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Contractual Intermediaries

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  • Ramey, Garey
  • Watson, Joel

Abstract

This paper analyzes the role of third party intermediaries, such as courts and arbitrators, in contract enforcement. In our model, intermediaries compel contracted transfers and resolve disputes when requested to do so by the contracting agents. When the verifiability of information is limited, successful enforcement requires that dispute resolution costs be sufficiently great. Optimal enforcement systems economize on dispute resolution and information costs, and may involve establishment of specific systems tailored to particular groups. We show further that the "holdup problem" may be resolved via an appropriately designed dispute resolution sytem.

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Bibliographic Info

Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt49p1c23g.

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Date of creation: 01 Aug 1999
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Handle: RePEc:cdl:ucsdec:qt49p1c23g

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Keywords: third party intermediaries; dispute resolution;

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References

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  1. Summers, Lawrence H. & Dickens, William T. & Katz, Lawrence F. & Lang, Kevin, 1989. "Employee Crime and the Monitoring Puzzle," Scholarly Articles 3645199, Harvard University Department of Economics.
  2. den Haan, Wouter J. & Ramey, Garey & Watson, Joel, 2000. "Job destruction and the experiences of displaced workers," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 52(1), pages 87-128, June.
  3. Ramey, Garey & Watson, Joel, 2000. "Conditioning Institutions and Renegotiation," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt5zd216tw, Department of Economics, UC San Diego.
  4. Kandori, Michihiro, 1992. "Social Norms and Community Enforcement," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(1), pages 63-80, January.
  5. Steven Shavell, 1989. "Sharing of Information Prior to Settlement or Litigation," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 183-195, Summer.
  6. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
  7. Cooter, Robert D & Rubinfeld, Daniel L, 1989. "Economic Analysis of Legal Disputes and Their Resolution," Journal of Economic Literature, American Economic Association, vol. 27(3), pages 1067-97, September.
  8. Hardman Moore, John & Hart, Oliver, 1985. "Incomplete Contracts and Renegotiation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 60, C.E.P.R. Discussion Papers.
  9. Wouter J. den Haan & Garey Ramey & Joel Watson, 1999. "Contract-Theoretic Approaches to Wages and Displacement," NBER Working Papers 6972, National Bureau of Economic Research, Inc.
  10. Dilip Abreu & David Pearce & Ennio Stacchetti, 1989. "Renegotiation and Symmetry in Repeated Games," STICERD - Theoretical Economics Paper Series, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE 198, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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  12. Kennan, John, 1979. "Bonding and the enforcement of labor contracts," Economics Letters, Elsevier, vol. 3(1), pages 61-66.
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  14. Wouter den Haan & Garey Ramey & Joel Watson, 1999. "Liquidity Flows and Fragility of Business Enterprises," NBER Working Papers 7057, National Bureau of Economic Research, Inc.
  15. Farrell, Joseph & Maskin, Eric, 1987. "Renegotiation in Repeated Games," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt9wv3h5jb, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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  17. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(4), pages 659-79, November.
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  19. Aaron S. Edlin & Stefan Reichelstein, 1995. "Holdups, Standard Breach Remedies, and Optimal Investment," NBER Working Papers 5007, National Bureau of Economic Research, Inc.
  20. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers, C.E.P.R. Discussion Papers 70, C.E.P.R. Discussion Papers.
  21. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  22. Blume, A., 1991. "Intra-Play Communication in Repeated Games," Working Papers, University of Iowa, Department of Economics 91-29, University of Iowa, Department of Economics.
  23. McCutcheon, Barbara, 1997. "Do Meetings in Smoke-Filled Rooms Facilitate Collusion?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(2), pages 330-50, April.
  24. Douglas Bernheim, B. & Ray, Debraj, 1989. "Collective dynamic consistency in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 295-326, December.
  25. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-40, September.
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  27. Bull, Clive, 1987. "The Existence of Self-Enforcing Implicit Contracts," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(1), pages 147-59, February.
  28. Shavell, Steven, 1995. "Alternative Dispute Resolution: An Economic Analysis," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 24(1), pages 1-28, January.
  29. Bendor, Jonathan & Mookherjee, Dilip, 1990. "Norms, Third-Party Sanctions, and Cooperation," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 6(1), pages 33-63, Spring.
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Citations

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Cited by:
  1. Thorsten Koeppl, 2005. "Optimal Dynamic Risk Sharing when Enforcement is a Decision Variable," Working Papers, Queen's University, Department of Economics 1050, Queen's University, Department of Economics.
  2. Ramey, Garey & Watson, Joel, 2000. "Conditioning Institutions and Renegotiation," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt5zd216tw, Department of Economics, UC San Diego.
  3. Wouter J. den Haan & Garey Ramey & Joel Watson, 1999. "Liquidity Flows and Fragility of Business Enterprises," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1215, Cowles Foundation for Research in Economics, Yale University.
  4. Wouter J. den Haan & Garey Ramey & Joel Watson, 1999. "Job Destruction and the Experiences of Displaced Workers," NBER Working Papers 7218, National Bureau of Economic Research, Inc.
  5. Wouter J. den Haan & Garey Ramey & Joel Watson, 1999. "Contract-theoretic approaches to wages and displacement," Review, Federal Reserve Bank of St. Louis, issue May, pages 55-68.
  6. Klimenko, Mikhail & Ramey, Garey & Watson, Joel, 2001. "Recurrent Trade Agreements and the Value of External Enforcement," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt9xm2x5w7, Department of Economics, UC San Diego.
  7. Brishti Guha, 2005. "The Auditor and the Firm : A Simple Model of Corporate Cheating and Intermediation," Microeconomics Working Papers 22429, East Asian Bureau of Economic Research.
  8. Avinash Dixit, 2003. "On Modes of Economic Governance," Econometrica, Econometric Society, Econometric Society, vol. 71(2), pages 449-481, March.
  9. Watson, Joel, 2006. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt0wx67671, Department of Economics, UC San Diego.

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