Berkeley Program in Law and Economics

The contribution of judicial system performance to economic development has been actively probed in recent years. Yet efforts to improve judicial systems have faltered. This paper offers an explanation. It proposes that transacting within social networks has provided a seemingly workable substitute for reliance on judicial systems in Brazil and many countries. This prompts public indifference to judicial system improvement. At the same time, where social network transacting is widespread and dominant, it presents numerous obstacles to economic development. Transactions costs economics provides tools for better understanding the characteristics, costs and extent of social network transacting. Relatively low costs are found for intra-network transacting, but trans-network transacting suffers. Constraints inherent in both social network transacting and in judicial dysfunction are reviewed for their negative impacts on both domestic activity and regional integration. Selected transactions costs economics literature is reviewed for a closer look at firm size and corporate governance in the context of countries like Brazil where judicial system dysfunction is found and where social network transacting is prominent. A recently completed project inside the 400 state courthouses of the São Paulo regional tribunal is reported. It shows how close attention to administrative details can significantly improve judicial system performance. The paper mixes real world observation with theoretical insights. It suggests that current explanations for sluggish economic development would be better served by increased awareness of social network transacting. It suggests that research within courthouses at a deeper level of detail will advance understanding of the negative consequences of judicial system dysfunction on specific aspects of economic development.