Working Paper: NBER ID: w7447
Authors: Simon Johnson; Andrei Shleifer
Abstract: The Coase theorem implies that, in a world of positive transaction costs, any of a number of strategies, including judicially enforced private contracts, judicially enforced laws, or even government regulation, may be the cheapest way to bring about efficient resource allocation. Unfortunately, some Coasians have ignored the possibility that the last of these strategies may sometimes be the best. This paper compares the regulation of financial markets in Poland and the Czech Republic in the 1990s, when the judicial systems remained underdeveloped in both countries. In Poland, strict enforcement of the securities law by an independent Securities and Exchange Commission was associated with rapid development of the stock market. In the Czech Republic, hands-off regulation was associated with a near collapse of the stock market. These episodes illustrate the centrality of law enforcement in making markets work, and the possible role of regulators in law enforcement.
Keywords: No keywords provided
JEL Codes: D73; D78; G18; K23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strict enforcement of securities laws (G18) | rapid development of the stock market (G10) |
| lack of enforcement (P37) | near collapse of the stock market (G01) |
| effective law enforcement (K40) | stock market development (G10) |
| lack of adequate law enforcement (P37) | markets cannot function effectively (D47) |
| law enforcement as a confounding variable (K42) | market performance (G14) |