Working Paper: CEPR ID: DP8433
Authors: Luca Anderlini; Leonardo Felli; Giovanni Immordino; Alessandro Riboni
Abstract: We analyze the relationship between legal institutions, innovation and growth. We compare a rigid (law set ex-ante) legal system and a flexible one (law set after observing current technology). The flexible system dominates in terms of welfare, amount of innovation and output growth at intermediate stages of technological development ? periods when legal change is needed. The rigid system is preferable at early stages of technological development, when (lack of) commitment problems are severe. For mature technologies the two legal systems are equivalent. We find that rigid legal systems may induce excessive (greater than first-best) R&D investment and output growth.
Keywords: commitment; flexibility; growth; innovation; legal system
JEL Codes: E61; L51; O3; O43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Flexible legal systems (P37) | Higher welfare (I31) |
| Flexible legal systems (P37) | Greater innovation (O35) |
| Flexible legal systems (P37) | Increased output growth (O49) |
| Rigid legal systems (K40) | Better incentives for R&D investment at early stages (O31) |
| Rigid legal systems (K40) | Excessive R&D investment (O32) |
| Rigid legal systems (K40) | Output growth greater than socially optimal level (O40) |
| Legal flexibility (K29) | R&D investment (O32) |
| R&D investment (O32) | Output growth (O40) |
| Mature technology (L63) | Equivalent economic outcomes for both legal systems (K41) |