Law and Economics

Introduction to an Economic Approach to Law Option

2002-2003

Department of Law Queen Mary, University of London

Dr. Amanda Perry-Kessaris Table of Contents

Please note, there will one reading week in each of the first two terms.

Table of Contents...... 2

Course Notes...... 4

Part 1: Introductory Issues...... 7

Session 1 ~ Introduction to the Course...... 8 Session 2 ~ History and Methodology of Law and Economics...... 9 Session 3 ~ Comparative Law and Economics: Efficiency and Equity...... 11 Session 4 ~ Economics and Development...... 13 Part 2: Legal Change...... 16

Session 5 ~ History of Legal Reform and Economic Development...... 17 Session 6 ~ Competition, Efficiency and Legal Change...... 21 Session 7 ~ Regional Case Study: Legal Systems and Economic Development in Asia...... 23 Session 8 ~ Sectoral Case Study I: Intellectual Property Rights...... 24 Session 9 ~ Sectoral Case Studies II: Property Law and Tort Law...... 27 Session 10 ~ Interim Revision...... 29 Part 3: Regulation...... 30

Session 11 ~ Basic Principles...... 31 Session 12 ~ Sectoral Case Study IV: Industrial Pollution...... 32 Session 13 ~ Economic Decision Making in a Regulatory Environment...... 34 Session 14 ~ Countertrade...... 36 Part 3: Inside and Outside the Legal System...... 37

Session 15 ~ Law and Economics of Bribery and Corruption...... 38 Session 16 ~ Short Term Informality...... 39

Economic Approach to Law * 2* A. Perry-Kessaris/ 2002-2003 Session 17 ~ Long Term Informality...... 41 Session 18 ~ Host State Legal Systems and Foreign Investors...... 42 Session 19 ~ Legal Culture and Economic Activity...... 44 Session 20 ~ Final Revision...... 45 Sources of Information...... 46

Notes for Written Work...... 52

Economic Approach to Law * 3* A. Perry-Kessaris/ 2002-2003 Course Notes

Lecturer Dr. Amanda Perry-Kessaris

Teaching method

Sessions will generally follow a lecture-seminar format.

Course description

The ‘traditional’ law and economics approach is to assess the relationship between laws and economic activity according to economic criteria, such as efficiency. By contrast, this course will:

 Focus on the economic approach to legal systems as a whole. That is, we will examine the economic approach to laws, the institutions which create and enforce them, and the individuals who use those laws and institutions.

 Adopt a critical, comparative approach to law and economics. We will use economic criteria to compare legal systems from different places and or times. By adopting a critical, comparative approach, we will be able to identify the merits and limitations of the economic approach to law.

No prior knowledge of economics is necessary for this course.

Objectives of the course:

The course is intended to provide you with a knowledge of, and an ability to critically assess, the following issues:

 The methodology of the economic approach to law

 The utility of the economic approach to law

 The limitations of the economic approach to law

 The relationship between the nature of legal systems and economic development

The course will help you to develop the following skills:

Economic Approach to Law * 4* A. Perry-Kessaris/ 2002-2003  Subject knowledge: this is taught through reading and participation in class.

 Subject application/ problem-solving: this is taught through participation in class, sometimes including group completion of problem questions.

 Subject sources and research: this is taught through regular analysis of why each piece of reading has been selected, and occasional requirement for independent internet research on a specific subject.

 Analysis, evaluation and critical judgement: this involves asking yourself questions like ‘why/why not’ , ‘who cares’, and ‘is that the best result’ ? It is taught using the integrated lecture-seminar format which encourages constant student comment and analysis, and an emphasis on evaluating the subject in a variety of non-legal contexts.

 Autonomy, communication and literacy : this is taught using integrated lecture-seminar format which encourages constant independent thought and verbal participation.

What is expected of you

 Do the reading

 Be prepared to participate in class discussions

 Let me know if you are having difficulties

 Give me your email address, check it regularly, make sure my emails are not trashed as a mass mailing, and keep space in your mailbox for emails with OHP attachments

Contacting me

Like most university lecturers, I spend much of my time engaged in research, administration, and dissemination (e.g. conferences and consultancy) as well as teaching. As a result, you will find that I am not always in my office.

 The best way to contact me is by email at [email protected]

 You can try me on my direct office line on 020 7882 5132, or leave a message with the Law Department office on 020 7882 3282.

 My office is Room 307 in the Queen Mary Law building. I am only available to meet students in person during term time weekly office hours (see my door for details), or outside of those times by appointment.

Economic Approach to Law * 5* A. Perry-Kessaris/ 2002-2003 Reading

There is no textbook for this course. You must read items listed under ‘reading’ for each session. Items listed under ‘background’ are for those of you who wish to read further.

Please note that some readings are referred to by author only on each session sheet- full references for these can be found at the end of these materials.

Assessment

One essay (25%) 4000-5000 words.

One exam (75%) closed book.

Economic Approach to Law * 6* A. Perry-Kessaris/ 2002-2003 Part 1: Introductory Issues

Economic Approach to Law * 7* A. Perry-Kessaris/ 2002-2003 Session 1 ~ Introduction to the Course

Objectives Get an overview of the course and what is expected of you.

Reading None

Issues for consideration:

1. Who are the main actors to be considered in this course?

2. Where does the action take place?

3. What is the structure of the story?

4. What are its themes?

5. Which section of the course do you expect to enjoy the most and the least? Why?

6. How does the course fit in with other courses you are studying?

7. Name one current event which seems to be relevant to the course.

Economic Approach to Law * 8* A. Perry-Kessaris/ 2002-2003 Session 2 ~ History and Methodology of Law and Economics

Objectives To outline the development and basic principles of law and economics.

