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Efficient contract enforcement

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  • Thorsten Koeppl
  • Cyril Monnet
  • Erwan Quintin

Abstract

We study how the efficient choice of contract enforcement interacts with the efficient allocation of capital in a simple production economy. Contract enforcement makes trade possible but requires an aggregate investment of capital that is no longer available for production. In such an economy, more dispersion in ex-ante marginal products makes it optimal to invest more resources in enforcement. Furthermore, implementing the optimal allocation requires a specific distribution of the cost for enforcement across agents that is not monotonic and results in a redistribution of endowments. At the efficient solution, agents at the bottom of the endowment distribution benefit the most from investment in enforcement and these investments lead to a reduction in consumption and income inequality. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Thorsten Koeppl & Cyril Monnet & Erwan Quintin, 2014. "Efficient contract enforcement," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(1), pages 161-183, January.
    • Handle: RePEc:spr:joecth:v:55:y:2014:i:1:p:161-183
    DOI: 10.1007/s00199-013-0745-3
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    Cited by:

    1. Latchezar Popov, 2014. "Enforcement frictions and optimal lending contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(1), pages 195-222, September.
    2. Adriano Campos Menezes & Jaime Orrillo, 2018. "Concerning The Seizure Of Collateral In Collateralized Loan Markets," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 13(03), pages 1-9, September.
    3. Borys Grochulski & Yuzhe Zhang, 2019. "Optimal liquidity policy with shadow banking," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(4), pages 967-1015, November.
    4. Toshihiko Mukoyama & Latchezar Popov, 2020. "Industrialization and the evolution of enforcement institutions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(3), pages 745-788, April.
    5. António Antunes & Tiago Cavalcanti & Anne Villamil, 2015. "The effects of credit subsidies on development," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(1), pages 1-30, January.
    6. Jan U. Auerbach, 2019. "Property rights enforcement with unverifiable incomes," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(3), pages 701-735, October.
    7. Florin Bidian & Camelia Bejan, 2015. "Martingale properties of self-enforcing debt," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(1), pages 35-57, September.
    8. Nadezhda V. Baryshnikova & Ngoc T.A. Pham & Maria M. Wihardja, 2016. "Does Political and Economic Inequality Affect Institutional Quality?," The Economic Record, The Economic Society of Australia, vol. 92(297), pages 190-208, June.
    9. Jeff S. Johnson & Ravipreet S. Sohi, 2016. "Understanding and resolving major contractual breaches in buyer–seller relationships: a grounded theory approach," Journal of the Academy of Marketing Science, Springer, vol. 44(2), pages 185-205, March.
    10. Monnet, Cyril & Quintin, Erwan, 2017. "Limited disclosure and hidden orders in asset markets," Journal of Financial Economics, Elsevier, vol. 123(3), pages 602-616.

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    More about this item

    Keywords

    Enforcement; Institutions; Inequality; Human and physical capital; D31; D52; O11; O43;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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