Better rule of law would generate economic growth, which would
in turn build constituencies for democratic reforms [Root and May
(2006)]. Consider prisoners dilemma, to Law and Economics Scholars, the
inevitability of prisoner’s dilemmas arising to block potentially
efficient exchanges explains the need for and consequently the adoption
of contract law. When the law enforces contracts, it permits the
participants in a potential prisoners’ dilemma the option of escaping
the dominant strategy equilibrium of non-cooperation, which prevents the
achievement of efficient exchanges, by permitting the parties to
effectively pre-commit to future cooperative behavior. Mutual
pre-commitments can produce the efficient cooperate-cooperate
equilibrium. The existence of contract law then tends to foster
efficient cooperative behaviour. Institutions are considered to provide
the mechanisms by which individuals can resolve social dilemmas [Steins
(1999)]. They are sets of rules that people have created in order to
control/regulate the behavior of people using a natural resource.
Several layers of institutions are important for institutional
development and economic performance. These layers, from the slowest
moving to the fastest moving are: human motivations and social
institutions, political institutions, legal institutions and private
institutions [Azfar (2006)]. Institutions perform their role to frame
rules, procedure and enabling environment for implementation of rules.
Rights of individuals are recognised and recognised through institutions
as well.