The effects of liberalization on litigation: notes toward a theory in the context of Japan.

• Published date: 22 March 2009
• Author: Ginsburg, Tom,Hoetker, Glenn
• Date: 22 March 2009

ABSTRACT

This Essay examines the under-studied relationship between liberalization and litigation. Liberalization should lead to expanded civil litigation for four reasons: (1) new market entrants are less subject to informal sanctions and may have a greater propensity to go to court; (2) privatization transfers resources away from the state, expanding the number of transactions subject to civil law regimes; (3) liberalization reduces the government's ability to resolve disputes outside the courts; and (4) liberalization leads to economic development, which is generally litigation-enhancing. We test these propositions using a unique dataset of prefecture-level civil litigation data in Japan during the 1990s. Using panel data, we find a small but significant effect of foreign firms on litigation.

INTRODUCTION

In his classic 1978 article, The Myth of the Reluctant Litigant, John Haley used institutional analysis to demolish the dominant culturalist view of Japanese litigation behavior. (1) Haley's foil, Takeyoshi Kawashima, had applied the dominant modernization theses of his time to understand Japanese law and society. (2) Haley, on the other hand, was prescient in shifting the analysis to institutional factors. Within two decades, the various new institutionalisms had come to dominate the social sciences, and with them sociolegal studies as well. Thanks to Haley, Japanese law became a bellwether of this broader trend. (3)

This Essay revisits the litigation debate from a quite distinct angle, one that might be called "Taking Kawashima Seriously." (4) For many decades, scholars have puzzled over the relationship between legal institutions and economic development. By and large, this literature has treated law as an independent variable that constrains or facilitates growth. (5) Far less attention has been paid among economists and lawyers to the effect of development on litigation, which was Kawashima's implicit framework. It has been observed for some time that law and economic development likely have a reciprocal relationship. (6) Not only does good law facilitate development, but development creates new demands on the legal system and arguably increases the scope of transactions governed by law in the economy. Yet there has been very little exploration of this direction of causality in the recent literature.

In an earlier paper, we identified a complex relationship between development and litigation rates, using prefecture-level data from Japan. (7) On the one hand, litigation is countercyclical. Holding other factors constant, growth seems to dampen demand for litigation. As the economic pie expands, forgiving behavior has lower marginal costs and so there is less willingness to go to court. (8) On the other hand, higher per capita income seems to increase demand for litigation. More wealth implies more transactions per capita, so that even if the rate of "bad" transactions stays constant, there is more litigation in the economy. We found that the growth effect was larger than the wealth effect, but that both were statistically significant determinants of increased litigation in Japan in the 1990s. (9) We did not, however, identify the mechanisms by which the economy affects litigation rates. (10)

In this Essay, we suggest that liberalization--defined as the elimination of barriers to entry of newer players in the market--is a key determinant of resort to legal dispute resolution mechanisms. By allowing in new players, liberalization expands the pool of economic actors and disrupts cooperative equilibria that may have previously emerged and become stabilized. New players may be less embedded in reputational networks that can contribute to informal forms of contract enforcement. Furthermore, liberalization creates a more competitive environment, pushing firms to adopt more vigorous strategies to seek economic advantage. These factors may make both new and old firms less "forgiving" of opportunism by contract partners.

The Essay is organized as follows. Part I explores the theoretical relationship between liberalization and litigation. Part II describes liberalization in Japan in the 1990s, and explains why foreign firms may have acted as agents of transmission of new norms. Part III concludes with a discussion of the implications of the analysis for Haley's thesis and for theories of law and development.

I. LIBERALIZATION AND LITIGATION

The 1990s saw significant shifts toward liberal political economy in many countries of the world. Pushed by the so-called "Washington Consensus," policy reform in developing countries revolved around a series of measures designed to enhance the role of markets. (11) Sometimes known as neoliberalism, these policies were an example of a more general process of liberalization, comparable to other such movements in history. Liberalization means many things to different people, including greater emphasis on fiscal discipline, privatization, and rollback or removal of substantive government regulation. At its core, however, liberalization involves the relaxation and removal of barriers to marketplace entry so as to facilitate enhanced opportunities for trade.

We believe that liberalization might contribute to greater demand for litigation through a number of modalities. First, the elimination of barriers to entry encourages new market participants to conduct economic activity, and these participants may, ceteris paribus, be more likely to litigate when disputes arise. Second, liberalization reduces the direct role of government in the economy, increasing demand for civil dispute resolution. Third, liberalization reduces government's capacity to act as a substitute dispute resolver, shifting disputes toward the courts. Fourth, liberalization can indirectly encourage more litigation through its effect on wealth. This, however, is offset by the growth effect, which dampens litigation. We discuss each of these modalities in turn.

A. New Entrants

A major goal of liberal economic policies is to allow new entrants into the marketplace. Other things being equal, new entrants may have a greater propensity to sue than established players in particular markets. Sociologists of law have long observed that litigation is less likely in close-knit groups because of the relationship-breaking quality of going to court. (12) Close-knit groups develop norms through repeated interactions over time. Norms can provide guidance to appropriate behavior, which can reduce the frequency of breach. When breach does occur, repeated interactions allow players to punish opportunism...