Law as Asymmetric Information: Theory, Application, and Results in the Context of Foreign Direct Investment in Real Estate

37 Pages Posted: 16 Sep 2010 Last revised: 19 May 2011

See all articles by Patrick J. Glen

Patrick J. Glen

Government of the United States of America - Department of Justice

Date Written: September 15, 2010

Abstract

In his seminal 1970 article on lemon markets, George Akerlof posited the possibility of market failure in the presence of asymmetric information regarding a good’s value. In the intervening four decades, the importance of accurate valuation information has grown as transnational trade has boomed. The aim of the instant article is to assess the potential impact on transnational trade of asymmetric information regarding the legal attributes of a given good. Inaccurate or asymmetric information regarding relevant legal attributes may give rise to the same problem of market failure that Akerlof initially posited. If buyers are unsure of the ownership of a good, its conveyability, or their rights and obligations in a given transaction, they might decline to transact at all. If these legal uncertainties are pervasive, transactions in that market might cease to take place altogether.

Nonetheless, consistent with the remainder of Akerlof’s article, the presence of certain counteracting institutions may lessen the impact of asymmetric information, thus forestalling market failure. These counteracting institutions in the context of asymmetric information regarding legal attributes would include a fully and fairly functioning judiciary, publicized and lucid laws and regulations, and other such mechanisms that would make clear the rights and obligations of all parties to a transaction. Thus, this article addresses the possibility of law as asymmetric information in the general sense and the specific, by assessing whether asymmetries regarding property law might contribute to market failure in the context of foreign direct investment in real estate. Regardless of whether that market is a lemons market, the conclusions of this article support systemic reform in the property regimes of developing and transition economies, to ensure that shortcomings in the institutional and legal frameworks of these states do not hinder fuller economic development.

Keywords: Akerlof, property law, foreign direct investment, asymmetric information, information economics, institution & capacity building

JEL Classification: D82, F21, F23, K'08 K11, K20

Suggested Citation

Glen, Patrick James, Law as Asymmetric Information: Theory, Application, and Results in the Context of Foreign Direct Investment in Real Estate (September 15, 2010). Berkeley Business Law Journal, Vol. 8, No. 1, pp. 116-151, 2011; Georgetown Public Law Research Paper No. 10-57; Georgetown Law and Economics Research Paper No. 10-14. Available at SSRN: https://ssrn.com/abstract=1677620

Patrick James Glen (Contact Author)

Government of the United States of America - Department of Justice ( email )

950 Pennsylvania Avenue, NW
Washington, DC 20530-0001
United States
202-305-7232 (Phone)

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