Reading Mackaay, Ejan,’ History of Law and Economics’ in Bouckaert, Boudewijn and Gerrit De Geest Eds (1999) Encyclopaedia of Law and Economics, University of Ghent and University of Utrecht, 0200, allserv.rug.ac.be/~gdegeest

Mackaay, Ejan, ‘Schools: General’ in Bouckaert, Boudewijn and Gerrit De Geest Eds (1999) Encyclopaedia of Law and Economics, University of Ghent and University of Utrecht, 0500, allserv.rug.ac.be/~gdegeest

Background Bouckaert and De Geest’s Encyclopaedia of Law and Economics referred to above is a very useful source for essays and gives an idea of the breadth of the subject, with over 170 individually downloadable chapters (Pdf format) on issues as varied as New Institutional Economics, Law and Economics in Serbia/France etc; Production of legal rules by bureaucrats and judges etc.

Cooter and Ulen: Chapter 1, and pp 9-12

1. Define the following terms:

(a) Maximisation

(b) Efficiency

(c) Equilibrium

2. Does economics seem to be a normative or a positive discipline? What about law? Why does it matter?

Economic Approach to Law * 9* A. Perry-Kessaris/ 2002-2003 3. Is the field of law and economics traditionally concerned with all aspects of the economy (micro and macro)? What aspects of the economy are the focus of this course?

4. Outline the basic principles of the following areas of Law and Economics:

(a) Chicago School

(b) Institutional Economics

(c) Transaction Costs Economics

Economic Approach to Law * 10* A. Perry-Kessaris/ 2002-2003 Session 3 ~ Comparative Law and Economics: Efficiency and Equity

Objectives To explore an alternative approach to law and economics, emphasising equity and justice as well as efficiency.

Reading Mattei, Ugo, Luisa Antoniolli and Andrea Rossato (1999) ‘Comparative Law and Economics’ in Bouckaert, Boudewijn and Gerrit De Geest Eds (1999) Encyclopaedia of Law and Economics, University of Ghent and University of Utrecht, 0560, allserv.rug.ac.be/~gdegeest

Perry, Amanda ‘Lawyers in Urban Development: Providing a Means to an End?’ Refereed article, Law, Social Justice and Global Development , 2001 (2) elj.warwick.ac.uk/global/issue/2001- 2/perry.html

1. How does Mattei’s approach to law and economics differ from the traditional approach?

2. How do the criteria according to which lawyers and economists measure success differ? Why are these differences important?

3. Does Mattei advocate a positive or a normative approach to the study of Law and Economics? Why?

4. Why is it particularly important to take a comparative approach to law and economics in the context of an increasingly globalised economy?

5. To what extent and in what respects is the Bangalorean legal frame work for protecting the urban environment efficient? How can this be measured?

6. To what extent and in what respects is the Bangalorean legal framework for protecting the urban environment fair? How can this be measured?

7. How would you compare the efficiency and fairness of the Bangalorean legal framework for protecting the urban environment with that of another legal framework?

Economic Approach to Law * 11* A. Perry-Kessaris/ 2002-2003 Session 4 ~ Economics and Development

Economic Approach to Law * 12* A. Perry-Kessaris/ 2002-2003 Objectives Consider the components of economic development, how it is achieved, and how it is measured, in order to be able to place the economic approach to law in a global context.

Reading Hewitt, T (1992) 'Developing Countries: 1945 to 1990' in T. Allen and A. Thomas eds., Poverty and Development in the 1990s Oxford: OUP, pp 221-237

Jenkins, Rhys (1995) ‘Theoretical Perspectives’ in Tom Hewitt, Hazel Johnson and Dave Wield eds. Industrialisation and Development Oxford: OUP, pp 128-166

World Bank Governance and Development

Background Todaro, M.P Economics for a Developing World Longman, London 1-12

Thomas, Allan and David Potter (1992) 'Development, Capitalism, and the Nation State' in Allen, Tim and Alan Thomas Poverty and Development in the 1990s 116-141

Definitions Macroeconomics: ‘The study of whole economic systems aggregating over the functioning of individual economic units. It is primarily concerned with variables which follow systemic and predictable paths of behaviour and can be analysed independently of the decisions of the many agents who determine their level.’1

Microeconomics: ‘The study of economics at the level of individual consumers, groups of consumers or firms. No very sharp boundary can be drawn between microeconomics and . . . macroeconomics. . . . The general concern of microeconomics is the efficient allocation of scarce resources between alternative uses but more specifically it involves the determination of price through optimising behaviour of economic agents, with consumers maximising utility and firms maximising profit.’2

Notes Do not be concerned if you find this reading a bit overwhelming at first. This material is probably very different from what you have seen before.

1 Penguin Dictionary of Economics

Economic Approach to Law * 13* A. Perry-Kessaris/ 2002-2003 Issues for consideration:

1. What is a developing country?

2. What is the difference between social development and economic development?

3. Which models of growth and development have been favoured in the post-war period? What have been some of the successes and failures of past development policies?

4. Consider the following quotations. What do they tell us about economics--a discipline which is increasingly mathematised?

“ Where before 1940 there were hundreds of thousands of cases [of malaria] a year in the American South there are now only a handful, a salubrious and apparently important change that took place in just a few years. But all that has happened in actuality is that cases are now recorded only when proved to be malaria, where formerly the word was used in much of the South as a colloquialism for a cold or a chill.”3

“Somebody once went to a good deal of trouble to find out if cigarette smokers make lower college grades than non-smokers. It turned out that they did. This pleased a good many people and they have been making much of it ever since.. . . Couldn’t it just as well be the other way around? Perhaps low marks drive students not to drink but to tobacco.”4

3 Huff, Darrell (1953) How to Lie with Statistics Penguin, p 80

4 Ibid p 85

Economic Approach to Law * 14* A. Perry-Kessaris/ 2002-2003 Part 2: Legal Change

Economic Approach to Law * 15* A. Perry-Kessaris/ 2002-2003 Session 5 ~ History of Legal Reform and Economic Development

Economic Approach to Law * 16* A. Perry-Kessaris/ 2002-2003 Objectives Trace the development of international efforts to use legal reform to improve economic growth, and the extent to which those efforts can/have provide(d) meaningful results.

