it provides. Therefore, if harmoni-sation can remove these costs, it would still produce an overall benefit even if thebenefits of divergence were removed by the same token.46There is a shared presumption in the literature that full harmonisation generally brings abouthigher costs than those caused by maintaining diversity.2 Convergence and Divergence 27
  • 20. On that count, harmonisation will always be beneficial and indeed jurists wouldbe right to focus solely on the costs of the current situation and the benefits ofchange.2.4.2.2 A More Complete Cost-Benefit AnalysisThe above analysis is incomplete on two accounts: harmonisation itself generatescosts (as opposed to the mere removal of the benefits of the current situation), andthe benefits of harmonisation must be discounted to reflect uncertainty as torealisation.Harmonisation generates costs of its own, which must also be taken intoaccount. First of all, the production of the harmonised legislation is costly,involving as it does extensive background studies and discussions. Costs also arisebecause of the need to ‘‘develop… new bureaucracies or demolish… old struc-tures’’.47Costs are also incurred in order to adapt to the new rules, in terms ofinformation spreading and re-training.Secondly, and more fundamentally, it is a rare occurrence where the area to beharmonised is relatively autonomous within the law as a whole. More frequently,this area interacts with the rest of the law. For instance, product liability or Stateliability for breaches of EU law are part of the law of liability and more generallyof private and/or public law. Ahead of harmonisation, each legal system is in anequilibrium of sorts: the various areas of the law are supposedly seamlesslyintegrated into the legal system. Top-down harmonisation, coming from the out-side, implies a break within the legal system, i.e. the creation of a specific ‘‘har-monized area’’ which co-exists with other remaining areas. In the ideal situation,implementing (incorporating) the harmonised law should be done seamlessly,without distorting the legal system. For instance, under EU law, the very mech-anism of the directive is meant to allow Member States some room to adapt theharmonised law to their legal system and thereby minimise distortions. The idealbeing an ideal, more often than not harmonisation will generate distortions withinthe legal system or miss its goal because harmonisation is undone at the imple-mentation stage (as mentioned above), or even both.When faced with such distortions as a result of harmonisation, legal systemscan react in two ways. Firstly, via a kind of ripple effect, the changes introduced inthe harmonised area can induce further changes outside of the harmonised area inorder to restore the system to a seamless equilibrium. There are numerousexamples of Member States using the implementation of a directive as anopportunity to change a broader area of their law (often in a spirit of ‘‘cleaningup’’). Such a ripple effect generates costs, but they are limited in time. Secondly,the legal system can treat the harmonised area as a form of foreign body(Fremdkörper) and seek to isolate it. For an example, see the reaction of German47See Wagner 2005.28 F. Chirico and P. Larouche
  • 21. courts and writers to the introduction of State liability for breaches of EU law viathe Francovich and Brasserie du Pêcheur judgments. The ensuing tension withinthe legal system generates costs on a lasting basis.Moreover, the need to legislate in many languages—leading to often lamentedinaccuracies, even within the same language48—may facilitate the reproduction ofthe divergence in the implementation phase.The above analysis applies to explicit as well as conceptual divergences.However, given the complexity of the law, harmonisation exercises sometimes endup replacing explicit divergence with conceptual divergence or merely pushingconceptual divergence deeper, so that harmonisation does not deliver all theexpected benefits. There is an illusion of convergence in terminology andpresumably a fair amount of conceptual overlap, but somewhere at the conceptuallevel undesirable divergence remains. If this happens as the result of an harmoni-sation effort aiming at removing externalities and costs of an existing divergence,then it will instead merely replace such costs with new ones, perhaps adding thosepeculiar to conceptual divergences.In addition to the above costs of harmonisation, by implication the benefits ofharmonisation must be discounted with a higher degree of uncertainty as to theresults. By the same token, it is more likely that harmonisation will inducesignificant distortions and thus costs.Accordingly, top-down harmonisation efforts must be analysed as a trade-offbetween the benefits of harmonisation and the costs associated with inducingdistortions within legal systems.2.4.3 Bottom-Up Alternatives: ‘‘Legal Emulation’’and the Marketplace of Legal IdeasBetween doing nothing and introducing top-down harmonisation, there is a thirdoption, namely relying on bottom-up processes to bring about convergence whenneeded.If legal systems diverge but they do communicate with each other through tradeand other forms of exchange, they will also communicate at the intellectual level,in the proverbial marketplace of ideas. If the various legal epistemic communitiesare introduced to each other’s ideas, one could expect that they will compare them.Over time, they might adopt the policies, concepts, reasoning or outcomes ofanother community if they are convinced that it is preferable. A certain amount ofconvergence will then result.Of course, if divergence echoes local preferences, one could object that locallaw will remain in place even after the comparison. However, in many cases, theneed to reduce transaction costs and improve trade will act as a counterweight and48See, for example, Pozzo 2003.2 Convergence and Divergence 29
