Law and Economics
Business Strategy and Operations
“Effective institutions are those that are incentive
compatible. Institutions with internal enforcement
mechanisms are effective because there is a mutually
recognized system of rewards and penalties.”
The World Bank’s ‘World Development Report’, 2002
There is a growing consensus among policy-makers around the world that economic growth and technology innovation require legal institutions compatible with economic incentives. The framework for the law must lead to predictable behavior by the courts while avoiding inadvertent deterrence of lawful behavior and unnecessary expenditures on transactional services.
A policy issue that has received considerable attention is the deregulation of recently privatized industries, in particular those once considered natural monopolies. Policy-makers must determine which sectors of an industry have competitive characteristics and how to loosen regulation for these sectors while still maintaining appropriate oversight for those sectors that exhibit natural monopoly characteristics.
EI’s Competition Policy and Legal Reform Experience and Services
EI economists have advised governments and industry participants and have worked with them and international agencies to address these issues for many industries, such as electric power generation and transmission, telecommunications, oil and gas production, pipelines, post offices, railroads, and airlines.
The establishment and enforcement of competition laws is also an important part of a developing country’s transition to a market-based economy. EI economists have worked with countries in Latin America, Eastern Europe, and the former Soviet Union on establishing, writing, and enforcing competition laws. EI economists have also advised foreign governments on their antidumping laws. EI economists can further assist policy-makers by providing a perspective on the strategic environment, public policies, technological changes, and market developments affecting specific industries.
EI economists also work for multilateral organizations, like the World Bank, in the evaluation of legal and judicial reform (LJR) programs. For example, working together with the International Women Judges Foundation, EI economists developed and implemented a methodology for evaluating a World Bank-funded program that provides legal advice to poor women in Ecuador. Although strengthening the rule of law has been identified as a key strategy for poverty reduction, measuring the impact of a specific LJR program face considerable challenges. Indeed, the major impact of effective legal reform is not seen in the cases that are brought before the courts, but instead arises from the changes in behavior induced by the knowledge of what courts will do. In addition, these benefits may take a long time to fully materialize, requiring innovative approaches to program evaluation.
EI economists also can provide corporate planners with an overview of a country’s regulatory and competition policies that may affect their corporations’ foreign operations, provide recommendations for corporate strategy in a particular competitive environment, and provide evaluations of potential acquisitions and/or strategic alliances.
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