The circularity problem states that before legal polycentrists can employ price theoretic arguments about market competition, they must first show that legal polycentrism is able to instantiate the institutional framework within which property rights are protected and contracts are enforced. If these requirements are not satisfied, it is illegitimately circular to draw on market competition as an argument for legal polycentrism. This paper indicates that the above problem can be solved by relying on the regression theorem of institutional development, whereby the development of higher-level (hard) institutions is conditioned by the development of lower-level (soft) institutions.
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