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Contract Law is Not Enough: The Many Legal Institutions That Support Contractual Commitments

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  • Gillian Hadfield

    (USC Law School)

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    Abstract

    One of the fundamental contributions of transaction cost theory and institutional economics has been to focus attention on opening the "black box" of contract enforcement, drawing attention to the institutions required to achieve effective and low-cost contract enforcement. The idea that the effectiveness of contract law is critical to the growth of economic activity is widespread in the literature on development and transition economies. Recent studies attempting to document toe relative strength of contract enforcement in different settings (La Porta, et al., 19982; Djankov, et al., 2003), however, have focused on relatively abstract notions of "courts" and "legal systems" and have yet to investigate the detailed institutional features that make contract law effective and low-cost. Even if it is correct to identify "common law legal systems" as productive of greater economic growth, for example, we still do not know what it is about those systems that produces this growth and in particular how these systems achieve more effective and lower cost contract enforcement. This paper explores in a detailed way the multiple legal institutions at work in the organization of courts, the judiciary, the legal profession, enforcement services, and the process of lawmaking and legal innovation, all of which play significant roles in structuring an effective and cost-effective regime of contract enforcement.

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    Paper provided by University of Southern California Law School in its series University of Southern California Legal Working Paper Series with number usclwps-1003.

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    Handle: RePEc:bep:usclwp:usclwps-1003

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    1. Masten, Scott E & Snyder, Edward A, 1993. "United States versus United Shoe Machinery Corporation: On the Merits," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 33-70, April.
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    3. Greif, Avner & Milgrom, Paul & Weingast, Barry R, 1994. "Coordination, Commitment, and Enforcement: The Case of the Merchant Guild," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 745-76, August.
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    6. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    7. Greif, Avner, 1989. "Reputation and Coalitions in Medieval Trade: Evidence on the Maghribi Traders," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 857-882, December.
    8. Simeon Djankov & Rafael Porta & Florencio de & Andrei Shleifer, 2002. "Courts: The Lex Mundi Project," Yale School of Management Working Papers ysm277, Yale School of Management, revised 01 Nov 2003.
    9. Bernstein, Lisa, 1992. "Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry," The Journal of Legal Studies, University of Chicago Press, vol. 21(1), pages 115-57, January.
    10. Henry Hansmann & Reinier Kraakman, 2000. "The Essential Role of Organizational Law," Yale School of Management Working Papers ysm147, Yale School of Management, revised 01 Nov 2001.
    11. Messick, Richard E, 1999. "Judicial Reform and Economic Development: A Survey of the Issues," World Bank Research Observer, World Bank Group, vol. 14(1), pages 117-36, February.
    12. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
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