The Political Economy of Rule of Law Enforcement: Interdependence Between Political and Economic Choices Under Imperfect Information
Abstract: The focus of this paper is the analysis of the creation of the ”rules of the game” in the legal development process within countries where we observe slow evolution of political institutions and simultaneously fast evolution of economic ones. The paper investigates a coordination game where the executive of the government is fully informed and committed to the rule of law enforcement, whereas a continuum of managers faces imperfect information and it is keen to strip assets against the law. A diffused information on the institutional quality of the country would create an incentive to reduce stripping. In fact the existence of good institutions is not a sufficient condition to conduce to the rule of law enforcement due to the need to spread the information about their strength. High institutional quality can increase the likelihood of rule of law enforcement only when there is diffused information among managers, whereas high uncertainty is conducive to poor rule of law enforce- ment. If good institutions and diffused information do not go hand-in-hand, there is scope for the co-existence of poor property rights protection notwithstanding fast market reforms implementation. This result is robust to the sequential or simul- tanous structure of the game and highlights the key importance of the information component. (JEL: D81, K42, P26)
