February 16, 2004
Comparing Institutions
Posted by Gordon Smith

Last week we inaugurated the Law & Economics Reading Group at the University of Wisconsin Law School. As you can imagine, the constituency for this group is smaller than for the Law & Society Reading Group (if that existed). Nevertheless, several members of our faculty enjoy talking about economics, so we settled on last Wednesday afternoon as an appropriate time to discuss our first work: Neil K. Komesar, Law’s Limits: The Rule of Law and the Supply and Demand of Rights (2001). Of course, Neil is on the faculty, and he is a great colleague, so we decided to take advantage of him.

Neil's big idea is comparative institutional analysis. It's very simple in concept, though often neglected in practice. In his most recent book, Neil concentrates on four institutions: courts, political processes, markets, and norms. These institutions are society’s mediators. Simply stated, their task is to make decisions about resource allocation (or, in my words, they resolve conflicts).

The goal of comparative institutional analysis is to define a role for law, by which Neil means “the adjudicative process.” In comparing markets and courts, many policymakers and commentators employ a single institutional framework that skews the analysis. For example, by focusing on the characteristics of courts, commentators have proposed judicial intervention where market solutions are superior or judicial abstention where the market is dysfunctional. Alternatively, by focusing on the shortcomings of the market, commentators often argue for judicial intervention in areas where the courts have little to offer.

Comparative institutional analysis is complicated by the fact that institutional competencies are not static. Neil identifies two attributes of transactions that seem to influence the quality of institutional performance most: the number of parties connected to the transaction and the complexity of the transaction. Importantly, “[i]nstitutions tend to move together,” and as numbers and complexity increase, institutional competence declines across the board. As a result, “analysis of law and rights will usually involve a series of close institutional choices.”

I am currently attempting to employ comparative institutional analysis in a paper on two important doctrines for the "law of venture capital contracting" (whatever that is!): the doctrine of independent legal significance and the doctrine of good faith. I will present the paper at a conference called "Venture Capital After the Bubble" in Portland, Oregon, on March 5. The conference is sponsored by Willamette Law Review, and it looks like a good lineup.

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