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Imperfect Contract Enforcement

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  • James E. Anderson
  • Leslie Young

Abstract

We model imperfect contract enforcement when repudiators and their victims default to spot trading. The interaction between the contract and spot markets under improved enforcement can exacerbate repudiation and reduce contract execution, harming all traders. Improved contract execution benefits traders on the excess side of the spot market by attracting potential counter-parties, but harms them by impeding their exit from contracts found to be unfavorable. Multiple equilibria and multiple optima are possible, with anarchy a local optimum, perfect enforcement a local minimum and imperfect enforcement a global optimum. LDCs exhibit parameter combinations such that imperfect enforcement is optimal from their side of international markets. The model thus rationalizes the internationally varying patterns of imperfect enforceability observable in survey data.

Suggested Citation

  • James E. Anderson & Leslie Young, 2002. "Imperfect Contract Enforcement," NBER Working Papers 8847, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:8847
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Babetskaia-Kukharchuk, Oxana & Maurel, Mathilde, 2004. "Russia's accession to the WTO: the potential for trade increase," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 680-699, December.
    2. Anderson James E & Young Leslie, 2006. "Trade and Contract Enforcement," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-36.
    3. Marianna Belloc, 2006. "Institutions and International Trade: A Reconsideration of Comparative Advantage," Journal of Economic Surveys, Wiley Blackwell, vol. 20(1), pages 3-26, February.
    4. Evelina Mengova, 2014. "Quality of Institutions and Outsourcing," International Economic Journal, Taylor & Francis Journals, vol. 28(4), pages 639-659, December.
    5. Anderson, James E. & Bandiera, Oriana, 2006. "Traders, cops and robbers," Journal of International Economics, Elsevier, vol. 70(1), pages 197-215, September.
    6. Swinnen Johan & Vandeplas Anneleen, 2012. "Rich Consumers and Poor Producers: Quality and Rent Distribution in Global Value Chains," Journal of Globalization and Development, De Gruyter, vol. 2(2), pages 1-30, January.

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    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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