The Custom in the Shadow of the Formal Law: An Economic Analysis

1. The Custom in the Shadow of the Formal Law: An Economic Analysis Gani Aldashev, Imane Chaara, Jean-Philippe Platteau, and Zaki Wahhaj Centre for Research in Development Economics (CRED) University of Namur

2. Outline of the presentation • Introduction/motivations • Description of the model • Results • A dynamic framework • Illustrations

3. Introduction Legal Pluralism: several law systems coexist

4. Introduction Legal Pluralism: several law systems coexist  legal system or formal law (formal institutions)

5. Introduction Legal Pluralism: several law systems coexist  legal system or formal law (formal institutions)  customary principles or informal rules (informal institutions)

6. Introduction Legal Pluralism: several law systems coexist  legal system or formal law (formal institutions)  customary principles or informal rules (informal institutions) The formal law is intended for either replacing[1]or complementing [2] the informal rule.

7. Introduction Legal Pluralism: several law systems coexist  legal system or formal law (formal institutions)  customary principles or informal rules (informal institutions) The formal law is intended for either replacing[1]or complementing [2] the informal rule. [1] legal pluralism is conceived of as a temporary outcome

8. Introduction Legal Pluralism: several law systems coexist  legal system or formal law (formal institutions)  customary principles or informal rules (informal institutions) The formal law is intended for either replacing[1]or complementing [2] the informal rule. [1] legal pluralism is conceived of as a temporary outcome [2] legal pluralism is seen as a permanent situation (different laws deal with different matters)

9. Introduction In the case in which legal pluralism is seen as a temporary outcome, substituting the formal for the informal law may obey two distinct rationales.

10. Introduction In the case in which legal pluralism is seen as a temporary outcome, substituting the formal for the informal law may obey two distinct rationales. • formal law uniformizes, codifies and simplifies the customary rules and practices •  informal rules appear to be « the foundations on which formal rules are built » (Knight [1992], North [1990])

11. Introduction (2) formal law aims at bringing a change that the custom inhibits  formal and informal laws are seen as conflicting with each other

12. Introduction Two different problems can arise when legal pluralism is intended to be temporary:

13. Introduction Two different problems can arise when legal pluralism is intended to be temporary: (1) There may be an uncertainty about whether the formal law or the custom actually applies.  Aoki [2001], Greif [2006]  Knight [1992]  Basu [2000]

14. Introduction (2) There may be manipulation of the state of legal pluralism by the privileged group in societies strongly differentieted in terms of power and social status. Example: laws providing for formal land rights or titles (Doornbos [1975], Glazier [1985], Barrows and Roth [1989], Berry [1993], Platteau [2000], Jacoby and Minten)

15. Introduction • Conventional view in literature : Except in cases where the statutory law is grounded in customary rules which it attends to formalize and simplify, legal pluralism tends to produce neutral or negative effects.

16. Introduction • In our research project : • a more general approach of legal pluralism

17. Introduction • In our research project : • a more general approach of legal pluralism • in reality, customary rules are continuously evolving. • the transformation of customs may partly occur as a result of the existence of statutory laws which have the effect of conferring a stronger bargaining position on some particular section(s) of the population.

18. Introduction • In our research project : • a more general approach of legal pluralism • in reality, customary rules are continuously evolving. • the transformation of customs may partly occur as a result of the existence of statutory laws which have the effect of conferring a stronger bargaining position on some particular section(s) of the population.  « local landholding systems are not the expression of an unchanging ‘traditional law’, but the fruit of a process of social change, which incorporates the effect of national legislation » (Lavigne Delville [2000])

19. Introduction Punchline of the paper: Even if the formal law is not resorted to in an explicit manner the simple fact that it exists and that people whose interests concur in its prescriptions can threaten to use it, might create a situation in which its objectives are partly met.

20. Introduction Punchline of the paper: Even if the formal law is not resorted to in an explicit manner, the simple fact that it exists and that people whose interests concur in its prescriptions can threaten to use it, might create a situation in which its objectives are partly met. In this case: - we may observe a permanent coexistence of the two types of law even when the intent of the legislator is to substitute the formal law for the custom.

21. Introduction Punchline of the paper: Even if the formal law is not resorted to in an explicit manner, the simple fact that it exists and that people whose interests concur in its prescriptions can threaten to use it, might create a situation in which its objectives are partly met. In this case: - we may observe a permanent coexistence of the two types of law even when the intent of the legislator is to substitute the formal law for the custom. - legal pluralism may obtain as a self-perpetuating equilibrium outcome of strategic interactions between arbiters and claimants.

22. Introduction • Our approach differs from the literature on the economic analysis of law in three respects: • the study of customary judges’ behavior • the study of the mechanism through which the customary law evolves as the formal law gets introduced or changed • the role of inequality is adressed

23. Introduction • Our approach differs from the literature on the economic analysis of law in three respects: • the study of customary judges’ behavior • the study of the mechanism through which the customary law evolves as the formal law gets introduced or changed • the role of inequality is adressed • BUT we remain in the tradition of the economic analysis of law by: • modelling the customary judge as a rational agent maximizing his uility • assuming that this utility arises from prestige motives and from the desire to write a decision that is close to the customary judge's preferences

24. Introduction • Alternative dispute resolution (ADR): • use of arbitration or mediation • The reality of developing countries severely limits the applicability of the existing analysis of ADR: • developped and developing countries differ in terms of legal integration • competition mechanism cannot be easily translated into developing countries' setting

25. Description of the model • 3 agents: R, P and M

26. Description of the model • 3 agents: R, P and M • Possible verdicts  [0,1] 0 being the most favourable verdict for R 1 being the most favourable verdict for P

27. Description of the model • 3 agents: R, P and M • Possible verdicts  [0,1] 0 being the most favourable verdict for R 1 being the most favourable verdict for P • The mediator M : he has a preferred verdict I = the community’s dominant custom at the present time.

