Legal Institutions, Innovation and Growth

We analyze the relationship between legal institutions, innovation and growth. We compare a rigid (law set ex-ante) legal system and a exible one (law set after observing current technology). The exible system dominates in terms of welfare, amount of innovation and output growth at intermediate stages of technological development - periods when legal change is needed. The rigid system is preferable at early stages of technological development, when (lack of) commitment problems are severe. For mature technologies the two legal systems are equivalent. We nd that rigid legal systems may induce excessive (greater than rst-best) R&D investment and output growth.