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This paper provides a political analysis of legal pluralism from a “new institutionalist” perspective. In response to question of why states recognize and incorporate non-state normative orderings into their legal systems, it is hypothesized that the decision of incorporation is made to enhance the capacities of postcolonial states with “rational” calculations. In this respect, two new categories of legal pluralism are introduced: capacity-enhancing recognition and capacity-diminishing recognition. The paper lastly assesses the implications of legal pluralism upon the state-society relations and individual rights and liberties of citizens in the case of Israel.