Working Paper: CEPR ID: DP2501
Authors: Grard Roland; Thierry Verdier
Abstract: We present a simple model to analyse law enforcement problems in transition economies. Law enforcement implies coordination problems and multiplicity of equilibria due to a law abidance and a fiscal externality. We analyse two institutional mechanisms for solving the coordination problem. A first mechanism, which we call ‘dualism’, follows the scenario of Chinese transition where the government keeps direct control over economic resources and where a liberalized non-state sector follows market rules. The second mechanism we put forward is accession to the European Union. We show that accession to the European Union, even without external borrowing, provides a mechanism to eliminate the ‘bad’ equilibrium, provided the ‘accessing’ country is small enough relative to the European Union. Interestingly, we show that accession without conditionality is better than with conditionality because conditionality creates a coordination problem of its own that partly annihilates the positive effects of expected accession.
Keywords: Accession; Coordination problems; Dual track; Law enforcement
JEL Codes: H40; H50; K42; P51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dualism (Z12) | elimination of bad equilibrium (D51) |
| state control (P26) | deterrent against predatory behavior (K42) |
| state control (P26) | enhanced coordination for tax collection (H26) |
| accession to the European Union (F55) | elimination of bad equilibria (C62) |
| being small relative to the EU (F55) | better law enforcement outcomes (K40) |
| anticipated future enforcement (K40) | influences current behavior (D91) |
| acquisition without conditionality (F35) | more beneficial outcomes (D91) |
| conditionality (C62) | coordination problems (P11) |