Politics, Legal Origins, and the Roots of Modern Economic Institutions

Scholars have proffered a number of theoretical explanations for the phenomenon that corporate ownership is diffuse in some countries and highly concentrated in others. One explanation, the social democracy theory, holds that leftist ideology weakens a variety of corporate governance mechanisms and thus prevents the separation of ownership from control in social democracies, where leftist ideology is particularly prevalent. Another explanation emphasizes the role of legal systems and rules, and argues that the origin of a country’s laws determines whether ownership and control will separate in that country. This “legal origins” theory has recently been employed to explain a wide variety of modern economic institutions beyond the context of corporate governance. Specifically, scholars have empirically linked legal origins to labor regulations, going so far as to claim that legal origins have a larger impact than political ideology on labor law. This paper employs political ideology variables to explore empirically the relative impacts of political ideology and legal origins on corporate ownership structure and on employment, collective relations, and social security laws. Quantitative analysis confirms that leftist ideology is empirically linked both to concentrated corporate ownership and to strict employment, collective relations, and social security regulations. Thus, this paper provides some support for the social democracy theory. However, even when controlling for political ideology, legal origins variables have a strong impact on corporate ownership dispersion, employment law, and collective relations law. This paper thus also provides empirical support for the legal origins theory. The results suggest the possibility that civil law may facilitate the transformation of leftist ideology into leftist government policy.