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Exiting a lawless state, Volume 1
 
Author:Hoff, Karla; Stiglitz, Joseph E.; Collection Title:Policy Research working paper ; no. WPS 4520
Country:World; Date Stored:2008/03/03
Document Date:2008/02/01Document Type:Policy Research Working Paper
SubTopics:Public Sector Corruption & Anticorruption Measures; Bankruptcy and Resolution of Financial Distress; National Governance; Labor Policies; Gender and LawLanguage:English
Region:The World RegionReport Number:WPS4520
Volume No:1  

Summary: An earlier paper showed that an economy could be trapped in an equilibrium state in which the absence of the rule of law led to asset-stripping, and the prevalence of asset-stripping led to the absence of a demand for the rule of law, highlighting a coordination failure. This paper looks more carefully at the dynamics of transition from a non-rule-of-law state. The paper identifies a commitment problem as the critical feature inhibiting the transition: the inability, under a rule of law, to forgive theft. This can lead to the perpetuation of the non-rule-of-law state, even when it might seem that the alternative is Pareto-improving.

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