1 measuring the law: the economics of doing business timothy fisher and mark melatos economics...
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Measuring the Law: The Economics of Doing
Business
Timothy Fisher and Mark Melatos
EconomicsUniversity of Sydney
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Overview
economics and law legal origins theory Doing Business reports criticisms of DB methodology detailed analysis conclusions discussion
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Economics and Law
. . . the rights which individuals possess, with their duties and privileges, will be to a large extent, what the law determines. As a result, the legal system will have a profound effect on the working of the economic system and may in certain respects be said to control it.
Ronald Coase, 1991 Nobel laureate
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Law and economics
law tries to regulate behaviour• economics analyses behaviour
EXAMPLE regulating speedingB benefit of speedingF fine if caughtp probability of being caught
• individual compares the cost to the benefit• will not speed if cost exceeds the benefit
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Law and economics
will not speed ifp × F > B
• e.g., F = 500, B = 20, p = 1% → cost is 5, benefit is 20 → individual will speed
implications• law matters (F )
• enforcement matters ( p)
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Comments
trade-off between p and F• higher F can compensate for lower p
public policy may try to influence B• e.g., campaign about the dangers of
speeding
point: tools of economics to evaluate problems of law
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Legal origins theory: seminal paper
“Law and finance”, by La Porta, Lopez-de-Silanes, Shleifer, & Vishny, JPE 1998.
examine financial laws in 49 countries• corporate governance• shareholder protection• creditor rights
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Law and finance
classify countries by legal origin• common law: UK, USA, Australia, Canada• civil code: French, German, Scandinavian
conclude: link between legal origin and development of financial markets
1. Common law2. Scandinavian and German civil law3. French civil law
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Legal origins theory
link between financial market development and economic development
conclude: legal origin is an important factor determining economic development
Shleifer appointed by World Bank to oversee Doing Business project
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World Bank Group (WBG)
a family of 5 organizations, of which two• International Bank for Reconstruction and
Development• International Development Association
are focused on developing countries• provides grants and low-interest loans
• education, health, agriculture, environment, etc.
• often tied to specific reforms
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Doing Business database objective measures of
• business regulations • enforcement
input and verification by 3,500+ people • government officials • lawyers• business consultants• accountants
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Doing Business database comparable indicators across 175
countries• index based on 10 sub-indices
used to analyze which regulations enhance or constrain investment, productivity, and growth
DB published annually since 2004• attracts widespread media coverage
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Sub-indices in Doing Business Index
1. Starting a business2. Dealing with licenses3. Hiring and firing workers4. Registering property5. Getting credit6. Protecting investors7. Paying taxes8. Trading across borders9. Enforcing contracts10. Closing a business
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Ease of Doing Business Index
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Doing Business Index specific rankings
1. Singapore2. New Zealand3. U.S.A.
8. Australia
18. Thailand
93. China
135. Indonesia
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Obvious criticisms
law reform is ongoing• origin increasingly irrelevant (dropped
2005)
errors and omissions• e.g., Canadian bankruptcy law
ignores other factors• wars, corruption, cronyism, hyper-inflation
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Example of “other factors”
“Indonesian public services hit by unskilled spending” Financial Times, February 12, 2007.
inflexible budgetary system inadequately trained civil service
• especially at local government level unable to spend increasing fiscal
resources• unspent reserves at 3.1% of GDP in 2006
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Criticisms of the methodology
national legal experts• who are they? how are they chosen?
optimality of law• index is based on WB preferences
• e.g., index favours easy dismissal of workers• not necessarily optimal
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Outputs versus inputs
real issue: does law achieve its goal?• WB index does not measure outcomes• measures the law (inputs)• empirical study of law
point: may be many ways to reach goals• many laws may be compatible with a
given goal
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DB reports• Poor countries regulate more
Schleifer (2005, EFM)“… American and European societies
are much richer today than they were 100 years ago, yet they are vastly more regulated.”
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Types of Regulation
“Procedural” vs “Behavioural” regulation• Transaction form vs quality• Behavioural regulation as a response to
market failure• Social weight?
DB measures often emphasise form• Procedures, time, cost
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Procedural Regulation
Costs:• Inefficiency, corruption• Complexity fosters uncertainty
Benefits: • Enforcement, consistency, fairness• Control of outcome
Procedural regulation and outcomes• Djankov et al. (2003, QJE)
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Behavioural Regulation
Regulating the business environment:• Environmental Law• Competition Law• Consumer Protection Law
Costs opportunities foregone Benefits:
• complexity, clarity, externalities
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Procedural Regulation in DB
Starting/closing a business Dealing with licenses Registering property - property rights? Paying taxes - clarity, dispute
resolution? Trading across borders
• Protection, infrastructure? Enforcing contracts
• Success rate of appeals?
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Behavioural Regulation in DB
Employing workers• Difficulty of hiring/firing• Rigidity of hours • Nonwage labour cost
Getting credit• Strength of legal rights• Depth of credit information• Credit registry coverage
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Behavioural Regulation in DB (cont.)
Protecting investors• Extent of disclosure• Extent of director liability• Ease of shareholder suits
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Interpreting the DB Reports
Cautious interpretation• Specific cases measured• Who is the regulator? What is their aim?• Endogeneity: Regulation ↔ Agent behaviour• Measurement difficulty: sample selection
bias
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Conclusion
Worthwhile exercise
Benchmarking reform opportunities
Methodological issues
Interpret with caution