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The Role of Institutions in the Contractual Process

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Author Info
Benito Arruñada ()

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Abstract

Human beings increase their productivity by specializing their resources and exchanging their products. The organization of exchange is costly, however, because specialized activities need coordination and incentives have to be aligned. This work first describes how these exchanges are organized in an institutional environment. It then focuses on the dual effect of this environment- as with any other specialized resource, institutions may be used for expropriation purposes. They enjoy specialization advantages in safeguarding exchange but they also make possible new forms of opportunism, causing new costs of exchange. Three perverse tendencies are identified:In the legal field, there is a surplus of mandatory rules and, at the same time, a deficit in default rules. Second, courts’ activity is biased against the quasi-judicial role of the parties and the market. Third, Market enforcement is based on reputational assets that are badly exposed to opportunism.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/521.pdf
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Publisher Info
Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 521.

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Date of creation: Dec 2000
Date of revision: Apr 2003
Handle: RePEc:upf:upfgen:521

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Web page: http://www.econ.upf.edu/

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Related research
Keywords: Contracts; institutions; enforcement; safeguards;

Find related papers by JEL classification:
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
K00 - Law and Economics - - General - - - General (including Data Sources and Description)
K20 - Law and Economics - - Regulation and Business Law - - - General

References listed on IDEAS
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  1. Hermalin, Benjamin E & Katz, Michael L, 1993. "Judicial Modification of Contracts between Sophisticated Parties: A More Complete View of Incomplete Contracts and Their Breach," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 230-55, October.
  2. Masten, Scott E & Snyder, Edward A, 1993. "United States versus United Shoe Machinery Corporation: On the Merits," Journal of Law & Economics, University of Chicago Press, vol. 36(1), pages 33-70, April.
  3. Arrunada, Benito & Garicano, Luis & Vazquez, Luis, 2001. "Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution," Journal of Law, Economics and Organization, Oxford University Press, vol. 17(1), pages 257-84, April.
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  4. Benito Arruñada, 2000. "The Quasi-Judicial Role of Large Retailers: An Efficiency Hypothesis of Their Relation with Suppliers," Economics Working Papers 445, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  5. Masten, Scott E, 1988. "A Legal Basis for the Firm," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 181-98, Spring.
  6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
    Other versions:
  7. Gonzalez-Diaz, Manuel & Arrunada, Benito & Fernandez, Alberto, 2000. "Causes of subcontracting: evidence from panel data on construction firms," Journal of Economic Behavior & Organization, Elsevier, vol. 42(2), pages 167-187, June. [Downloadable!] (restricted)
    Other versions:
  8. North, Douglass C, 1991. "Institutions," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 97-112, Winter. [Downloadable!] (restricted)
  9. Klein, Benjamin & Murphy, Kevin M, 1988. "Vertical Restraints as Contract Enforcement Mechanisms," Journal of Law & Economics, University of Chicago Press, vol. 31(2), pages 265-97, October.
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This page was last updated on 2009-12-18.

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