Law Enforcement and Transition
University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR)
Paris School of Economics (PSE); Delta - Ecole Normale Superieure (ENS); Centre for Economic Policy Research (CEPR)
European Economic Review, Vol. 47, No. 4, August 2003
We present a simple model to analyze law enforcement problems in transition economies. Law enforcement implies coordination problems and multiplicity of equilibria due to a law abidance and a fiscal externality. We analyze two institutional mechanisms for solving the coordination problem. A first mechanism, which we call "dualism", follows the scenario of Chinese transition where the government keeps direct control over economic resources and where a liberalized non-state sector follows market rules. The second mechanism we put forward is accession to the European Union. We show that accession to the European Union, even without external borrowing, provides a mechanism to eliminate the "bad" equilibrium, provided the "accessing" country is small enough relative to the European Union. Interestingly, we show that accession without conditionality is better than with conditionality because conditionality creates a coordination problem of its own that partly annihilates the positive effects of expected accession.
Keywords: Accession, coordination problems, dual track, law enforcement
JEL Classification: H40, H50, K42, P51Accepted Paper Series
Date posted: October 5, 2003
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