20 July 2016
Demand for Law and Enabling Structure of Regulation | Dmitry Stepanov

Laws, regulations and the law itself might be viewed from economic analysis of law standpoint as a type of any non-material goods, thus there is a demand for, and supply of, law.

Repeating interactions between market actors who employ domestic law to structure their commercial transactions or to deal with national regulators is essentially similar to demand-supply model whereby market participants form their demand for better quality law and legislatures, regulators or judges provide some supply quantity. In this model, enabling element of legal rules for private law and coherence and predictability for public laws and regulations are the key factors, as the author argues, which determine the demand side. Law and regulations as being a public good have the feature of other public goods: inadequate level of production, that is to say supply side should be characterized by low quantity supplied and lesser elasticity of supply. This underproduction of law coupled with comparatively high elasticity of demand for law leads to various externalities: market players may switch into non-legal rules and practices (corruption, organized crime, assessing probabilities instead of rely on predictable rules) or migrate to foreign jurisdictions and seek for other — foreign or non-state — enforcement institutions. These alternative practices suppress demand for law further and create new costs for domestic jurisdiction. The only way to win in regulatory competition — as the paper states — is to stimulate demand and increase quantity supplied, i.e. to create a number of incentives for broader application of domestic legal system by local actors and to prevent migration of business activity into foreign jurisdictions. The theory of comparative advantage and ideas of regulatory arbitrage teach us that the demand for law will be satisfied in any case, the only question is where and how, by which means — domestically or abroad. Therefore national governments should provide adequate quantity of law supplied, otherwise they are facing the risks to their sovereignty. Yet another option to increase utility from the law is to decrease deadweight loss caused by mandatory rules within private law and excessive regulations in the domain of public law: since mandatory rules in this paper equated with correcting taxes (Pigou taxes), increasing enabling structure of law must lead to greater consumers’ surplus and eventually to higher utility from domestic law employed by market participants.

Keywords: demand for law, enabling norms, regulation, economic analysis of law, deadweight loss, correcting taxes, regulatory competition

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