Law without Hierarchy

Legal systems are often assumed to require a single authoritative agency, such as a high court. Yet in some arbitration systems with no central authority, rules develop that are clear, adaptable, and judicable—and hence fulfill common criteria for law. This paper argues that institutional procedures of certain arbitration systems produce incentives to develop such rules. Using a formal model, I show that when arbitrators can be vetoed by disputants, arbitrators have an incentive to conceal biases that, if revealed, result in future rejection. An arbitrator maintains a neutral reputation through reasoned explanations that rely on precedent in most cases and develop new rules in cases without clear precedent. Disputants, in turn, benefit from published explanations because of the effect on their individual probabilities of winning. This argument provides a theoretical mechanism for why some arbitration systems produce legal rules even without a central authority. There are endless diversities in the opinions of men. We often see not only different courts but the arbitrators of the same court differing from each other. To avoid the confusion which would unavoidably result from the contradictory decisions of a number of independent judicatories, all nations have found it necessary to establish one court paramount to the rest, possessing a general superintendence and authorized to settle and declare in the last resort a uniform rule of civil justice. (Hamilton [1787] 2003, p. 146)