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Legal Institutions, Innovation and Growth

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Abstract

We build a stylized model of endogenous technological change and analyze the relationship between legal institutions, innovation and growth. Two legal systems are analyzed: a rigid system, where an uncontingent law is written ex ante (before knowing the current technology) and a flexible system where law-makers select the law ex post (after observing the current technology). We show that flexible legal systems dominate in terms of welfare, amount of innovation and output growth in economies at intermediate stages of technological development -- which are periods when legal change is more needed -- while rigid legal systems are preferable at early stages of technological development, when commitment problems are more severe. For mature technologies the two legal systems are shown to be equivalent. Surprisingly, we find that rigid legal systems may induce excessive (greater than first-best) R&D investment and output growth.

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 256.

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Date of creation: 03 Jul 2010
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Publication status: Published in International Economic Review, 2013, 54, pp. 937-956
Handle: RePEc:sef:csefwp:256

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Keywords: Commitment; Flexibility; Innovation and Growth;

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References

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  1. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2002. "Law and Finance: why Does Legal Origin Matter?," NBER Working Papers 9379, National Bureau of Economic Research, Inc.
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Cited by:
  1. Massenot, Baptiste, 2010. "Contract enforcement, litigation, and economic development," MPRA Paper 27501, University Library of Munich, Germany.
  2. Giovanni Immordino & Michele Polo, 2012. "Antitrust in Innovative Industries: the Optimal Legal Standards," Working Papers 434, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Massenot, Baptiste, 2010. "Financial development in adversarial and inquisitorial legal systems," MPRA Paper 27098, University Library of Munich, Germany.

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