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Contract Law and Development

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  • Aristotelis Boukouras

    (Georg-August-University Göttingen)

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    Abstract

    We relate the design of contract law to the process of development. In this paper, contract law de fines which private agreements are enforceable (i.e. are binding and enforced by courts) and which are not. Speci cally, we consider an economy where agents face a hold-up problem (moral hazard in teams). The resulting time-inconsistency problem leads to inefficiently low levels of eff ort and trading among agents. The solution to this problem requires a social contract which meets two conditions: (i) an economywide delegate (judge) responsible for the enforcement of the social contract and (ii) a set of non-enforceable private contracts (regulation). However, because this mechanism is costly, its effectiveness depends on the aggregate production of the economy. To capture the interaction between contract enforcement and development, we introduce a multiperiod economy and show that, in the early stages of development, the mechanism is infeasible. The appearance of enforcement institutions and regulation is delayed for the later stages. At this point of time, the hold-up problem is solved and this spurs economic growth further. Finally, the relationship between economic development and the evolution of contract law may be non-monotonic, which may explain why empirical studies fail to find a robust relationship between the two.

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    Bibliographic Info

    Paper provided by Courant Research Centre PEG in its series Courant Research Centre: Poverty, Equity and Growth - Discussion Papers with number 61.

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    Date of creation: 20 Jan 2011
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    Handle: RePEc:got:gotcrc:061

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    Related research

    Keywords: contract law; development; enforcement institutions; hold-up; institutional agent; regulation; social contract;

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    1. Revisiting the Croke Park Agreement on Public Sector Pay
      by brianmlucey in Brian M. Lucey on 2012-07-05 12:05:40

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