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Demand For Contract Enforcement in A Barter Environment

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Do greater potential gains from trade enhance or erode contracting institutions? In an anonymous exchange environment traders can sign a contract, hence agreeing to interact with the assigned partner, or wait till the next match. Any contract can be endorsed (for a pay) by the enforcement agency, which then observes the interaction with a positive probability known to the traders and punishes the detected infractors. The agency enforces only those contracts that are paid for, and a trader freely chooses whether to endorse his contract. Demand for contract enforcement is the highest amount a proposer of a contract is ready to pay to the agency (in a stationary subgame perfect equilibrium). It may be strictly positive, as we show, even when contracts are broken. Surprisingly, larger potential gains from exchange may dampen the demand, but not always: they may boost the demand for 'high quality' agencies (that oversee the interactions frequently enough).

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Paper provided by University of Haifa, Department of Economics in its series Working Papers with number WP2011/15.

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Length: 35
Date of creation:
Date of revision: 06 Dec 2011
Publication status: published in http://www.springerlink.com
Handle: RePEc:haf:huedwp:wp201115

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Keywords: Contracting institutions; third party enforcement; demand for contracts; gains from trade;

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