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Trade and Contract Enforcement

Author

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  • Anderson James E

    () (Boston College)

  • Young Leslie

    () (Chinese University of Hong Kong)

Abstract

We model imperfect contract enforcement when the victims of default resort to spot trading because the act of repudiation reveals a favorable outside option. We show that enforcement imperfection is essentially distinct from the contract incompleteness analyzed in the previous literature. Improved contract execution benefits traders on the excess side of the spot market by attracting potential counter-parties, but harms them by impeding their exit from unfavorable contracts. Multiple optima are possible, with anarchy a local optimum, perfect enforcement a local minimum and imperfect enforcement a global optimum. LDCs exhibit parameter combinations such that imperfect enforcement may often be optimal.

Suggested Citation

  • Anderson James E & Young Leslie, 2006. "Trade and Contract Enforcement," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-36, November.
  • Handle: RePEc:bpj:bejeap:v:contributions.5:y:2006:i:1:n:30
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fatica, Serena, 2009. "Taxation and the quality of institutions: asymmetric effects on FDI," MPRA Paper 24179, University Library of Munich, Germany, revised Jun 2010.
    2. Iwanow, Tomasz & Kirkpatrick, Colin, 2009. "Trade Facilitation and Manufactured Exports: Is Africa Different?," World Development, Elsevier, vol. 37(6), pages 1039-1050, June.
    3. Luis Araujo & Emanuel Ornelas, 2005. "Trust-Based Trade," IBMEC RJ Economics Discussion Papers 2005-08, Economics Research Group, IBMEC Business School - Rio de Janeiro.
    4. Xeni Dassiou & Jon Stern, 2009. "Infrastructure Contracts: Trust and Institutional Updating," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 35(1), pages 171-216, September.
    5. James Anderson, 2009. "Does trade foster contract enforcement?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 41(1), pages 105-130, October.
    6. Cassar, Alessandra & Friedman, Daniel & Schneider, Patricia Higino, 2009. "Cheating in markets: A laboratory experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 240-259, October.
    7. Dixit, Avinash, 2015. "Governance, trade, and investment," Research in Economics, Elsevier, vol. 69(2), pages 166-179.
    8. Zhang, Jianhong & Zhou, Chaohong & Ebbers, Haico, 2011. "Completion of Chinese overseas acquisitions: Institutional perspectives and evidence," International Business Review, Elsevier, vol. 20(2), pages 226-238, April.
    9. James E. Anderson & Douglas Marcouiller, 2002. "Insecurity And The Pattern Of Trade: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 342-352, May.
    10. Yu, Shu & Beugelsdijk, Sjoerd & de Haan, Jakob, 2015. "Trade, trust and the rule of law," European Journal of Political Economy, Elsevier, vol. 37(C), pages 102-115.
    11. James E. Anderson & Douglas Marcouiller, 1999. "Trade, Insecurity, and Home Bias: An Empirical Investigation," NBER Working Papers 7000, National Bureau of Economic Research, Inc.
    12. Pierre-Guillaume Méon & Khalid Sekkat, 2008. "Institutional Quality And Trade: Which Institutions? Which Trade?," Economic Inquiry, Western Economic Association International, vol. 46(2), pages 227-240, April.
    13. James E. Anderson, 1999. "Why Do Nations Trade (So Little)?," Boston College Working Papers in Economics 428, Boston College Department of Economics.
    14. José De Sousa & Anne-Célia Disdier, 2006. "La qualité du cadre juridique constitue-t-elle une barrière au commerce ?. Application aux économies en transition," Revue économique, Presses de Sciences-Po, vol. 57(1), pages 135-149.

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