Reading Tamanaha, Brian Z. 'The Lessons of Law and Development Studies' 89 [1995] American Journal of International Law 470

Buscaglia, Edgardo (1999) ‘Law and Economics of Development’, in Bouckaert, Boudewijn and Gerrit De Geest Eds (1999) Encyclopaedia of Law and Economics, University of Ghent and University of Utrecht, 0580, allserv.rug.ac.be/~gdegeest

World Bank ‘Governance and Public Sector Reform’ Home Page www1.worldbank.org/publicsector/ (includes links to home pages for ‘Legal Institutions of the Market Economy’ and ‘Administrative and Civil Service Reform’)

World Bank ‘Reform Strategies: What Works and What Hasn’t’ www1.worldbank.org/publicsector/legal/reform.htm#4

World Bank ‘Evaluating Legal Systems’ www1.worldbank.org/publicsector/legal/performancemeasures.htm

World Bank ‘Measuring Performance of a Legal System’ www1.worldbank.org/publicsector/legal/performancebrief.htm

Background Perry, Amanda (1999) ‘International Economic Organisations and the Modern Law and Development Movement’ in A. Seidman, R.B. Seidman and T. Waelde eds. Making Development Work: Legislative Reform for Institutional Transformation and Good Governance London: Kluwer Law International, pp 19-32

Perry, A Legal Systems as a Determinant of FDI Chapter 3 and pp 164 - 169

1. Identify the major trends in international efforts to use legal reform to promote economic development factors since the 1960s. What factors have influenced these trends?

2. What resources does a country need to bring about desired legal change? What role can foreign sources of assistance play in the process of legal change?

Economic Approach to Law * 17* A. Perry-Kessaris/ 2002-2003 3. What lessons have been learnt by law and development practitioners since the 1970's? What is the link between modernisation theory and current technical legal assistance?

4. What are the risks associated with legal reform efforts that fail?

5. According to the dominant theory, by what are the sources transactions costs within the legal system? How are these best reduced.?

6. Define the following terms:

(a) Transparency

(b) Predictability

(c) Accountability

(d) Credibility

7. Return to the reading by Afsah, Law Plante and Wheeler (see session Regulation I). Reflect upon their remark that:

‘The traditional emphasis on “appropriate instruments”, while ultimately correct, is premature because most developing-country agencies have too many information and transactions costs problems to implement and instruments in a comprehensive manner.’

8. Outline the arguments in favour of and against the following statement:

‘Until more is known about transaction costs in various legal systems, legal reform “may, at best, only produce beneficial results in the long run, and at worse, a much more likely scenario, worsen matters in many countries.” Therefore “the proper role of the new institutionalism might be to provide diagnoses rather than to prescribe cures.” ‘5

Group work

Group 1: Foreigners

You represent the World Bank Legal Department, and must stick to its current policy. You have been asked to draw up a plan of action for the initial appraisal mission (i.e. a trip to determine what kind of reform needs to be undertaken) for a new legal reform project in Discretionland.

5 Perry (2001) p 167. Original references removed.

Economic Approach to Law * 18* A. Perry-Kessaris/ 2002-2003  Team (a) Explain the overarching framework for the project, including the assumptions upon which it is based.

 Team (b) Detail what specific aspects of Discretionland’s legal system you will need to assess and according to which criteria.

Group 2: Discretionlanders

 Team (c) You are journalists working for a high quality newspaper in Discretionland. You have heard that the World Bank is coming to town and wish to put its visit in historical context for your readers. Draw up an outline for an article on the major trends in international law reform policy over the last four decades, and the theoretical and practical concerns that such law reform has raised.

 Team (d) You are bureaucrats and judges working in Discretionland. Currently you enjoy a large amount of discretion in your decision making. You are concerned that this might be taken away if its benefits are not appreciated. Draw up an outline for a speech, to be made by the head of the Society of Judges and Bureaucrats, in defence of your broad discretion.

Economic Approach to Law * 19* A. Perry-Kessaris/ 2002-2003 Session 6 ~ Competition, Efficiency and Legal Change

Objectives Consider the role of efficiency as an objective of, and a factor in, the process of legal change; and the role of efficiency and competition in the process of the convergence of legal systems.

Reading Perry, A ‘Multinational Enterprises, International Economic Organisations and Convergence among Legal Systems’ forthcoming 2002 Non State Actors and International Law

Long, Clarisa and Edgardo Buscaglia (1997) in Edgardo Buscaglia, William Ratliff and Robert Cooter eds. (1997) The Law and Economics of Development Connecticut: JAI Press, pp 181-213

Background Ogus, Anthony (1999) ‘Competition between National Legal Systems: A Contribution of Economic Analysis to Comparative Law’ 48 International and Comparative Law Quarterly 405.

Mattei, Ugo(1998) Comparative Law and Economics University of Michigan Press, Chapter 5

1. Why have ‘legal transplants’ been a popular tool for legal change?

2. Are legal transplants efficient?

3. What are the grounds on which legal transplants have been criticised?

4. To what extent can it be said that there is a competition between different sources of law?

5. If a source of law is chosen through a competitive process, does that mean that it is the most efficient option? Does it mean it is the fairest option?

6. Distinguish between heterogeneous and homogeneous laws. Which are more likely to harmonise naturally? Why?

Economic Approach to Law * 20* A. Perry-Kessaris/ 2002-2003 7. In what cases should laws be forced to harmonise across international boundaries? How would this occur?

Economic Approach to Law * 21* A. Perry-Kessaris/ 2002-2003 Session 7 ~ Regional Case Study: Legal Systems and Economic Development in Asia

Objectives To critically assess evidence of the existence, direction and nature of the relationship between legal systems and economic growth in Asia.

