Lawlessness and Economics Alternative Modes of Governance

204 Pages·2006·2.11 MB·English

by  Avinash K. Dixit

Lawlessness and Economics
The Gorman Lectures in Economics
Series Editor, Richard Blundell
A series statement appears at the back of the book
Lawlessness and Economics
Alternative Modes of Governance
Avinash K. Dixit
Princeton University Press
Princeton and Oxford
Copyright © 2004 by Princeton University Press Published by Princeton University Press,
41 William Street, Princeton, New Jersey 08540
In the United Kingdom: Princeton University Press,
3 Market Place, Woodstock, Oxfordshire OX20 1SY
All rights reserved
Second printing, and first paperback printing, 2007
Paperback ISBN-13: 978-0-691-13034-7
Paperback ISBN-10: 0-691-13034-5
The Library of Congress has cataloged the cloth edition of this book as follows
Dixit, Avinash K.
Lawlessness and economics : alternative modes of governance / Avinash K. Dixit.
p. cm. — (The Gorman lectures in economics) Includes bibliographical references and index.
ISBN 0-691-11486-2 (cl : alk. paper)
1. Economic policy. 2. Corporate governance. 3. Contracts. 4. Rights of property. 5. Corporation law. 6. Business enterprises—Law
and legislation. 7. International cooperation. 8. Developing countries—Economic policy. 9. Corporate governance—Developing
countries. 10. Contracts—Developing countries. 11. Right of property—Developing countries. 12. Corporation law—Developing
countries. 13. Business enterprises—Law and legislation—Developing countries. I. Title. II. Series.
HD87.D588 2004
330.1—dc22 2003068992
British Library Cataloguing-in-Publication Data is available This book has been composed in Times and typeset by T&T Productions
Ltd, London Printed on acid-free paper. ∞
press.princeton.edu
Printed in the United States of America
10 9 8 7 6 5 4 3 2
Contents

Preface
1 Economics With and Without the Law
1.1 The Need for Economic Governance
1.2 Economics Taking the Law for Granted
1.3 “Lawlessness and Economics” in Context
1.4 Law and Economics
1.5 Economics in the Shadow of the Law
1.6 Other Institutions of Economic Governance
1.7 Some Basic Analytical Apparatus
1.8 Approach of the Book
2 Private Ordering in the Shadow of the Law
2.1 Issues and Empirical Research
2.2 Bargaining When the Law is a Backstop
2.3 Relational and Formal Contracts
2.4 Arbitration and Information
2.5 Assessment and Prospects
2.6 Mathematical Appendix
3 Relation-Based Contract Enforcement
3.1 Issues and Empirical Research
3.2 Relation-Based and Rule-Based Governance
3.3 Limits of Relation-Based Governance
3.4 Related Theoretical Models
3.5 Assessment and Prospects
3.6 Mathematical Appendix
4 Profit-Motivated Contract Enforcement
4.1 Issues and Empirical Research
4.2 The Structure of the Model
4.3 Information Intermediaries
4.4 Enforcement Intermediaries
4.5 Assessment and Prospects
4.6 Mathematical Appendix
5 Private Protection of Property Rights
5.1 Issues and Empirical Research
5.2 Production and Protection under Anarchy
5.3 For-Profit Private Protection
5.4 A Predatory State and Its Citizens
5.5 Assessment and Prospects
5.6 Mathematical Appendix
6 Conclusion
6.1 Implications for Institutions and Policies
6.2 Implications for Future Research
References
Index
Preface
A multidisciplinary research area, to which I have given the attention-grabbing
name “Lawlessness and Economics,” has emerged within the social sciences
during the last two decades. It studies the alternative institutions that support
economic activity when a government is unable or unwilling to provide adequate
protection of property rights and enforcement of contracts through the machinery
of state law. Research in this field has accelerated in recent years, partly as the
underlying conceptual framework has developed, and partly as the importance as
well as the difficulties of institution-building in less-developed countries and
transition economies have been recognized.
Those who like to see unity in the social sciences could not wish for a better
field. It contains ethnographic studies by anthropologists and sociologists, case
studies by lawyers and economic historians, and formal modeling and data
analysis by economists and political scientists. Moreover, these distinct
approaches have not developed in isolation from one another. Practitioners of
each have learned from the work of others, and have built on it in their own way.
This research has accumulated to the point where the time seems ripe to pull
some of the threads together, to help insiders make some connections they might
have missed, and to alert outsiders to the existence of new, interesting, and
challenging research opportunities. As a recent arrival in the field, I have mixed
qualifications for undertaking this task. I cannot hope to be as comprehensive or
authoritative as those who were present at the creation, but can hope to provide a
fresh perspective and bring a somewhat different toolkit for analysis.
Specifically, in my capacity as an applied game theorist, I can contribute some
modeling motivated by case studies and empirical evidence, thereby hoping to
improve and deepen our understanding of the issues and phenomena.
The opportunity to make such a contribution came to me in the form of an
invitation to deliver the Gorman Lectures at University College London in
December 2002. As I said in the preface to The making of economic policy: a
transaction-cost politics perspective (Dixit 1996), which was based on my
Munich Lectures in Economics, books based on a short series of lectures offer
the author a delightful vehicle. He can expand the discussion beyond the
confines of a journal article, but the limits on length and the short deadlines
relieve him of the responsibility of being comprehensive, as would be required
in a full-fledged book. I am lucky to get a similar opportunity for a second time,
and have chosen to repeat the formula and be highly selective. Think of this
book not as a menu from which you can order and consume, but as a prospectus
inviting you to invest.
In this instance, attempting a comprehensive treatment would be difficult for
another reason, namely the “lemming effect” identified by Robert Solow in his
Ely Lecture (Solow 1974). In the course of his research on the economics of
exhaustible resources, he found that
every time the mail came it contained another paper by another
economic theorist on [this subject]. It was a little like trotting down to
the sea, minding your own business like any nice independent rat,
and then looking around and suddenly discovering that you’re a
lemming.
In the case of institutions of governance, not only economic theorists but also
theoretical, empirical, and field researchers from all the social sciences are in the
game. (And now the papers come by email, more than once a day.) Search
engines find hundreds of thousands of web pages, and thousands of scholarly
articles, related to governance. I have no choice but to be highly selective, and
have made the selection idiosyncratically to fit with my immediate interests. I
apologize in advance to all those fellow lemmings who are left out, either
because I did not know of their work or arbitrarily judged it to be outside my
current scope.
My primary reaction to the invitation to give the Gorman Lectures was, of
course, one of feeling honored. My early research on public economics and
international trade owes much to Terence Gorman’s foundational work on
consumer theory and aggregation. I had the privilege of meeting him on several
occasions during the 1970s and 1980s, and greatly admired his combination of
seriousness of purpose and infectious enthusiasm for the subject. The economics
profession is richer for having had him in our midst for the last half-century, and
poorer for his passing in early 2003. I hope these lectures constitute a small
tribute to him.