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.
