Financial Development in Adversarial and Inquisitorial Legal Systems

Abstract

This paper analyzes how the adversarial and inquisitorial evidence collection procedures affect financial development. In investigating the true returns of insolvent entrepreneurs, the adversarial procedure relies on lawyers whereas the inquisitorial procedure relies on judges. Investors are willing to lend more in adversarial than in inquisitorial legal systems if they are richer than entrepreneurs or if lawyers are more productive than judges. Manipulation of evidence by lawyers has an ambiguous impact on finance. The empirical evidence shows that a more inquisitorial procedure is associated with less developed financial markets.adversarial; inquisitorial; financial development; legal origins