Understanding the role of law and the legal system in economic development requires more than a purely economic model

Abstract

This article illustrates that an approach to law and economics which uses economic models and quantitative analysis without considering socio-cultural factors and lacks detailed legal understanding of the specific ‘laws’ being analysed can lead to problematic policy prescriptions. It shows that the ‘law and finance’ approach to law and economic development is flawed. More generally, the article demonstrates that law and economics cannot solely rely on the application of the techniques of economics but must also recognise the importance of culture in determining economic behaviour. The studies discussed utilise a New Institutional Economics model of the role of law and the legal system, draw on dimensional models of culture from cross-cultural psychology and utilise a Leximetric dataset containing more finely grained measures of creditor and investor protection indices than those used in earlier studies of the role of law in economic development. The evidence adduced suggests a strong and persistent transplant effect.