December 15, 2007
Measuring Law and Institutions
Over the weekend I was at two meetings in Paris, one on Judicial Independence in China sponsored by Oxford's Foundation for Law, Justice and Society, and the other on Measuring Law and Institutions, sponsored by Universitie Paris X. I'll focus on the latter in this post.
Many of the papers were relevant to this blog. (My co-author Zach Elkins presented some of our work from the Comparative Constitutions Project.) Apropos of Kevin Davis' cogent critique of Doing Business mentioned earlier in this blog, Benito Arrunada presented a published paper called Pitfalls to Avoid when Measuring the Institutional Environment: Is Doing Business Damaging Business, (Journal of Comparative Economics 35(4):729-47 (2007)). His presentation summed it up nicely: the "Doing Business" project is a disaster for policy, a disaster for business, and a disaster for institutional analysis.
Two of Benito's many points. First, Doing Business evaluates only mandatory procedures. Consider the problem of buying a house. In France you have to go to a notary, providing a monopolistic regulatory barrier as a matter of law. In the US, there are no mandatory state barriers, but there are trust companies, lawyers, etc, who provide equivalent functions to certify title, might delay things, and would not be captured in DB. This suggest systematic measurement error.
The second point is that DB process focuses on barriers to entry without a theory as to why this is an important issue. One might assume the theory is reduction of costs of transacting. But the DB report considers ex ante regulatory measures only,without considering ex post costs. Suppose that, as in an ideal DB world, barriers to entry were reduced to zero. Now assume that something goes wrong with the firm, requiring ex post costs to resolve, either in bankruptcy or another legal process. These costs are not considered by DB but ought to be in order to have a complete picture of the true cost of regulatory barriers.
The argument is much richer than I am able to convey here. Benito has an online discussion on the topic for those who are interested.
More to come as the meeting continues...
December 15, 2007 | Permalink
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