The Economics of Legal Harmonization

The global legal landscape is undergoing substantial transformations, adapting to an increasingly global market economy. Differences between legal systems create obstacles to transnational commerce. Countries can reduce these legal differences through non-cooperative and cooperative adaptation processes, fostering networks of trade that link diverse legal traditions. In this article, we study the process of legal adaptation, looking at non-cooperative and cooperative solutions that can alternatively lead to legal transplantation, harmonization and unification. The presence of adaptation and switching costs renders unification extremely difficult. In the general case, cooperative solutions reduce differences to a greater extent than non-cooperative solutions, but rarely lead to complete legal unification. We consider the case of endogenous switching costs and show that when countries have the possibility to reduce their own switching costs to facilitate harmonization, they may actually choose to raise them. This may lead to the paradox that countries engaging in cooperative harmonization end up with less harmonization than those that pursued non-cooperative strategies. This explains why differences are often bridged by private codifications and by the evolving norms of the lex mercatoria.Legal Harmonization, Legal Transplantation, Transnational Contracts, Legal Change,

Corruption and Decentralization

This paper studies the effect of decentralization on corruption in a hierarchical organization, where decentralization is intended as the delegation of control power to lower levels in a hierarchy. Decentral- ization causes a loss in control to the higher levels, thus curbing their incentives to monitor and detect corrupt activities. However, it also lowers the expected gains from corruption as, following decentralization, the number of individuals who are in charge of a single decision is reduced. It is then more likely that corrupt agents are called to bear the consequences of their actions. Hence, decentralization, although creating agency problems inside an organization, can help in controlling corruption

Inexpressive Law

According to expressive law theories, expression of values is an important function played by the law. Expressive laws affect behavior, not by threatening sanctions or promising rewards, but by changing individual preferences and tastes and, in some cases, by affecting social norms and values. New laws, however, can run against sticky social norms, failing to achieve their expressive effects. By developing a dynamic model, in this paper we show that inexpressive laws (laws whose expressive function is undermined by sticky norms) can not only be ineffective but can push the values of society away from those expressed by the law. We study the effects of legal intervention on the values shared by members of society, considering the feedback effects between laws and social norms. Just like expressive laws can foster consensus in heterogeneous groups, inexpressive laws can create a social divide, even in previously homogeneous societies

Inexpressive Law

According to expressive law theories, expression of values is an important function played by the law. Expressive laws affect behavior, not by threatening sanctions or promising rewards, but by changing individual preferences and tastes and, in some cases, by affecting social norms and values. New laws, however, can run against sticky social norms, failing to achieve their expressive effects. By developing a dynamic model, in this paper we show that inexpressive laws (laws whose expressive function is undermined by sticky norms) can not only be ineffective but can push the values of society away from those expressed by the law. We study the effects of legal intervention on the values shared by members of society, considering the feedback effects between laws and social norms. Just like expressive laws can foster consensus in heterogeneous groups, inexpressive laws can create a social divide, even in previously homogeneous societies.Social Norms, Countervailing Effect, Expressive Law, Civil Disobedience

Imperfect Substitutes for Perfect Complements: Solving the Anticommons Problem

An integrated monopoly, where all complements forming a composite good are offered by a single firm, is typically welfare superior to a complementary monopoly. This is the "tragedy of the anticommons". We consider the possibility of competition in the market for each complement. We present a model with two perfect complements and introduce n imperfect substitutes for one and then for both complements. We prove that, if one complementary good is produced by a monopolist, and if competition for the other complement does not vary the average quality in the market, then an integrated monopoly is still superior. In such case, favoring competition in some sectors, leaving monopolies in others would be detrimental for consumers and producers alike. Competition may be preferred if and only if the substitutes of the complementary good differ in their quality, so that as their number increases, average quality and/or quality variance increases. Results change when competition is introduced in each sector. In this case, if goods are close substitutes, we find that competition may be welfare superior for a relatively small number of competing firms in each sector, even with no quality differentiation

The Impact of Constitutional Protection of Economic Rights on Entrepreneurship: A Taxonomic Survey

In this monograph we perform an in-depth analysis of 195 constitutional texts to single out the provisions that, by enhancing economic freedom in a country, are likely to create the institutional side of an entrepreneurial ecosystem favorable to new business creation. The relevant information on constitutions is extracted from the Comparative Constitutions Project: A Cross-National Historical Dataset of Written Constitutions (Elkins et al. 2009), a repository of valuable data on the formal characteristics of written constitutions for most independent states since 1789. Data on entrepreneurial activity in the countries taken into account in the empirical analysis are extracted from the World Bank Group Entrepreneurship Database. The study addresses a question of primary importance for the analysis of entrepreneurship: Does constitutional protection of principles and values which are commonly referred to as the ‘economic constitution’ and which are usually associated with a country’s entrepreneurial activity, positively influence the rate of new firm formation and the total endowment of entrepreneurship capital in that country? We are able to give a positive answer to this question and this legitimates us to recommend inclusion of provisions prone to entrepreneurship in the constitution of any country

Piracy and Quality Choice in Monopolistic Markets

We study the impact of piracy on the quality choices of a monopolist. In the absence of piracy, the monopolist has no incentive to differentiate its products. With piracy the monopolist might instead produce more than one quality, so that differentiation arises as the optimal strategy. This is because the producer wants to divert consumers from the pirated good to the original one. Differentiation involves either producing a new, low-quality good such that piracy is either eliminated or still observed in equilibrium

Self-Defeating Subsidiarity

In this paper we analyze the factors that should be considered when allocating a given policy function at a particular level of government and how these factors affect the growth and evolution of multi-level governments. After discussing the interplay of economies of scale, economies of scope, and heterogeneity of preferences in determining the optimal level of legal intervention, we show that the subsidiarity principle can have mixed effects as a firewall against progressive centralization. Our economic model of subsidiarity reveals that once some functions become centralized, further centralization becomes easier and often unavoidable. Contrary to its intended function, a piecemeal application of the subsidiarity principle can trigger a path-dependent avalanche of centralization, turning subsidiarity into a self-defeating statement of principle

Sharing Residual Liability: ‘Cheapest Cost Avoider’ Revisited

Economic models of tort law evaluate the efficiency of liability rules in terms of care and activity levels. A liability regime is optimal when it creates incentives to maximize the value of risky activities at the net of accident and precaution costs. The allocation of primary and residual liability allows policymakers to induce parties to undertake socially desirable care and activity levels. Traditionally, tort law systems have assigned residual liability either entirely on the tortfeasor or entirely on the victim. In this paper, we unpack the cheapest cost-avoider principle (Calabresi, 1970) to consider the virtues and the limits of loss-sharing rules in generating optimal (second-best) incentives and allocations of risk. We find that loss-sharing may be optimal in the presence of countervailing policy objectives, of homogeneous risk avoiders and of subadditive risk, potentially offering a valuable tool for policymakers and courts in awarding damages in a large number of real-world accident cases