  • 22. will provide an incentive to move away from a law based strictly on localpreferences.49Law and economics scholars have tried to modelise this phenomenon, givingrise to the theory of regulatory competition.50Regulatory competition is discussedin greater detail in Chap. 10, but a few general remarks can be made here.Regulatory competition makes a parallel between product markets and lawmaking: they consider legal rules as a sort of ‘‘product’’ and depict law makers inthe different legal systems51as the suppliers of such product. On a given topic,52different law-makers compete with each other for the provision of the legal rulesthat are more attractive to their ‘‘customers’’, intended as individuals as well asfirms. Those ‘‘customers’’, in turn, respond by relocating in the jurisdiction whoseset of rules best suits their preferences. This way, law makers are pushed toexperiment and try to find out the best legal rule. This process of trial and error canlead to a certain amount of convergence, as soon as ‘‘good’’ rules are beingdiscovered and can be replicated. In such case, convergence will not have beenimposed by any superior authority but chosen bottom-up by the legal systems onthe basis of their own costs and benefits analysis of changing an existing rule. Thisway, some of the costs of top-down harmonisation are avoided.The theory of regulatory competition has been used extensively to explaindevelopments in American corporate law,53as one of the topical legal fields wherelegislators compete to attract businesses to incorporate within the boundaries oftheir jurisdiction.In practice, regulatory competition suffers from the restrictiveness of itsassumptions.Actually, as mentioned at the beginning of this section, the form of bottom-upsolution suggested in this chapter is broader than ‘‘regulatory competition’’. Itextends also to a ‘‘marketplace of legal ideas’’ where law is central and membersof the legal community are looking for the best solution to the issues they areconfronted with. It broadens the idea of regulatory competition to a more generalphenomenon of legal emulation,54by touching directly the problem of circulationof legal ideas not among the economic actors but among the legal actors and theregulators. With legal emulation, legal rules do not evolve as a sort of ‘‘side effect’’of the choices of economic actors and citizens, but they are compared and chosendirectly by legal actors.49It has been remarked, however, that some areas of law might be deeply connected with localpreferences and therefore less subject to ‘‘regulatory emulation’’ and that this might in particularbe the case of ‘‘interventionist’’ law, as opposed to ‘‘facilitative’’ law. See Ogus 2002.50van den Bergh 2000; Esty and Geradin 2001; Ogus 1999.51Or at different levels in a single legal system with a federal structure.52This is generally the case for legislators that, each within their geographical borders, have thepower to regulate the same kind of situations.53Romano 1985.54Legal emulation is developed in greater detail infra, Chap. 10, Sect. 10.4.30 F. Chirico and P. Larouche
  • 23. Legal emulation can help explaining the move towards convergence in the fieldof competition law: Member States of the EU have very similar competition lawstoday but it has not always been so. This convergence was not the effect of anharmonisation effort55and perhaps the previous regimes were possibly betterattuned to local preferences; yet the benefits of convergence in terms of reductionof transaction costs (including administrative costs) have played an important rolein the drive towards change.2.5 ConclusionBy taking the consequences of what has been said in the previous sections, we canattempt to draw some conclusions.Bearing in mind that the mere existence of a divergence is not a problem initself, it is worthwhile noting that none of the alternatives described above seemsto be the panacea for all forms of ‘‘problematic’’ divergences.If the divergence problem is, in fact one of transboundary externalities, then, asit has been highlighted, non-coordinated actions might result in failures. In suchcases, therefore, both explicit and conceptual divergence is probably best cured byharmonisation. This does not necessarily imply that a uniform substantive rule beimposed upon for all the involved jurisdictions. As mentioned, there are variousdegrees of inter-jurisdictional cooperation that can be established, relative to theproblem at hand and to the jurisdictions involved. Thus, harmonisation could alsotake the form of a procedural framework,56within which to come to an agreement,or aim at establishing an appropriate (uniform) private international law rule.57If the problem is caused by the presence of transaction costs, the recipe willprobably not be the same for every case. In some cases, the ‘‘do nothing’’ approachmight work well. Full harmonisation is generally prone to bring about very highcosts, without being sure of the overall result. Moreover, in the case of conceptualdivergences, it might push the problem deeper, thus reinforcing the costs specificto such form of divergence.‘‘Legal emulation’’—a broader version of regulatory competition extending tothe ‘‘marketplace of legal ideas’’—offers a valid alternative to the abovementionedsolutions. It could bring about a certain degree of convergence without many of thecosts of a top-down harmonisation and only where this appears to be desirable,because economic actors have revealed their preferences for a superior legal rule55Of course this is not meant to deny that some adaptations were not the fruit of choice butrather the consequence of certain obligations, but the described convergence was certainly not adeliberate act of harmonisation.56In this direction, Barnard and Deakin 2002, 220.57In favour of this alternative, Alférez 1999.2 Convergence and Divergence 31
