Economics of the Mortgage and Mortgage Institutions: Differences between Civil Law and Common Law Approaches

Abstract

We examine the history of U.S. mortgage as a means of illustrating the influence of different aspects of the U.S. common law system on financial development. We hypothesize that the value of common law to financial development is with respect to theflexibility that the system provides market participants as they attempt to respond to shocks. This is in contrast to civil law, which tends to specify particular contracts as admissible. The model is an application of the Le Chatelier Principle, which suggests that adding constraints to system makes it’s responses less elastic. We consider a special case of restrictions on mortgage type (fixed vs adjustable rate) to illustrate the principle.