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Trade and Contract Enforcement

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Author Info

  • Anderson James E

    ()
    (Boston College)

  • Young Leslie

    ()
    (Chinese University of Hong Kong)

Abstract

We model imperfect contract enforcement when the victims of default resort to spot trading because the act of repudiation reveals a favorable outside option. We show that enforcement imperfection is essentially distinct from the contract incompleteness analyzed in the previous literature. Improved contract execution benefits traders on the excess side of the spot market by attracting potential counter-parties, but harms them by impeding their exit from unfavorable contracts. Multiple optima are possible, with anarchy a local optimum, perfect enforcement a local minimum and imperfect enforcement a global optimum. LDCs exhibit parameter combinations such that imperfect enforcement may often be optimal.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 5 (2006)
Issue (Month): 1 (November)
Pages: 1-36

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Handle: RePEc:bpj:bejeap:v:contributions.5:y:2006:i:1:n:30

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Cited by:
  1. James E. Anderson, 2007. "Does Trade Foster Contract Enforcement?," Boston College Working Papers in Economics 672, Boston College Department of Economics.
  2. Cassar, Alessandra & Friedman, Daniel & Schneider, Patricia Higino, 2009. "Cheating in markets: A laboratory experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 240-259, October.
  3. Pierre-Guillaume Méon & Khalid Sekkat, 2008. "Institutional Quality And Trade: Which Institutions? Which Trade?," Economic Inquiry, Western Economic Association International, vol. 46(2), pages 227-240, 04.
  4. Luis Araujo & Emanuel Ornelas, 2007. "Trust-based trade," LSE Research Online Documents on Economics 19693, London School of Economics and Political Science, LSE Library.
  5. Iwanow, Tomasz & Kirkpatrick, Colin, 2009. "Trade Facilitation and Manufactured Exports: Is Africa Different?," World Development, Elsevier, vol. 37(6), pages 1039-1050, June.
  6. James E. Anderson & Douglas Marcouiller, S.J., 1999. "Insecurity and the Pattern of Trade: An Empirical Investigation," Boston College Working Papers in Economics 418, Boston College Department of Economics, revised 03 Aug 2000.
  7. Dassiou, X. & Stern, J., 2008. "Infrastructure Contracts: Trust and Institutional Updating," Working Papers 08/06, Department of Economics, City University London.
  8. James E. Anderson & Douglas Marcouiller, 1999. "Trade, Insecurity, and Home Bias: An Empirical Investigation," NBER Working Papers 7000, National Bureau of Economic Research, Inc.
  9. Fatica, Serena, 2009. "Taxation and the quality of institutions: asymmetric effects on FDI," MPRA Paper 24179, University Library of Munich, Germany, revised Jun 2010.
  10. Zhang, Jianhong & Zhou, Chaohong & Ebbers, Haico, 2011. "Completion of Chinese overseas acquisitions: Institutional perspectives and evidence," International Business Review, Elsevier, vol. 20(2), pages 226-238, April.
  11. James E. Anderson, 1999. "Why Do Nations Trade (So Little)?," Boston College Working Papers in Economics 428, Boston College Department of Economics.
  12. José De Sousa & Anne-Célia Disdier, 2006. "La qualité du cadre juridique constitue-t-elle une barrière au commerce ?. Application aux économies en transition," Revue économique, Presses de Sciences-Po, vol. 57(1), pages 135-149.

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