  • 24. or because regulators have been exposed to (or forced to take into account) a legalrule in force in a different jurisdiction.Moving back to conceptual divergence in particular, in general, the use ofeconomic analysis tends to reduce the sense of urgency which might be felt whenconceptual divergence is detected. Indeed, by and large, the various economicanalysis tools used to examine explicit divergences are applicable to conceptualdivergences as well. As is the case with explicit divergence, they show thatdivergence can rationally be explained, that it does not really occur that often, thatit may not always undesirable and that attempts to remove it can sometimes makethe situation worse.ReferencesBarnard C, Deakin S (2002) Market access and regulatory competition. In: Barnard C, Scott J(eds) The law of the single European market, unpacking the premises. Hart, Oxford, p 220Becker G (1983) A theory of pressure groups for political influence. Quart J Econ 98:371Bergh R (2000) Towards an institutional legal framework for regulatory competition in Europe.Kyklos 53:435Bhagwati J (1996) The demand to reduce domestic diversity among trading nations. In: BhagwatiJ, Hudec R (eds) Fair trade and harmonization. MIT Press, BostonBrian AW (1989) Competing technologies, increasing returns, and lock-in by historical events.Econ J 97:642Castoriadis C (1975) L’institution imaginaire de la société. Seuil, ParisDavid PA (1985) Clio and the economics of QWERTY. Am Econ Rev 75:332Esty D, Geradin D (2001) Regulatory competition and co-opetition. In: Esty D, Geradin D (eds)Regulatory competition and economic integration: comparative perspectives. OUP, OxfordFarber DA, Frickey PP (1991) Law and public choice: a critical introduction. University ofChicago Press, ChicagoGarcimartín Alférez FJ (1999) Regulatory competition: a private international law approach. EurJ Law Econ 8:251Gillette CP (1988) Lock-in effects in law and norms. Boston Univ L Rev 78:813Grundmann S, Stuyck J (eds) (2002) Academic green paper on contract law. Kluwer, DeventerHadfield GK (2000) The price of law: how the market for lawyers distorts the justice system.Mich L Rev 98:953Hart H (1954) Definition and theory in jurisprudence. L Quart Rev 70:37Hataway O (2001) Path dependency in the law: the course and pattern of legal change in acommon law system. Iowa L Rev 86:601Hayek FA (1978) Competition as a discovery procedure. In: Hayek FA (ed) New studies inphilosophy, politics, economics and the history of ideas. Routledge, London, p 179Heine K, Kerber W (2002) European corporate laws, regulatory competition and pathdependence. Eur J L Econ 13:47Kaplow L, Shavell S (2001) Fairness versus welfare. Harv L Rev 114:961Katz M, Shapiro C (1985) Network externalities, competition and compatibility. Am Econ Rev75:425Katz M, Shapiro C (1994) Systems competition and network effects. J Econ Pers 8:93Legrand P (1996) European legal systems are not converging. ICLQ 45:52Legrand P (2004) A diabolical idea. In: Hartkamp AS et al (eds) Towards a European civil code.Kluwer Law International, Deventer, p 24532 F. Chirico and P. Larouche
  • 25. Lemley MR, McGowan D (1998) Legal implications of network economic effects. Cal L Rev86:479Liebowitz SJ, Margolis SE (1994) Network externality: a uncommon tragedy. J Econ Pres 8:133Liebowitz SJ, Margolis SE (1999) Path dependence. In: Bouckaert B, de Geest G (eds)Encyclopaedia of law and economics. Edward Elgar, ChathamMattei U (2001) Legal systems in distress: HIV-contaminated blood, path dependency and legalchange. Glob Jurist Adv 1, Article 4Michaels R (2006) The functional method of comparative law. In: Reimann M, Zimmermann R(eds) The Oxford handbook of comparative law. OUP, Oxford, p 339Mueller DC (1989) Public choice II. CUP, CambridgeOgus A (1999) Competition between national legal systems: a contribution of economic analysisto comparative law. ICLQ 48:405Ogus A (2002) The economic basis of legal culture: networks and monopolization. Oxf J LegStud 22:420Pozzo B (2003) Harmonisation of European contract law and the need of creating a commonterminology. Eur Priv L Rev 11:754Prechal S et al (eds) (2008) The coherence of EU law. OUP, OxfordRibstein LE, Kobayashi BH (1996) An economic analysis of uniform state laws. J Leg Stud25:131Roe MJ (1995) Chaos and evolution in law and economics. Harv L Rev 109:641Romano R (1985) Law as a product: some pieces of the incorporation puzzle, J L Econ Org 1:225Ross A (1957) Tu-tu. Harv L Rev 70:812Shy O (2001) The economics of network industries. CUP, CambridgeStigler GJ (1971) The theory of economic regulation. Bell J Econ Man Sci 2:3Sun JM, Pelkmans J (1995) Regulatory competition in the single market. J Common Mark Stud33:67Teubner G (1993) Law as an autopoietic system. Blackwell, OxfordTeubner G (1998) Legal irritants: good faith in British law or how unifying law ends up in newdivergences. Mod L Rev 61:11Wagner H (2005) Economic analysis of cross-border legal uncertainty—the example of theEuropean union. In: Smits J (ed) The need for a European contract law. Empirical and legalperspectives. Europa Law Publishing, Groningen2 Convergence and Divergence 33
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