Reading Pistor, Katharina and Philip A Wellons (1999) The Role of Law and Legal Institutions in Asian Economic Development 1960-1995 Oxford University Press, pp. 1-20 and 263-285 (or Executive Summary (adbROL.pdf), available at www.adb.org/Publications)

Harding, Andrew (2002) ‘Global Doctrine and Local Knowledge: Law in South East Asia’ 51:1 ICLQ 35-53

Background Asian Development Bank law and development website: www.adb.org/work/Law_Devt/

1. By what methods did the ADB seek to measure the relationship between legal systems and economic development in Asia?

2. To what extent has there been convergence along the allocative dimension of legal systems as between Asian states and as between Asia and non Asian states?

3. To what extent has there been convergence along the procedural dimension of legal systems as between Asian states and as between Asia and non Asian states?

4. Which of the four hypotheses at the centre of the ADB Study was proved by the data?

5. Did changes in legal systems cause changes in economic development or vice versa?

Economic Approach to Law * 22* A. Perry-Kessaris/ 2002-2003 Session 8 ~ Sectoral Case Study I: Intellectual Property Rights

Objectives Consider the role of intellectual property rights in the relationship between developed and developing countries, and in the development process generally.

Reading Adeyinka, Alex ‘Intellectual Property Rights in Developing Countries: Nigeria’s Copyright Decree, 1988’ in Bondzi-Simpson ed The Law and Economic Development in the Third World

Buscaglia, Edgardo and William Ratliff (2000) Law and Economics in Developing Countries Hoover Institute Press pp. 19-29

The Economist ‘Have Patent, Will Travel’ Jun 28 2001, www.Economist.Com/Displaystory.Cfm?Story_Id=677617

The Economist ‘Patent Problems Pending’ Oct 25 2001, www.Economist.Com/Displaystory.Cfm?Story_Id=832862

The Economist ‘The Right To Good Ideas’ Jun 21 2001, www.Economist.Com/Displaystory.Cfm?Story_Id=664495

The Economist ‘A Scandal Brewing’ Aug 23 2001 www.economist.com/displayStory.cfm?Story_ID=749010

Posey, Darrell 'Intellectual Property Rights and Just Compensation for Indigenous Knowledge' 6:4 Anthropology Today August 1990 13

Background Rosser, Andrew ‘The Political Economy of Institutional Reform in Indonesia: The Case of Intellectual Property’ in Kanishka Jayasuriya Ed, (1999) Law, Capitalism and Power in Asia: The Rule of Law and Legal Institutions London: Routledge, 95-117

1. What is the economic function of intellectual property rights?

Economic Approach to Law * 23* A. Perry-Kessaris/ 2002-2003 2. What are the direct and indirect costs and benefits associated with implementing a legal system (law and institutions) to protect intellectual property rights in the developed and developing world?

3. Define the following terms: Trademark, Patent, Copyright.

4. How and to what extent do the attitudes of developed and developing countries to intellectual property rights conflict? Why does it matter?

5. Is software piracy is more of a problem in the developing world than in the developed world? How would an economist measure this? How would a lawyer measure this?

Group work

1. Find evidence from your reading, including articles from The Economist which support or negate the following views; or answer the following questions:

(a) "The efforts of developed countries to persuade (or cajole by threat of reciprocal measures) developing countries to overhaul their IP laws are driven primarily by self- interest. Nonetheless, developing countries are beginning to appreciate the economic and technological advantages to domestic economies flowing from law reform in this area" (Adeyinka, p 43)

(b) ‘ "Countries with advanced economies tend to be those displaying intellectual property protection systems in which the public has a basic degree of confidence" while conversely, "the countries which are in varying stages of developing or ‘catching up,’ tend to have protection systems in which their populations [and perhaps more significantly the population of countries with more advanced economies] do mot have much confidence’ (Ibid p 44)

(c) "Although weak IP regimes may appear to have [the advantages of saving money, promoting local industry, helping to acquire new technology and lessening dependency on external sources] in the shorter term, the longer term costs appear to outweigh those advantages." (Ibid p 44)

(d) "The economics of intellectual property poses the classical chicken and egg problem: does strong intellectual property protection lead to, or result from, advanced levels of economic development?" (Ibid p 74).

2. Discuss the following

(a) "There are two conceptual views of intellectual property rights. One perceives intellectual property as public goods or free goods, and the other contends that they are primarily the "private property" of their creators. “ Which types of countries or

Economic Approach to Law * 24* A. Perry-Kessaris/ 2002-2003 groups have tended to hold which views? Have these views changed over time? Which if any is the right view?

(b) What is the economic function of intellectual property rights? Is it distinct from the legal function?

(c) Is software piracy is more of a problem in the developing world than in the developed world? How would an economist measure this? How would a lawyer measure this?

(d) What are the direct and indirect costs and benefits associated with implementing a legal system (law and institutions) to protect intellectual property rights in the developed and developing world?

Economic Approach to Law * 25* A. Perry-Kessaris/ 2002-2003 Session 9 ~ Sectoral Case Studies II: Property Law and Tort Law

Objectives To consider the economic functions of tort and property law.

Reading Bussani and Mattei ‘Making the Other Path Efficient: Economic Analysis of Tort Law in Less Developed Countries’ in Buscaglia Ratliff and Cooter eds. (1997) pp 149-180

De Soto, Hernando (2000) The Mystery of Capital pp 39-66 and 93- 133.

Background Mattei (1998): Chapter 9

Mattei (1998): Chapter 8

Katz (1998) pp 105-116

1. Compare and contrast the perspectives of lawyers and economists in the field of property rights.

2. What is codification? What are its benefits?

3. What are the prerequisites of successful codification?

4. To what extent do the legal systems of post-socialist economies differ?

5. What are some of the major clashes of economic theory which arise in the context of property law reform in post-socialist economies?

6. Which system is generally more efficient in governing property rights: common law or civil law?

7. What kinds of transaction costs are likely to be associated with the process of reforming property rights?

Economic Approach to Law * 26* A. Perry-Kessaris/ 2002-2003 8. Why is tort law a useful sector in which to test the economic approach to law?

9. Compare and contrast the development of tort law in the West, Africa and Latin America.

10. What is the economic function of tort law?

11. Compare and contrast the objectives and approach of the authors in the two readings for this week.

Economic Approach to Law * 27* A. Perry-Kessaris/ 2002-2003 Session 10 ~ Interim Revision

Objectives To take stock and iron out any problems.

