Lawlessness and Economics

Lawlessness and Economics: Alternative Modes of Governance

Avinash K. Dixit
Copyright Date: 2004
Pages: 184
https://www.jstor.org/stable/j.ctt7t9hw
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  • Book Info
    Lawlessness and Economics
    Book Description:

    How can property rights be protected and contracts be enforced in countries where the rule of law is ineffective or absent? How can firms from advanced market economies do business in such circumstances? InLawlessness and Economics, Avinash Dixit examines the theory of private institutions that transcend or supplement weak economic governance from the state.

    In much of the world and through much of history, private mechanisms--such as long-term relationships, arbitration, social networks to disseminate information and norms to impose sanctions, and for-profit enforcement services--have grown up in place of formal, state-governed institutions. Even in countries with strong legal systems, many of these mechanisms continue under the shadow of the law. Numerous case studies and empirical investigations have demonstrated the variety, importance, and merits, and drawbacks of such institutions.

    This book builds on these studies and constructs a toolkit of theoretical models to analyze them. The models shed new conceptual light on the different modes of governance, and deepen our understanding of the interaction of the alternative institutions with each other and with the government's law. For example, one model explains the limit on the size of social networks and illuminates problems in the transition to more formal legal systems as economies grow beyond this limit. Other models explain why for-profit enforcement is inefficient. The models also help us understand why state law dovetails with some non-state institutions and collides with others. This can help less-developed countries and transition economies devise better processes for the introduction or reform of their formal legal systems.

    eISBN: 978-1-4008-4137-0
    Subjects: Business, Sociology, Economics, Law

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-xii)
  4. 1 Economics With and Without the Law
    (pp. 1-24)

    Most economic activities and interactions share several properties that together create the need for an institutional infrastructure of governance. First, these activities and interactions are opportunities to create or add value. This includes creation of tangible or intangible property (such as improved land, physical and human capital, reputation, and goodwill) and exchange of goods and services. Second, the activities require input from several individuals. We have known since the birth of economics how division of labor enhances productivity; more recently, we have recognized the importance of creation and preservation of common property resources. Third, the interactions are based on explicit...

  5. 2 Private Ordering in the Shadow of the Law
    (pp. 25-58)

    Even in modern advanced economies where the state promulgates and enforces laws bearing on economic conduct, these laws rarely govern all detailed aspects of transactions and contracts. Most business transactions between, as well as within, firms are conducted using various informal arrangements, such as handshakes and oral agreements, ongoing relationships, and custom and practice. If disputes arise, the parties first attempt to resolve them by direct negotiation. The law is available if these attempts at private settlement fail, but recourse to it is usually the last step, not the first, and often signifies the end of an ongoing relationship. Evidence...

  6. 3 Relation-Based Contract Enforcement
    (pp. 59-96)

    The purpose of institutions and mechanisms of economic governance is to induce individuals to take cooperative or honest actions that achieve and sustain mutually beneficial outcomes in their economic interactions, countering the temptation of each individual to take opportunistic or cheating actions that promote his interest at the expense of the aggregate good. Similar issues arise in other fields, most prominently in evolutionary biology. Dugatkin (1999, pp. 17–27) gives a fourfold classification of the approaches to cooperation: (1) kin and family selection; (2) direct reciprocity; (3) selfish teamwork; and (4) group altruism.

    The first of these is inherently biological....

  7. 4 Profit-Motivated Contract Enforcement
    (pp. 97-124)

    Chapter 3 compared two modes of contract enforcement:

    self-governance, based on community information networks and ostracization or other forms of sanctions; and

    formal state governance, based on a framework of laws and of auditing and monitoring mechanisms.

    The first was limited by the matching and communication technologies; in large worlds it may fail altogether, or fail to realize the full economic benefits of comparative advantage. The second depended on the community’s ability to solve the collective-action problems of investing in the infrastructure of laws and monitoring, and to overcome the power of vested interests with sunk capital in the status...

  8. 5 Private Protection of Property Rights
    (pp. 125-148)

    Economic theorists have always recognized the importance of secure property rights in creating the right incentives to produce and to invest. North and Weingast (1989) emphasize its role in the rise of Western European economies. Students of less-developed countries (De Soto 2000; Rodrik 2000, pp. 6, 7) and transition economies (McMillan 2002) reinforce this lesson. They also show how insecure property rights remain in many countries. The threats to property rights come from two broad classes of predators. Other individuals may encroach on one’s property, may extort money by making threats of damaging the property, or may steal the property...

  9. 6 Conclusion
    (pp. 149-154)

    The study of non-state institutions to underpin economic activity is a lively research subject that spans several traditional disciplines—economics, law, politics, sociology, and anthropology. It merits recognition as a field in its own right, or perhaps as a subfield of the New Institutional Economics or Organizational Theory. I hope this book makes some useful contributions to the field and earns it better recognition. First, I bring together several strands that had previously been distinct: case studies and theoretical models, analyses of informal social networks and norms, and of more formal legalistic or profit-motivated organizations for governance, and so on....

  10. References
    (pp. 155-162)
  11. Index
    (pp. 163-168)
  12. Back Matter
    (pp. 169-169)