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The Elgar Companion to Law and Economics, Second Edition

Edited by Jürgen G. Backhaus

This thoroughly updated and revised edition of a popular and authoritative reference work introduces the reader to the major concepts and leading contributors in the field of law and economics. The Companion features accessible, informative and provocative entries on all the significant issues, and breaks new ground by bringing together widely dispersed yet theoretically congruent ideas.
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Chapter 3: Legal Change in Economic Analysis

John N. Drobak and Douglass C. North


John N. Drobak and Douglass C. North One school of law and economics analyses legal problems by using economic principles. Scholars working in the new institutional economics reverse that process and incorporate legal analysis in their explanation of economic events. The new institutionalists believe that economic growth cannot be understood with neoclassical theory alone. Neoclassical theory can be a powerful explanatory and predictive tool, but it is also a static theory that often oversimplifies, sometimes erroneously, the dynamic world. In an attempt to bring order to this uncertain and constantly changing world, human beings have used institutions – the rules of the game of a society – to structure human interaction. Institutions provide the framework of incentives that shape economic, political and social organization. They provide a foundation for the formation of property rights. Institutions affect economic performance by determining, together with the technology employed, the transaction and transformation costs that make up the total costs of production. Informal institutions include such things as norms of behaviour, codes of conduct and business conventions. Many formal institutions, such as constitutions, statutes, regulations and decisions of courts, are legal. Some formal institutions are created by non-governmental organizations – religious laws, corporate rules of self-governance and use restrictions imposed by residential groups, for example (see North, 1990). An institution is defined by how it is enforced, as well as by the written or understood terms of the rule. Enforcement can be carried out by third parties (government enforcement, social ostracism), second parties (retaliation) or...

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