Working Paper: NBER ID: w7702
Authors: James E. Anderson; Leslie Young
Abstract: Without the rule of law, traders who incur trading costs can be held up by counter-parties who are stronger in anarchic bargaining. The favourable terms which the latter extract can overcrowd that side of the market, dissipating the benefits. We establish plausible necessary and sufficient conditions for a move from anarchy toward the rule of law to benefit all traders. The rule of law might be delayed, not only by the difficulties of setting up legal institutions, but by monopolistic traders that have meantime emerged to address the inefficiencies of anarchic trade. These monopolistic traders must also guarantee atomistic traders against holdup.
Keywords: No keywords provided
JEL Codes: F1; D2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rule of law (K15) | trading efficiency (G14) |
| absence of rule of law (P37) | inefficiencies in trade (F12) |
| absence of enforceable agreements (K12) | sellers extracting favorable terms (D43) |
| sellers binding themselves (L14) | more efficient market (G14) |
| development of rule of law (K15) | motivated by potential gains from international trade (F10) |
| monopolistic traders obstructing rule of law (K21) | protecting their interests (F52) |