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Contract Enforcement, Social Efficiency, and Distribution: Some Experimental Evidence

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  • Steven Y. Wu
  • Brian Roe

Abstract

We use economic experiments to investigate how different contract enforcement regimes affect efficiency and the distribution of surplus in a vertically coordinated market with buyer concentration. We find that if a third party (e.g., government) perfectly enforces contracts, social efficiency is enhanced. We also find that when third-party enforcement is imperfect, social efficiency will not necessarily decrease because trading partners find ways to self enforce contracts. However, opportunistic behavior by some traders leaves some sellers (growers) with ex post profits below reservation levels. Finally, partial or one-sided third-party enforcement causes significant efficiency losses by constraining subjects' ability to use informal enforcement instruments. Copyright 2007, Oxford University Press.

Suggested Citation

  • Steven Y. Wu & Brian Roe, 2007. "Contract Enforcement, Social Efficiency, and Distribution: Some Experimental Evidence," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(2), pages 243-258.
    • Handle: RePEc:oup:ajagec:v:89:y:2007:i:2:p:243-258
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    File URL: http://hdl.handle.net/10.1111/j.1467-8276.2007.00996.x
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    Citations

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    Cited by:

    1. Cordero Salas, Paula, 2013. "Cooperation and reciprocity in carbon sequestration contracts," Policy Research Working Paper Series 6521, The World Bank.
    2. Elwyn Davies & Marcel Fafchamps, 2017. "When No Bad Deed Goes Punished: Relational Contracting in Ghana versus the UK," NBER Working Papers 23123, National Bureau of Economic Research, Inc.
    3. Saenger, Christoph & Torero, Maximo & Qaim, Matin, 2016. "Impact of third-party enforcement of contracts in agricultural markets—A field experiment in Vietnam," IFPRI book chapters, in: Devaux, André & Torero, Maximo & Donovan, Jason & Horton, Douglas E. (ed.), Innovation for inclusive value-chain development: Successes and challenges, chapter 11, pages 343-374, International Food Policy Research Institute (IFPRI).
    4. Steven Y. Wu, 2014. "Adapting Contract Theory to Fit Contract Farming," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 96(5), pages 1241-1256.
    5. Sebastian Kunte & Meike Wollni & Claudia Keser, 2017. "Making it personal: breach and private ordering in a contract farming experiment," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 44(1), pages 121-148.
    6. Salas, Paula Cordero, 2012. "Does Contract Enforcement Limit the Distribution of Bargaining Power? An Experimental Study," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124503, Agricultural and Applied Economics Association.
    7. Wu, Steven Y., 2013. "Adapting Contract Theory to Fit Contract Farming," 2014 Allied Social Sciences Association (ASSA) Annual Meeting, January 3-5, 2014, Philadelphia, PA 161894, Agricultural and Applied Economics Association.
    8. Bhattacharya, Haimanti & Dugar, Subhasish, 2022. "Business norm versus norm-nudge as a contract-enforcing mechanism: Evidence from a real marketplace," European Economic Review, Elsevier, vol. 144(C).
    9. Bhattacharya, Haimanti & Dugar, Subhasish, 2023. "Undervaluation versus unaffordability as negotiation tactics: Evidence from a field experiment," Journal of Economic Psychology, Elsevier, vol. 96(C).
    10. Raszap Skorbiansky, Sharon, 2018. "Investing in communication: An experimental study of communication in a relational contract setting," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 74(C), pages 85-96.
    11. Steven Y. Wu, 2006. "Contract theory and agricultural policy analysis: a discussion and survey of recent developments ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(4), pages 490-509, December.
    12. Davies, Elwyn & Fafchamps, Marcel, 2021. "When no bad deed goes punished: Relational contracting in Ghana and the UK," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 714-737.

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