Lawlessness and Economics

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? In Lawlessness 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.

Preface vii1. Economics With and Without the Law 1
1.1 The Need for Economic Governance 1
1.2 Economics Taking the Law for Granted 2
1.3 "Lawlessness and Economics "in Context 5
1.4 Law and Economics 9
1.5 Economics in the Shadow of the Law 10
1.6 Other Institutions of Economic Governance 12
1.7 Some Basic Analytical Apparatus 14
1.8 Approach of the Book 21
2. Private Ordering in the Shadow of the Law 25
2.1 Issues and Empirical Research 25
2.2 Bargaining When the Law is a Backstop 29
2.3 Relational and Formal Contracts 32
2.4 Arbitration and Information 40
2.5 Assessment and Prospects 48
2.6 Mathematical Appendix 50
3. Relation-Based Contract Enforcement 59
3.1 Issues and Empirical Research 59
3.2 Relation-Based and Rule-Based Governance 65
3.3 Limits of Relation-Based Governance 67
3.4 Related Theoretical Models 76
3.5 Assessment and Prospects 78
3.6 Mathematical Appendix 86
4. Profit-Motivated Contract Enforcement 97
4.1 Issues and Empirical Research 97
4.2 The Structure of the Model 101
4.3 Information Intermediaries 103
4.4 Enforcement Intermediaries 107
4.5 Assessment and Prospects 110
4.6 Mathematical Appendix 111
5. Private Protection of Property Rights 125
5.1 Issues and Empirical Research 125
5.2 Production and Protection under Anarchy 131
5.3 For-Profit Private Protection 133
5.4 A Predatory State and Its Citizens 138
5.5 Assessment and Prospects 143
5.6 Mathematical Appendix 144
6. Conclusion 149
6.1 Implications for Institutions and Policies 149
6.2 Implications for Future Research 153
References 155
Index 163