Why the Shadow of the Law is Important for Economists

Abstract

The concept of the shadow of the law refers to the way laws can affect people’s actions even when there is no direct legal involvement. Often the law is used to “send a signal”. This paper presents an economics perspective on this concept. An illustrative game is presented and several related economic concepts are described. An assessment is made of the implications in terms of the suitability of the signals given and various responses that may be observed. In summary, the law is a central component of policy. The paper draws attention to an important dimension of policy implementation.

Keywords: Law, shadow of the law, policy implementation, negotiation

JEL Classification: K4