Law, Informal Rules, and Economic Performance: The Case for Common Law.

• Author: Alston, Lee J.
• Position: Book review

* Law, Informal Rules, and Economic Performance: The Case for Common Law

By Svetozar Pejovich, with contributions by Enrico Colombatto

Cheltenham, U.K.: Edward Elgar, 2008.

Pp. xi, 178. $115.00 cloth, $30.00 paperback.

Proper incentives matter for economic performance. To most readers, this claim is nothing new, but in Law, Information Rules, and Economic Performance Svetozar Pejovich delves deeply into the microanalytic details of the incentive effects that arise from formal and informal institutions and into how they must mesh to produce preferred outcomes. He pays particular attention to the different incentive effects that arise from common law and civil law.

The book has three parts. In part I, Pejovich sets the stage for the subsequent analysis. He defines efficiency not as a static concept (as in most neoclassical analyses), but rather as a dynamic process akin to that described by Joseph Schumpeter. In the dynamic he portrays, institutions affect economic performance, which reciprocally affects institutions. Although institutions provide incentives, they also have transaction costs that affect exchange opportunities. All of this is straightforward to those schooled in the New Institutional Economics, but for others, Pejovich's explanation can serve as a useful primer. He writes in a clear, concise manner with ample examples to drive his concepts home. His prose reminds me of that of his mentor, Armen Alchian.

In part II, Pejovich analyzes the incentive effects of the rule of law, which he maintains is crucial if capitalism is to deliver the goods. The problem with "the rule of law" in many analyses, especially those employing the concept in the usual cross-country regression, is that it is measured as a bundle, and one does not know which part of the bundle matters and, more important, how aspects of the rule of law can play out differently across countries. (This problem is one of the many reasons why I am not a fan of such cross-country analyses.) Pejovich does not fall into this trap. He decomposes the rule of law into four principal components: private-property rights; the law of contract; an independent judiciary; and a constitution. He also stresses the importance of individualism, which in his account is central to economic performance. Certainly, individualism fosters private-property rights, which allow for voluntary exchange to produce wealth, provided contracts are enforced. For Pejovich, the importance of the law of...