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Endogenous Enforcement Institutions

  • Gani Aldashev

    ()

    (Center for Research in the Economics of Development, University of Namur and ECARES, ULB)

  • Giorgio Zanarone

    ()

    (Colegio Universitario de Estudios Financieros (CUNEF))

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 agent’s effort only if the ruler has limited expropriation power, so that the ruler’s 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 ruler’s expropriation power is sufficiently constrained.

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File URL: http://www.unamur.be/eco/economie/recherche/wpseries/wp/1403.pdf
File Function: First version, 2014
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Paper provided by University of Namur, Department of Economics in its series Working Papers with number 1403.

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Length: 41 pages
Date of creation: Jan 2014
Date of revision:
Handle: RePEc:nam:wpaper:1403
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  1. Scott E. Masten & Jens Pr�fer, 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.
  2. 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.
  3. Yang Yao & Monica Martinez Bravo & Gerard Padro i Miquel & Nancy Qia, 2012. "The Effects of Democratization on Public Goods and Redistribution: Evidence from China," Working Papers id:5011, eSocialSciences.
  4. 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.
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