Reading Your notes

1. How did each session fit with the other sessions?

2. What other issues would you have liked to cover so far?

3. Which subjects did you find the most difficult to understand? Why?

4. Which readings did you find most challenging or enjoyable?

5. Has your view of the subject become more clear as the course has progressed?

Economic Approach to Law * 28* A. Perry-Kessaris/ 2002-2003 Part 3: Regulation

Economic Approach to Law * 29* A. Perry-Kessaris/ 2002-2003 Session 11 ~ Basic Principles

Objectives To consider the role of law in the economic function of regulating markets.

Reading Baldwin and Cave: pp 1-17 and 34-62.

1. Why do we regulate the activities of the private sector?

2. Who should regulate?

3. According to what criteria should we measure the success of regulation?

Exercise

You are advising the Minister for Infrastructure of the government of the fictitious state Pigeonpostland. Her priority for the next five years is to ensure that Pigeonpostlanders have access to high quality, low cost telecommunication services. She comes from a rural area, and is particularly keen to ensure that consumers in her electoral constituency get access to such services. As part of an internationally financed public sector reform initiative, Pigeonpostland’s telecommunication services have been privatised. Services will be provided by private companies, and the state will act as a referee of the industry, ensuring that it provides high quality, low cost services.

You have been asked to brief the Minister on what broad categories of regulation can be used in order to achieve the above goals. Prepare a brief explanation of each type of regulation which could be used, the general nature of that type of regulation, and an example of such a regulation.

Economic Approach to Law * 30* A. Perry-Kessaris/ 2002-2003 Session 12 ~ Sectoral Case Study IV: Industrial Pollution

Objectives To consider new developments in the regulation of industrial pollution, the practical difficulties associated with this process, and their relevance to understanding the relationship between law and economic activity; and to uncover the importance of information in the regulatory process.

Reading Afsah, Shakeb, Benoit La Plante and David Wheeler (1996) Controlling Industrial Pollution: A New Paradigm Policy Research Working Paper Series 1672 Washington DC: World Bank (www.worldbank.org/nipr/work_paper/1672/index.htm)

Afsah, Shakeb, Allen Blackman and Damayanti Ratunanda (2000) How Do Public Disclosure Pollution Control Programs Work? Evidence from Indonesia.

Hawkins, K (1984) ‘Law as Last Resort’ in Robert Baldwin, Colin Scott and Christopher Hood eds. A Reader on Regulation OUP, 1998, pp 288-306

Definitions Bounded rationality: ‘The idea that economic agents may not have the cognitive power to make decisions about their optimum behaviour. They may thus intend to be rational, but not actually be so. These limits may make it hard to specify contracts that cover all contingencies.’6

1. How would an economist measure the success or failure of a public disclosure approach to regulating the market? How would they explain that success/ failure?

2. Was the PROPER system a success story? Why? How? From whose perspective?

Economic Approach to Law * 31* A. Perry-Kessaris/ 2002-2003 3. Consider the ‘New Paradigm’ for controlling industrial pollution, and the regulatory strategies outlined by Baldwin and Cave (see). Which aspects of the role of law in controlling pollution have not been addressed in the New Paradigm?

4. Explain the reasoning behind the observation made by Shakeb, Plante and Wheeler that ‘a regulatory approach based on inappropriate assumptions about information and transactions costs has distracted policy analysts from the real implementation issues in developing- country agencies.’

5. Why is the cost and complexity of information important to economists? Why is it important to lawyers?

6. What is the connection between formalised self-regulation and informality (see sessions on informality)?

7. Do you agree with the following statement? Why/not:

‘As an economy develops and law becomes more complex, citizens need more information about law to obey it. Obtaining specialised information requires costly legal counsel. Alignment of state law with social norms enables citizens to economise on legal counsel by taking morality as a guide to legality’7

7 Robert D. Cooter ‘The Rule of State Law Versus the Rule-of-Law State: Economic Analysis of the Legal Foundations of Development’ in Buscaglia, Ratliff and Cooter (1997), p102.

Economic Approach to Law * 32* A. Perry-Kessaris/ 2002-2003 Session 13 ~ Economic Decision Making in a Regulatory Environment

Objectives To consider some non-traditional theoretical work on the decision making process of economic actors, and the impact of these findings on our understanding of the relationship between law and economic activity.

Reading Perry-Kessaris, A (‘Re)Presenting the Butterfly: Contributions of Economic Theory to Understanding Decision Making in a Regulatory Environment’ in Perry-Kessaris and Hatchard (Eds) Facing Complexity: Law and Development in the 21 st Century (forthcoming 2003) Cavendish

Background Ormerod, P (1998) Butterfly Economics: A New General Theory of Social and Economic Behaviour London: Faber and Faber pp ix-27 and 182-192.

Notes Don’t worry if you are confused by the graphs in this reading- all will be revealed when we meet.

8. “It seems to me that one of the most restrictive assumptions of orthodoxy -restrictive in that it severely limits its capacity to illuminate many real world problems -is the assumption that the tastes and preferences of agents are fixed.”8 Discuss the relevance of this quotation to law.

9. Consider the regulatory strategies outlined by Baldwin and Cave (see session Regulation I). Whose behaviour must be affected in order for each strategy to be successful?

10. Assume that Ormerod’s argument about the importance of interactive decision making is correct. How would this affect your predictions as to the likelihood of success for the kinds of strategies outlined by Baldwin and Cave? What warnings would you attach to their use?

