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Toward a Theory of Regulation for Developing Countries

Posted on 18 January 2009

Towards a Theory of Regulation for Developing Countries: Insights from Jean-Jacques Laffont’s last book

Antonio Estache, a good friend of mine and one of my favourite author wrote a very interesting paper on the lessons that can be learned from Jean-Jacques Laffont's papers on institutions and development. The paper is forthcoming in the Journal of Economic Litterature. One of the main argument is that "Developing economies are often described as “economies with missing markets.” In the contractual world of regulation, missing markets translate into incomplete contracts. Contracts are incomplete because of players’ bounded rationality, as in any economy—but also because of institutional weaknesses."

The first time I read Laffont's 2005 book on this issue I was fascinated by this idea and by the way he proposed a formalization of weak institutions and their impact on contracting choices and regulation. This paper takes stock and suggests we should go on following the path proposed by Jean-Jacques Laffont. I totally agree with this view.

One remaining question for me stay that I do not really understand why such theory would be reserved for developing countries. Many of the issues tackled in the paper and more generally in this theoretical path seem totally relevant to explain contractual issues in developed countries with imperfect institutions (i.e. all countries) as well.

Click here to download the paper