28. Description of the model • 3 agents: R, P and M • Possible verdicts  [0,1] 0 being the most favourable verdict for R 1 being the most favourable verdict for P • The mediator M : he has a preferred verdict I = the community’s dominant custom at the present time. • The mediator chooses a verdict vM [0,1]. Therefore, the interval is his strategy set.

29. Description of the model • The formal judge :

30. Description of the model • The formal judge : • Reasons of the unpredictability of the formal judge’s verdict vF: • asymetries of information • existence of several bodies of law available to the formal judge • the subjectivity of the judge

31. Description of the model • The formal judge : • Reasons of the unpredictability of the formal judge’s verdict vF: • asymetries of information • existence of several bodies of law available to the formal judge • the subjectivity of the judge • cR and cPcapture the administrative cost of going to a formal court.

32. Description of the model • Once the dispute is resolved, the players participate in a social exchange game:

33. Description of the model • Once the dispute is resolved, the players participate in a social exchange game: • the agent who appeals to the formal law is excluded

34. Description of the model • Once the dispute is resolved, the players participate in a social exchange game: • the agent who appeals to the formal law is excluded • all non-excluded agents participate in the production of a public good

35. Description of the model • Once the dispute is resolved, the players participate in a social exchange game: • the agent who appeals to the formal law is excluded • all non-excluded agents participate in the production of a public good • Q(Z) is the benefit of the public good (Z = A, AR , AP)

36. Description of the model • Once the dispute is resolved, the players participate in a social exchange game: • the agent who appeals to the formal law is excluded • all non-excluded agents participate in the production of a public good • Q(Z) is the benefit of the public good (Z = A, AR , AP) • Cost-sharing rule: each non excluded agent K contributes CK(Z) to the public good (K = R, P or M)

37. Description of the model • Once the dispute is resolved, the players participate in a social exchange game: • the agent who appeals to the formal law is excluded • all non-excluded agents participate in the production of a public good • Q(Z) is the benefit of the public good (Z = A, AR , AP) • Cost-sharing rule: each non excluded agent K contributes CK(Z) to the public good (K = R, P or M) • We assume Q(Z) – CK(Z) > 0, for any Z and K.

38. Description of the model • M’s utility is: Where X is the prestige in utility terms that the mediator acquires from having his verdict unchallenged

39. Description of the model • R’s utility is:

40. Description of the model • P’s utility is:

41. Timing of the game • One-shot sequential game • 3 players: the mediator, the ‘rich’ agent, the ‘poor’ agent

42. Timing of the game • One-shot sequential game • 3 players: the mediator, the ‘rich’ agent, the ‘poor’ agent TIMING • The institutions of the formal court are set.

43. Timing of the game • One-shot sequential game • 3 players: the mediator, the ‘rich’ agent, the ‘poor’ agent TIMING • The institutions of the formal court are set. • M chooses verdict vM

44. Timing of the game • One-shot sequential game • 3 players: the mediator, the ‘rich’ agent, the ‘poor’ agent TIMING • The institutions of the formal court are set. • M chooses verdict vM • P decides whether to appeal to the formal court (F); if she chooses F, the community excludes her, the social game without P is played, and the payoffs of all parties are determined.

45. Timing of the game • One-shot sequential game • 3 players: the mediator, the ‘rich’ agent, the ‘poor’ agent TIMING • The institutions of the formal court are set. • M chooses verdict vM • P decides whether to appeal to the formal court (F); if she chooses F, the community excludes her, the social game without P is played, and the payoffs of all parties are determined. • Otherwise, R decides whether to bring the case to the formal court (F); if she chooses F, the community excludes her, the social game without R is played, and the payoffs of all parties are determined.

46. Timing of the game • One-shot sequential game • 3 players: the mediator, the ‘rich’ agent, the ‘poor’ agent TIMING • The institutions of the formal court are set. • M chooses verdict vM • P decides whether to appeal to the formal court (F); if she chooses F, the community excludes her, the social game without P is played, and the payoffs of all parties are determined. • Otherwise, R decides whether to bring the case to the formal court (F); if she chooses F, the community excludes her, the social game without R is played, and the payoffs of all parties are determined. • Otherwise, both parties accept the verdict vM, the social game without exclusion is played and the payoffs of all parties are determined.

47. 0 1 Equilibrium • We solve by backward induction

48. Ī 1 Where R is indifferent Equilibrium • We solve by backward induction 0

49. 0 I Ī Where P is indifferent Where R is indifferent 1 Equilibrium • We solve by backward induction

50. 0 I Ī Where P is indifferent Where R is indifferent 1 Equilibrium • We solve by backward induction • The case will go unappealed iff vM (I, Ī)