11. Do you agree with the following statement? Why/not?

8 Paul Ormerod, in an Keynote address given to the Association of Heterodox Economists, 29 June 2000.

Economic Approach to Law * 33* A. Perry-Kessaris/ 2002-2003 ‘The predictive limits of empirical research favours an incremental, highly contextual approach to developing new legal initiatives intended to alter people’s behaviour.’9

9 Tanina Rostain (2000) ‘Educating Homo Economicus: Cautionary notes on the New Behavioural Law and Economics Movement’ 34:4 Law and Society Review 973, 989

Economic Approach to Law * 34* A. Perry-Kessaris/ 2002-2003 Session 14 ~ Countertrade

Objectives To consider the economic motivations and legal problems associated with the regulation of economic activity at an international level through the example of countertrade.

Reading Perry, A ‘Legal Implications of Countertrade in an Economic Context‘ School of Oriental and African Studies Law Department Occasional Paper No. 2

1. Why do states engage in countertrade?

2. What are the legal and economic problems posed by countertrade?

3. Do you expect countertrade to continue, increase or decrease?

4. “It is clear that both the perception and the reality of countertrade need to be altered, in order for its positive implications to consistently outweigh the negative. Discuss.

Economic Approach to Law * 35* A. Perry-Kessaris/ 2002-2003 Part 3: Inside and Outside the Legal System

Economic Approach to Law * 36* A. Perry-Kessaris/ 2002-2003 Session 15 ~ Law and Economics of Bribery and Corruption

Objectives To consider the causes and effects of corruption and bribery in international business; and current initiatives for reform.

Reading Rose-Ackerman, S ‘Corruption and the Global Corporation: Ethical Obligations and Workable Strategies’ in Michael Likosky ed. (2002) Transnational Law and Legal Process: Globalisation and Power Disparities Butterworths, pp 148-171

Klitgaard, R (1988) ‘Objectives’ in Controlling Corruption, University of California Press, pp 13-51

Transparency International for the ‘Corruption Perception Index’ and ‘Bribe Payments Index’ www.transparency.org

Background World Bank Anti Corruption site: www1.worldbank.org/publicsector/anticorrupt/

OAS (www.oas.org) and OECD (www.oecd.org) bribery conventions

1. Why do (a) businesses and (b) public sector institutions engage in corruption?

2. What are the costs and benefits of corruption to (a) corrupt MNEs, (b) clean MNEs (c) corrupt states, (d) clean states and (e) wider society?

3. What measure can be taken at a state level to control corruption?

4. What measures can and are being taken at the international level to control corruption?

5. What can society do to control corruption?

6. Can you see any evidence from the Transparency International indices as to whether corruption might be associated with economic development levels?

Economic Approach to Law * 37* A. Perry-Kessaris/ 2002-2003 Session 16 ~ Short Term Informality

Objectives Examine the economic causes and effects of informality on individual transactions.

Reading Macaulay, S ‘Non-contractual Relations in Business: A Preliminary Study’ in Peter J Buckley and Jonathan Mitchies Firms, Organisations and Contracts (Oxford University Press,1996) pp. 339-358

Stone, Andrew, Brian Levy and Ricardo Paredes (1996) ‘Public Institutions and Private Transactions: a Comparative Analysis of the Legal and Regulatory Environment for Business Transactions in Brazil and Chile’ in Lee J Alston, Thráinn Eggertsson and Douglass C North eds. Empirical Studies in Institutional Change Cambridge University Press, pp. 95-128

1. Compare and contrast the types of, reasons for, participants in and impacts of informality described in the studies by Macaulay and Stone et. Al.

2. Why do people sometimes prefer to use informal methods of doing business?

3. What are the possible benefits of informality?

4. What are the risks of informality?

5. How did Stone et al compare the legal systems of Brazil and Chile? How would you expect an institution such as the World Bank to compare those legal systems?

6. By what other methods could you measure the ‘success’ of the Brazilian and Chilean legal systems? Against what criteria?

Economic Approach to Law * 38* A. Perry-Kessaris/ 2002-2003 7. Consider how the following argument, if true, affects the relative importance of the law in economic decision making:

Ellickson’s study of the resolution of cattle trespass disputes is often presented as evidence that economic actors will not seek out the formal legal system or ‘bargain in the shadow of the law,’ but rather will resolve disputes informally according to informal rules, where they consider this to be more efficient. However, as Campbell and Picciotto point out, although the informal rules used to resolve the cattle trespass disputes might differ from the actual content of the formal rules of the state, they may not have differed substantially from the disputants’ interpretations of the formal rules of the state. If this is the case then, ‘although state law influences social behaviour only indirectly, and people rarely resort to formal legal action, it clearly does have an influence, which is sometimes strong.’10

10 David Campbell and Sol Picciotto (1998) ‘Exploring the Interaction between Law and Economics: the Limits of Formalism’ 18:3 Legal Studies, pp. 269-271. See also Robert C. Ellickson, (1991) Order Without Law: How Neighbors Settle Disputes London: Harvard University Press.

Economic Approach to Law * 39* A. Perry-Kessaris/ 2002-2003 Session 17 ~ Long Term Informality

Objectives Examine the economic causes and effects of informality on long term residential and business operations.

Reading De Soto, Hernando (1989) The Other Path pp. 131-187

De Soto, Hernando (2000) The Mystery of Capital pp. 1-11 and 189- 210

Background Perry, A (1998) 'Law and Urban Change in an Indian City' in Fernandes, Edesio and Ann Varley eds. Illegal Cities: Law and Urban Change in Developing Countries Zed Publications

1. What is informal accommodation?

2. What are the economic effects of living in informal accommodation?

3. What are the economic and legal obstacles to become formal?

4. What are the economic and legal incentives to remain informal?

5. What are the obstacles which informality brings to businesses?

6. What are the obstacles to formalising businesses?

Economic Approach to Law * 40* A. Perry-Kessaris/ 2002-2003 Session 18 ~ Host State Legal Systems and Foreign Investors

Objectives To critically assess the dominant theory that legal systems are a determinant of the location of Foreign Direct Investment (FDI); and that FDI levels can be improved by the introduction of the dominant ‘ideal’ legal model.

