Avinash Dixit - Lawlessness and Economics: Alternative Modes of Governance

Lawlessness and Economics

Series Editor, Richard Blundell

A series statement appears at the back of the book

Alternative Modes of Governance

Avinash K. Dixit

Princeton University Press
Princeton and Oxford

Copyright 2004 by Princeton University Press

Published by Princeton University Press,
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In the United Kingdom: Princeton University Press,
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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 enterprisesLaw and legislation. 7. International cooperation. 8. Developing countriesEconomic policy. 9. Corporate governanceDeveloping countries. 10. ContractsDeveloping countries. 11. Right of propertyDeveloping countries. 12. Corporation lawDeveloping countries. 13. Business enterprisesLaw and legislationDeveloping countries. I. Title. II. Series.

HD87.D588 2004
330.1dc22 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.

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Printed in the United States of America

10 9 8 7 6 5 4 3 2

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 youre 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 Gormans 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.

If Terences writing had one flaw, it was his tendency to make small slips and leave typos uncorrected. There was never anything seriously wrong, but one had to read through carefully and make sure that the slips did not affect the basic argument. This was actually a very useful learning device for students. I would like to pretend that any typos or slips in my writing are kept there deliberately for this purpose (and hope that there are no serious errors).

I have benefited from opportunities to present large and small parts of the contents of this book at other venues. An early version of the general ideas and the model of Economic Sciences and Public Administration in October 2002, and a one-day seminar at the IMF Institute in April 2003. And of course I gave seminars based on individual papers at places too numerous to list. I benefited from comments and questions at all of these occasions.

Two of the chapters in this book contain, with slight changes, substantial portions of two of my previously published journal articles. Material from Dixit (2003b) appears in . I thank the publishersthe University of Chicago Press and the Econometric Society, respectivelyfor permissions to reprint from these articles.

It is a pleasure to acknowledge my debt to many people who facilitated my entry into this field, guided me through the literature, and gave me comments and suggestions on my own writing. Alessandra Casella deserves star billing for her encouragement and constructive criticism throughout the process. Karla Hoffs careful and perceptive reading of many of the papers in their early versions helped me make better contacts with existing literature and saved me from some errors. Oriana Bandiera read the first draft of the complete manuscript and gave me detailed and perceptive comments. Such people who convey large positive externalities on others in the profession deserve special recognition and applause. In the earliest stages of my reading in this area, Oliver Williamson was a source of basic ideas and knowledge for me as for so many others, and I found works by Shuhe Li, Jean Ensminger, Avner Greif, and Diego Gambetta especially interesting and stimulating. For discussions of specific topics and comments on individual papers I am grateful to Dilip Abreu, Daron Acemoglu, Lisa Bernstein, Peter Diamond, David Epstein, Xavier Gabaix, Diego Gambetta, Claudia Goldin, Gene Grossman, Katherine Hefer, Giovanni Maggi, Margaret Meyer, Peter Murrell, Thomas Palfrey, Torsten Persson, Anne Sartori, Andrei Shleifer, Robert Solow, Lars Svensson, Jean Tirole, Robin Wells, Oliver Williamson, and Peyton Young.