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One-Sided Enforcement in a Model with Persistent Adverse Selection

Author

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  • David Martimort

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique)

  • Aggey Simons

    (Unknown)

Abstract

We study a repeated buyer-seller relationship with persistent adverse selection and one-sided enforcement, where a prepaid seller can breach by taking the money and running. The optimal stationary contract depends on enforcement strength and the discount factor. Three regimes arise. With a strong legal system, penalties deter breach and the optimal static contract can be repeated. With a weak system, the penalty caps transfers, forcing bunching among efficient (low-cost) types. With a very weak system, compliance relies on relational rents, causing large downward distortions. Strengthening public enforcement relaxes both incentive and enforcement constraints, reducing allocative inefficiency.

Suggested Citation

  • David Martimort & Aggey Simons, 2026. "One-Sided Enforcement in a Model with Persistent Adverse Selection," Working Papers hal-05488385, HAL.
    • Handle: RePEc:hal:wpaper:hal-05488385
    Note: View the original document on HAL open archive server: https://hal.science/hal-05488385v1
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