Demand For Contract Enforcement in A Barter Environment
AbstractDo 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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Bibliographic InfoPaper provided by University of Haifa, Department of Economics in its series Working Papers with number WP2011/15.
Date of creation:
Date of revision: 06 Dec 2011
Publication status: published in http://www.springerlink.com
Contracting institutions; third party enforcement; demand for contracts; gains from trade;
Other versions of this item:
- Anna Rubinchik & Roberto Samaniego, 2013. "Demand for contract enforcement in a barter environment," Social Choice and Welfare, Springer, vol. 41(1), pages 73-97, June.
- H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
- H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
- K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
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