#08-26
Comparing Legal and Alternative Institutions in Commerce
Franklin Allen and Jun "QJ" Qian, May 2008
Abstract: The extraordinary economic performance of China and India in recent decades raises
questions about the conventional wisdom of using the legal system as the basis of commerce.
Despite many well-known advantages, the legal system can be captured by interest groups and
become a barrier to change. We argue that one way to solve this problem is not to use the law as
the basis for commerce but instead to use alternative mechanisms outside the legal system. Our
prior work on China and India suggests that these alternative mechanisms can be quite effective. In
the context of a fast-growing economy such as China or India, there is an additional advantage that
this type of system can adapt and change much more quickly than when the law is used. In
particular, competition can ensure the most efficient mechanism prevails and this process does not
require persuading the legislature and the electorate to revise the law when circumstances change.
Keywords: Dispute resolution, institutions, law, legislature, competition.
JEL classifications:. O0; H0; P5.
