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How enforcement institutions affect markets

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  • Benito Arruñada
  • Marco Casari

Abstract

In an experiment we study market outcomes under alternative incentive structures for thirdparty enforcers. Our transactions resemble an anonymous credit market where lenders can give loans and borrowers can repay them. When borrowers default, judges are free to enforce repayment but are themselves paid differently in each of three treatments. First, paying judges according to lenders’ votes maximizes surplus and the equality of earnings. In contrast, paying judges according to borrowers’ votes triggers insufficient enforcement, destroying the market and producing the lowest surplus and the most unequal distribution of earnings. Lastly, judges paid the average earnings of borrowers and lenders achieve results close to those based on lender voting. We employ a steps-of-reasoning argument to interpret the performances of different institutions. When voting and enforcement rights are allocated to different classes of actors, the difficulty of their task changes, and arguably as a consequence they focus on high or low surplus equilibria.

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Bibliographic Info

Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1200.

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Length: 48 pages
Date of creation: Apr 2007
Date of revision:
Handle: RePEc:pur:prukra:1200

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Keywords: impersonal exchange ; third-party enforcement ; experiments ; steps of reasoning ; judges’ incentives ; repeated interaction;

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Cited by:
  1. Benito Arruñada & Marco Casari & Francesca Pancotto, 2012. "Are Self-regarding Subjects More Rational?," Working Papers 611, Barcelona Graduate School of Economics.
  2. Anna Rita Germani, 2007. "The Environmental Enforcement in the Civil and the Common Law Systems. A Case on the Economic Effects of Legal Institutions," Quaderni DSEMS 22-2007, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.
  3. Germani, Anna Rita & Morone, Andrea & Morone, Piergiuseppe, 2009. "Investigating Discretionary Environmental Enforcement: a pilot experiment," MPRA Paper 12735, University Library of Munich, Germany.
  4. B. Arruñada & M. Casari & F. Pancotto, 2012. "Are Self-regarding Subjects More Strategic?," Working Papers wp805, Dipartimento Scienze Economiche, Universita' di Bologna.

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