Reading Perry, A Legal Systems as a Determinant of FDI Kluwer Law International , 2001: Chapters 4, 5 and 6

Background Board of Investment of Sri Lanka: www.boisrilanka.org

Foreign Investment Advisory Service: www.fias.net

Perry, Amanda (2000) ‘Effective Legal Systems and Foreign Direct Investment: In Search of the Evidence’ 49 International and Comparative Law Quarterly 779

Definitions Foreign Direct Investment: ‘FDI is foreign, in that it crosses national territorial boundaries. It consists of investment moving from one state (‘home’ state), to another (‘host’ state). . . . FDI is direct in that ownership, and therefore control over the use of the resources transferred, remains with the investor. This is to be distinguished from indirect investment in which control over the assets passes from the seller to the buyer. . . . FDI is traditionally envisaged as the creation of branches, joint ventures and subsidiaries. This is to be distinguished from indirect investment, often involving the purchase of foreign securities, in which individual assets or financial products such as capital, debt or equity are transferred from the seller to the buyer.’11

1. How by what methods did the study seek to assess whether the legal system was important to foreign investors in Sri Lanka?

11 Perry (2001) pp 13-14 original references removed.

Economic Approach to Law * 41* A. Perry-Kessaris/ 2002-2003 2. What are the methodological limitations of this study?

3. To what extent does the Sri Lankan legal system appear to have been a factor in the investor’s decision making process?

4. What reasons can you give to explain these results? What is the significance of these finding for producers and recipients of legal reform aimed at promoting FDI?

5. By what methods did the study seek to measure what type of legal system is appropriate for attracting foreigners to invest in Sri Lanka?

6. To what extent do investors appear to be actively seeking a legal system similar to the ‘Ideal Paradigm’ ?

7. What are the methodological limitations of this study?

8. What is the significance of these finding for producers and recipients of legal reform aimed at promoting FDI?

9. What reasons can you give to explain the results of the study?

10. What further empirical studies might you conduct in order to develop this line of inquiry?

Economic Approach to Law * 42* A. Perry-Kessaris/ 2002-2003 Session 19 ~ Legal Culture and Economic Activity

Objectives To consider the possible effect of the failure to consider variations in culture upon those aspects of the economic approach to law considered in previous sessions.

Reading Campbell, David (1999) ‘What is Meant by “the Rule of Law” in Asian Company Law Reform?’ in Roman Tomasic ed. Company Law in East Asia Ashgate, 11-38

Perry, Amanda (2002) ‘The Relationship between Legal Systems and Economic Development: Integrating Economic and Cultural Approaches’ 29:2 Journal of Law and Society 282-307

Background Gillespie, John ‘Transplanted Company Law : An Ideological and Cultural Analysis of Market Entry in Vietnam’ 51:3 ICLQ 641-672

1. Why is it important to think ‘beyond the economic approach to law’ in this course?

2. By what methods did Hofstede seek to measure variations in attitudes across cultures?

3. What dimensions of variation did Hofstede identify?

4. How might an economic actors’ level of individualism affect their perceptions and expectations of a legal system?

5. How might attitudes to uncertainty affect the extent to which the legal system is a factor in the decision making of economic actors?

6. What impact might attitudes to power have upon an economic actor’s perceptions and expectations of a legal system?

Economic Approach to Law * 43* A. Perry-Kessaris/ 2002-2003 Session 20 ~ Final Revision

Objectives Summarise and revise what has been covered in the course.

Reading Your notes

1. How did each session fit with the other sessions?

2. What other issues would you have liked to cover in the course?

3. Which subjects did you find the most difficult to understand and why?

4. Which subjects did you find most interesting and why?

5. Which reading did you find difficult and why?

6. What changes would you propose to improve the course?

Economic Approach to Law * 44* A. Perry-Kessaris/ 2002-2003 Sources of Information

Newspapers such as the Financial Times, The Guardian, and The Economist always provide useful background information. Some may be available for downloading from the CD ROM service in the library.

Email:

Talk to / ask questions of people all over the world who are interested in this area by subscribing to:

- Law-Dev: send the message: subscribe law-dev, to the address: [email protected]

Internet sites:

A good starting point for finding websites on Law and Economics is Find Law: http://lawecon.lp.findlaw.com/index.html

A huge range of academic papers on all aspects of law and other social sciences is available for free at: http:// www.ssrn.com

Other more specific sites are listed below and are intended to provide you with ideas about where to look.

Africa News www1.nando.net/ans/

Daily News (Sri Lanka) www.lanka.net/lakehouse

The Hindu (India) www.webpage.com/hindu/current/weekly.html

The Economist www.economist.com

Economic Approach to Law * 45* A. Perry-Kessaris/ 2002-2003 International Organisations and Think Tanks:

Asian Development Bank www.asiandevbank.org

African Development Bank www.africandevelopmentbank.com/

Dept for International Dev’t www.oneworld.org/dfid/

European Bank for www.ebrd.com/ Reconstruction & Dev’t

International Institute of www.pointcom.com/gifs/reviews/may Sustainable Dev’t

Organisation of American www.oas.org States

Organisation of Economic www.oecd.org Cooperation and Development

Overseas Development Institute www.oneworld.org/odi/index.html

Oxfam www.oneworld.org/textver/oxfam/index.html

UN Development Programme www.undp.org/ UNDP

UN Environment Programme www.unep.unep.no

UN Industrial Dev’t Organisation www.unido.org/

USAID www.info.usaid.gov/usaid.html

World Bank www.worldbank.org

World Trade Organisation www.wto.org

International Trade:

Ethical Investments www.arq.co.uk/ethicalbusiness/

Economic Approach to Law * 46* A. Perry-Kessaris/ 2002-2003 International Chamber of www1.usa1.com/~ibnet/icchp.html Commerce

