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John A. Dove and Russell S. Sobel

Legal federalism is a system in which a government’s legal powers (judicial and legislative) are separated both vertically and horizontally with multiple levels of decentralized government. This type of system results in differences in legal rules and interpretations across sub-regions within the nation, in contrast to a more centralized legal system in which laws would be more uniform. In this chapter, we consider how the presence of horizontal legal variation across jurisdictions affects the level of innovation and entrepreneurship in an economy. In addition, we examine how the disruptive and unpredictable process of product innovation itself helps to push the evolution of law through time. Because entrepreneurs constantly create new products that require new interpretations of existing statutory law (or the creation of new statutory law), we argue that it is the predictability of the dynamic application of the law into new areas that matters most in attracting entrepreneurs to an area and supporting innovation within an economy.