IDEAS home Printed from https://ideas.repec.org/p/got/gotcrc/061.html
   My bibliography  Save this paper

Contract Law and Development

Author

Listed:
  • Aristotelis Boukouras

    (Georg-August-University Göttingen)

Abstract

We relate the design of contract law to the process of development. In this paper, contract law de fines which private agreements are enforceable (i.e. are binding and enforced by courts) and which are not. Speci cally, we consider an economy where agents face a hold-up problem (moral hazard in teams). The resulting time-inconsistency problem leads to inefficiently low levels of eff ort and trading among agents. The solution to this problem requires a social contract which meets two conditions: (i) an economywide delegate (judge) responsible for the enforcement of the social contract and (ii) a set of non-enforceable private contracts (regulation). However, because this mechanism is costly, its effectiveness depends on the aggregate production of the economy. To capture the interaction between contract enforcement and development, we introduce a multiperiod economy and show that, in the early stages of development, the mechanism is infeasible. The appearance of enforcement institutions and regulation is delayed for the later stages. At this point of time, the hold-up problem is solved and this spurs economic growth further. Finally, the relationship between economic development and the evolution of contract law may be non-monotonic, which may explain why empirical studies fail to find a robust relationship between the two.

Suggested Citation

  • Aristotelis Boukouras, 2011. "Contract Law and Development," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 61, Courant Research Centre PEG.
  • Handle: RePEc:got:gotcrc:061
    as

    Download full text from publisher

    File URL: http://www2.vwl.wiso.uni-goettingen.de/courant-papers/CRC-PEG_DP_61.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Pan, Chenjun & Kinsey, Jean D., 2002. "The Supply Chain Of Pork: U.S. And China," Working Papers 14300, University of Minnesota, The Food Industry Center.
    2. Gow, Hamish R. & Streeter, Deborah H. & Swinnen, Johan F. M., 2000. "How private contract enforcement mechanisms can succeed where public institutions fail: the case of Juhocukor a.s," Agricultural Economics, Blackwell, vol. 23(3), pages 253-265, September.
    3. Gow, Hamish R & Swinnen, Johan F M, 1998. "Up- and Downstream Restructuring, Foreign Direct Investment, and Hold-Up Problems in Agricultural Transition," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 25(3), pages 331-350.
    4. Chow, Gregory C, 1997. "Challenges of China's Economic System for Economic Theory," American Economic Review, American Economic Association, vol. 87(2), pages 321-327, May.
    5. Brent Hueth & Ethan Ligon, 2002. "Estimation of an efficient tomato contract," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, pages 237-253.
    6. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    7. Newey, Whitney K., 1987. "Efficient estimation of limited dependent variable models with endogenous explanatory variables," Journal of Econometrics, Elsevier, vol. 36(3), pages 231-250, November.
    8. Hamish R. Gow & Johan F. M. Swinnen, 2001. "Private Enforcement Capital and Contract Enforcement in Transition Economies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 686-690.
    9. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-685, May.
    10. MacDonald, James M. & Korb, Penelope J., 2006. "Agricultural Contracting Update: Contracts in 2003," Economic Information Bulletin 33903, United States Department of Agriculture, Economic Research Service.
    11. Amemiya, Takeshi, 1978. "The Estimation of a Simultaneous Equation Generalized Probit Model," Econometrica, Econometric Society, vol. 46(5), pages 1193-1205, September.
    12. Klein, Benjamin, 1996. "Why Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships," Economic Inquiry, Western Economic Association International, vol. 34(3), pages 444-463, July.
    13. Key, Nigel & Runsten, David, 1999. "Contract Farming, Smallholders, and Rural Development in Latin America: The Organization of Agroprocessing Firms and the Scale of Outgrower Production," World Development, Elsevier, vol. 27(2), pages 381-401, February.
    14. Melkonian, Tigran A., 2004. "Quality Measurement and Contract Design: Evidence from the North American Sugar Beet Industry," Staff General Research Papers Archive 12350, Iowa State University, Department of Economics.
    15. Beckmann, Volker & Boger, Silke, 2004. "Courts and contract enforcement in transition agriculture: theory and evidence from Poland," Agricultural Economics, Blackwell, vol. 31(2-3), pages 251-263, December.
    16. Knoeber, Charles R, 1989. "A Real Game of Chicken: Contracts, Tournaments, and the Production of Broilers," Journal of Law, Economics, and Organization, Oxford University Press, vol. 5(2), pages 271-292, Fall.
    17. Knoeber, Charles R & Thurman, Walter N, 1994. "Testing the Theory of Tournaments: An Empirical Analysis of Broiler Production," Journal of Labor Economics, University of Chicago Press, vol. 12(2), pages 155-179, April.
    18. Rivers, Douglas & Vuong, Quang H., 1988. "Limited information estimators and exogeneity tests for simultaneous probit models," Journal of Econometrics, Elsevier, vol. 39(3), pages 347-366, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Revisiting the Croke Park Agreement on Public Sector Pay
      by brianmlucey in Brian M. Lucey on 2012-07-05 17:05:40

    More about this item

    Keywords

    contract law; development; enforcement institutions; hold-up; institutional agent; regulation; social contract;

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:got:gotcrc:061. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dominik Noe). General contact details of provider: http://www.uni-goettingen.de/en/82144.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.