International Trade Law Project ananse.irv.uit.no/trade_law/nav

UN Commission on Int’l Trade www.un.or.at/uncitral Law

UN Conference on Trade & gatekeeper.unicc.org/unctad Dev’t

DIAL Asian Legislation Project www.austlii.edu.au/au/special/dial/

China Law www.qis.net/chinalaw/

Federal Information Center (US) www.gsa.gov/et/fic-firs/fichome.htm

Hieros Gamos www.hg.org/

Int’l & comparative law gopher://gopher.law.cornell.edu/ documents

International Law www.noord.bart.nl/~bethlehem/law.html

House of Representatives law.house.gov/ Library

Governments

House of Commons www.publications.hmso.gov.uk/Parliament/Comm ons/hoccont.htm

UK Government Pages www.open.gov.uk/index/oindex.htm Organisation

Zambian National WWW Server www.zamnet.zm/

Foreign Direct Investment:

Economic Approach to Law * 47* A. Perry-Kessaris/ 2002-2003 Colombia www.sinycia.com.co/Clientes/Coinvertir/f_invest.ht ml

India (INDOLink) www.genius.net/indolink/

Indonesia /Singapore/ Malaysia www.mis.bppt.go.id/~faisol/snt_indicator/chap506. html

Iran www.tdb.gov.sg/globlink/business/iran/ir_3.html

Korea darkwing.uoregon.edu/~felsing/kstuff/obrien1.html

Sri Lanka www.BOIsrilanka.org

Books of General Use:

Baldwin, Robert, Colin Scott and Christopher Hood eds. (1998) A Reader on Regulation Oxford University Press

Baldwin, Robert and Martin Cave (1999) Understanding Regulation OUP

Bouckaert, Boudewijn and Gerrit De Geest (Eds.) Encyclopaedia of Law and Economics, University of Ghent and University of Utrecht, available at allserv.rug.ac.be/~gdegeest/

Buscaglia, Edgardo, William Ratliff and Robert Cooter eds. (1997) The Law and Economics of Development JAI Press

Buscaglia, Edgardo and William Ratliff (2000) Law and Economics in Developing Countries Hoover Institute Press

Cooter, Robert and Thomas Ulen (1997) Law and Economics Addison Wesley

De Soto, Hernando (2000) The Mystery of Capital Bantam

De Soto, Hernando (1989) The Other Path Harper and Row

Katz, Avery Wiener (1998) Foundations of the Economic Approach to Law Oxford University Press

Mattei, Ugo(1998) Comparative Law and Economics University of Michigan Press

Economic Approach to Law * 48* A. Perry-Kessaris/ 2002-2003 Mercuro, Nicholas and Steven Medema (1997) Economics and the Law Princeton University Press

Perry, Amanda (2001) Legal Systems as a Determinant of FDI: Lessons form Sri Lanka Kluwer Law International

Pistor, Katharina and Philip A Wellons The Role of Law and Legal Institutions in Asian Economic Development 1960-1995 Oxford University Press

Economic Approach to Law * 49* A. Perry-Kessaris/ 2002-2003 Other Sources:

Bids ISI

This database, held by Bath Information and Data Services, is available at

http://www.isi.bids.ac.uk/ and allows you to search for journal articles on particular subjects. You must get a password and username from the library to be able to use the service. It is extremely useful for extended essays in particular. Full details available in the library.

Interlibrary Loans

If you discover an article or book (e.g. on BIDSISI or through other means) which you want, but which is not available in the Library, you may get it on interlibrary loan. Full details available in the library.

Economic Approach to Law * 50* A. Perry-Kessaris/ 2002-2003 Notes for Written Work

General notes:

 Essays MUST be typewritten and double spaced. If not they will be handed back to you.

 It is UNACCEPTABLE to fail to follow a standard referencing procedure. Read about possible options below. Learn one and use it. Failure to do so is a serious business.

 It is UNACCEPTABLE to exceed the word limit the word limit will be ignored.

Quoting directly from other people’s work:

If you wish to directly quote the words of another person, then you need to place them in quotation marks. If you do not do so, you will be guilty of plagiarism

If your quotation is long (i.e. it runs to three lines or more of your essay page), then you should

‘indent it in the way that this line is indented, and place quotation marks around it’

You must reproduce the quote exactly, including its punctuation.

You must provide a full reference for the quotation (see below)

References:

When you wish to use the work of others to support your argument, you must acknowledge that it is someone else’s work, and where you found it. You do this by providing a reference.

You can choose one of two reference systems.

1. The ‘Harvard System’

Economic Approach to Law * 51* A. Perry-Kessaris/ 2002-2003 This method uses short citations in the text of your paper.

e.g. movies are the most important method of communication today (Author Date, Page).

This method must be accompanied by a full bibliography (see below)

You may use footnotes while using the Harvard system, where in text citation is too bulky (e.g. newspaper articles) or (rarely in short essays) to comment upon your own text.

2. The ‘London System’

This method uses endnotes (notes at the end of the paper) or footnotes (notes at the foot of the relevant (page) to give details of the documents from which you are quoting or using as support.

You must record the details of the publication in full in the footnote the first time that you refer to it

e.g. Law books are fascinating.12 This is especially true of law books which were written a long time ago.13

If you are referring to a source for the second time you may use the word Ibid. (if the reference immediately follows the first one) or op cit., if you have made other references since your first mention of the source.

You don’t need a bibliography if you use the ‘London System’ because all the relevant details have been provided in foot/endnotes.

Plagiarism:

Plagiarism is the use, without acknowledgement, of the intellectual work of other people and the act of representing the ideas or discoveries of another as one’s own in written work submitted for assessment. To copy sentences, phrases or even striking expressions without acknowledgement of the source (either by inadequate citation or failure to indicate verbatim quotations) is plagiarism; to paraphrase without acknowledgement is likewise plagiarism. Where such copying or paraphrase has occurred, the mere mention of the source in a bibliography shall not be deemed sufficient acknowledgement; each such instance must be referred specifically to its source. Verbatim quotations must be either in inverted comas, or indented, and specifically acknowledged.

12 Last Name, First Name (Date). Title Place, Publisher. page(s)

13 Ibid., page

Economic Approach to Law * 52* A. Perry-Kessaris/ 2002-2003 Economic Approach to Law * 53* A. Perry-Kessaris/ 2002-2003