Endogenous Enforcement Institutions
We model the State as a self-enforcing agreement over the use of force. A principal contracts with an agent, and a powerful ruler enforces their contracts through a mix of monetary fines and coercion. If the ruler fails to enforce, or if he uses his power to expropriate, all parties revert to low production forever after. Our model has two important implications. First, a better coercion technology moves the optimal system from private ordering, where contracts are enforced by the threat of termination, to the State, where they are enforced by the threat of coercion. This is consistent with the historical correlation between improvements in coercion and the transition from the Law Merchant enforcement system to the State. Second, contract enforcement and non-expropriation are complementary inputs in the State, in the sense that improvements in the enforcement technology increase the agents effort only if the ruler has limited expropriation power, so that the rulers incentive constraint on contractual enforcement is binding. This result relates to the Acemoglu and Johnson (2005) finding that constraints on rulers have affected the development of nations more than improvements in contractual enforcement. Using their data we find that, consistent with our model, contractual enforcement does affect development, but only when the rulers expropriation power is sufficiently constrained.
|Date of creation:||Jan 2014|
|Date of revision:|
|Contact details of provider:|| Postal: Rempart de la Vierge 8, B-5000 Namur|
Web page: http://www.fundp.ac.be/en/eco
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Agnès Bénassy-Quéré & Maylis Coupet & Thierry Mayer, 2007.
"Institutional Determinants of Foreign Direct Investment,"
Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers)
- Agnès Bénassy-Quéré & Maylis Coupet & Thierry Mayer, 2007. "Institutional Determinants of Foreign Direct Investment," The World Economy, Wiley Blackwell, vol. 30(5), pages 764-782, 05.
- Agnès Bénassy-Quéré & Maylis Coupet & Thierry Mayer, 2005. "Institutional Determinants of Foreign Direct Investment," Working Papers 2005-05, CEPII research center.
- Avinash Dixit, 2003. "Trade Expansion and Contract Enforcement," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1293-1317, December.
- Bernstein, Lisa, 1992. "Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry," The Journal of Legal Studies, University of Chicago Press, vol. 21(1), pages 115-57, January.
- Michael Kosfeld & Devesh Rustagi, 2015. "Leader Punishment and Cooperation in Groups: Experimental Field Evidence from Commons Management in Ethiopia," American Economic Review, American Economic Association, vol. 105(2), pages 747-83, February.
- Yang Yao & Monica Martinez Bravo & Gerard Padro i Miquel & Nancy Qia, 2012.
"The Effects of Democratization on Public Goods and Redistribution: Evidence from China,"
- Martinez-Bravo, Monica & Padro, Gerard & Qian, Nancy & Yao, Yang, 2012. "The Effects of Democratization on Public Goods and Redistribution: Evidence from China," CEPR Discussion Papers 8975, C.E.P.R. Discussion Papers.
- David K Levine & Salvatore Modica, 2014. "Peer Discipline and Incentives Within Groups," Levine's Working Paper Archive 786969000000000973, David K. Levine.
- Masten, S.E. & Prüfer, J., 2011.
"On the Evolution of Collective Enforcement Institutions : Communities and Courts,"
2011-074, Tilburg University, Center for Economic Research.
- Scott E. Masten & Jens Prüfer, 2014. "On the Evolution of Collective Enforcement Institutions: Communities and Courts," The Journal of Legal Studies, University of Chicago Press, vol. 43(2), pages 359 - 400.
- Leonid Hurwicz, 2008.
"But Who Will Guard the Guardians?,"
American Economic Review,
American Economic Association, vol. 98(3), pages 577-85, June.
- W. Bentley MacLeod, 2007. "Reputations, Relationships, and Contract Enforcement," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 595-628, September.
- Paul R. Milgrom & Douglass C. North & Barry R. Weingast, 1990. "The Role Of Institutions In The Revival Of Trade: The Law Merchant, Private Judges, And The Champagne Fairs," Economics and Politics, Wiley Blackwell, vol. 2(1), pages 1-23, 03.
- Daron Acemoglu, 2002.
"Why Not a Political Coase Theorem? Social Conflict, Commitment and Politics,"
NBER Working Papers
9377, National Bureau of Economic Research, Inc.
- Acemoglu, Daron, 2003. "Why not a political Coase theorem? Social conflict, commitment, and politics," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 620-652, December.
- Raphael A. Auer, 2013.
"Geography, institutions, and the making of comparative development,"
Journal of Economic Growth,
Springer, vol. 18(2), pages 179-215, June.
- Raphael A. Auer, 2012. "Geography, Institutions, and the Making of Comparative Development," CESifo Working Paper Series 3874, CESifo Group Munich.
- David Y. Albouy, 2012. "The Colonial Origins of Comparative Development: An Empirical Investigation: Comment," American Economic Review, American Economic Association, vol. 102(6), pages 3059-76, October.
- Bendor, Jonathan & Mookherjee, Dilip, 1990. "Norms, Third-Party Sanctions, and Cooperation," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(1), pages 33-63, Spring.
- Baker, George & Gibbons, Robert & Murphy, Kevin J, 1999. "Informal Authority in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 56-73, April.
- Stefania Ottone & Ferruccio Ponzano & Luca Zarri, 2015. "Power to the People? An Experimental Analysis of Bottom-Up Accountability of Third-Party Institutions," Journal of Law, Economics and Organization, Oxford University Press, vol. 31(2), pages 347-382.
- Weingast, Barry R, 1995. "The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development," Journal of Law, Economics and Organization, Oxford University Press, vol. 11(1), pages 1-31, April.
- Avinash Dixit, 2011. "International Trade, Foreign Direct Investment, and Security," Annual Review of Economics, Annual Reviews, vol. 3(1), pages 191-213, 09.
- Dincecco, Mark & Federico, Giovanni & Vindigni, Andrea, 2011. "Warfare, Taxation, and Political Change: Evidence from the Italian Risorgimento," The Journal of Economic History, Cambridge University Press, vol. 71(04), pages 887-914, December.
- Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September.
- Chenggang Xu, 2011. "The Fundamental Institutions of China's Reforms and Development," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 1076-1151, December.
- Wooldridge, Jeffrey M., 2003. "Further results on instrumental variables estimation of average treatment effects in the correlated random coefficient model," Economics Letters, Elsevier, vol. 79(2), pages 185-191, May.
When requesting a correction, please mention this item's handle: RePEc:nam:wpaper:1403. 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: (Marie-Helene Mathieu)
If references are entirely missing, you can add them using this form.