Comparing Legal and Alternative Institutions in Finance and Commerce

Wharton Financial Institutions Center Working Paper No. 08-26

40 Pages Posted: 31 Mar 2009 Last revised: 4 Dec 2011

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Jun "QJ" Qian

Fanhai International School of Finance, Fudan University

Date Written: January 1, 2009

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 Classification: O0, H0, P5

Suggested Citation

Allen, Franklin and Qian, Jun, Comparing Legal and Alternative Institutions in Finance and Commerce (January 1, 2009). Wharton Financial Institutions Center Working Paper No. 08-26, Available at SSRN: https://ssrn.com/abstract=1136168 or http://dx.doi.org/10.2139/ssrn.1136168

Franklin Allen (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Jun Qian

Fanhai International School of Finance, Fudan University ( email )

Shanghai
China
86-21-63895501 (Phone)
86-21-62934572 (Fax)

HOME PAGE: http://www.fisf.fudan.edu.cn/show-65-69.html

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