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Economic value of English law | Oxera

2.3: The law underpins growth in the volume of transactions (and therefore the generation of economic value)

Published: October 5th 2021
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3.1: Introduction 3.2: The economic value created through the UK legal services ecosystem 3.3: The economic value created for the UK as a whole -3.3.1: English law as a global market standard -3.3.2: Agglomeration effects -3.3.3: Reduced transaction costs for UK businesses trading internationally 3.4: The choice of law and legal services for internationally mobile transactions
4.1: Introduction 4.2: English law provides significant value to the UK economy -4.2.1: Maritime sector -4.2.2: Commodity trading -4.2.3: ISDA swaps and derivatives -4.2.4: International insurance contracts -4.2.5: The value of English law to the UK economy is significant 4.3: Risks and opportunities 4.4: Future opportunities for the use of English law represent significant potential value to the UK
5.1: Introduction 5.2: English law suffers from a type of ‘market failure’ 5.3: Solutions to the free-rider problem: coordination across private and public parties 5.4: How to manage the ‘provision’ of English law
A1.1: Maritime sector -A1.1.1: Size of the market -A1.1.2: Overview of governing laws -A1.1.3: Risks and opportunities A1.2: Commodity trading -A1.2.1: Size of the market -A1.2.2: Overview of governing laws -A1.2.3: Risks and opportunities A1.3: ISDA swaps and derivatives -A1.3.1: Size of the market -A1.3.2: Overview of governing laws -A1.3.3: Risks and opportunities A1.4: International insurance contracts -A1.4.1: Size of the market -A1.4.2: Overview of governing laws -A1.4.3: Risks and opportunities
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Chapter 2

2.3: The law underpins growth in the volume of transactions (and therefore the generation of economic value)

For transactions to take place, there must be a level of trust between the parties, and some degree of confidence about what will happen if something goes wrong.

When there is uncertainty surrounding a potential transaction, parties will price in the risk of that uncertainty, leading to higher transaction costs. In turn, this means that fewer transactions are likely to occur.[1]See, for example, Williamson, O.E. (1985), ‘The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting’, Free Press, New York; and North, D.C. (1990), ‘Institutions, … Continue reading The law provides a degree of predictability and confidence to enable transactions to take place by providing a set of common rules that once generally understood and considered to be enforceable through the legal system, [2]In this study, we define a legal system as the combination of: (i) the framework that defines and enforces rights and obligations; (ii) the institutions, organisations and individuals defining and … Continue reading give greater certainty about what will happen under specific conditions. This gives a degree of confidence in the enforceability of contracts (which are the legal instruments underpinning transactions). This in turn provides a reduction in the level of uncertainty surrounding a potential transaction, and thus lower transaction costs. Ultimately, this results in more transactions that enable and drive economic value.[3]Examples from the academic literature of the effect of contracts or legal protection on economic development are provided by Pablo Casas-Arce and Albert Saiz (2007), who find that costly enforcement … Continue reading

Therefore, the law adds economic value by increasing predictability of outcomes and hence growth in the volume of transactions in an economy.

References

References
↑1See, for example, Williamson, O.E. (1985), ‘The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting’, Free Press, New York; and North, D.C. (1990), ‘Institutions, Institutional Change and Economic Performance’, Cambridge University Press.
↑2In this study, we define a legal system as the combination of: (i) the framework that defines and enforces rights and obligations; (ii) the institutions, organisations and individuals defining and enforcing the law; and (iii) the organisations and individuals providing services in relation to the law.
↑3Examples from the academic literature of the effect of contracts or legal protection on economic development are provided by Pablo Casas-Arce and Albert Saiz (2007), who find that costly enforcement of rental contracts hampers the development of the rental housing market in a cross-section of countries, and Jun Qian and Philip E. Strahan (2007), who find that better creditor protection lowers interest rates that lenders charge.