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Contract Enforcement: A Political Economy Model of Legal Development

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  • Fali Huang

Abstract

In an effort to understand why the relative usage of relational and legal contracts differs across societies, this article builds a political economy model of legal development where legal quality of contract enforcement is a costly public good. It finds that legal investment tends to be too small under elite rule but too large under majority rule in comparison with the socially optimal level. Furthermore, elite rule, low legal quality, and high-income inequality may form a self-perpetuating circle that hinders economic development. In contrast to the conventional view, this article suggests that the often-observed association between heavy reliance on relational contracts and under development is most likely caused by the presence of elite rule rather than by a more collective-oriented culture per se because it is optimal for societies better at using relational contracts to start legal investment relatively late and to have lower quality of legal enforcement. The Author 2012. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

Suggested Citation

  • Fali Huang, 2013. "Contract Enforcement: A Political Economy Model of Legal Development," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 29(4), pages 835-870, August.
    • Handle: RePEc:oup:jleorg:v:29:y:2013:i:4:p:835-870
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    File URL: http://hdl.handle.net/10.1093/jleo/ews004
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    Cited by:

    1. Takuma Kunieda & Keisuke Okada & Akihisa Shibata, 2017. "A Simple Model of Contract Enforcement Institutions," Pacific Economic Review, Wiley Blackwell, vol. 22(3), pages 410-434, August.
    2. Haiwen Zhou, 2024. "National integration and institution building," Pacific Economic Review, Wiley Blackwell, vol. 29(1), pages 26-43, February.

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