Does trade foster contract enforcement?
The paper analyses the comparative statistics of a model of the demand for contract enforcement by traders. Building on previous work, the paper models imperfect contract enforcement as a parametric probability that a ``court'' will enforce a contract in default, and develops a theory of endogenous enforcement. The comparative statistics of enforcement are examined first in a single market and then in two independent markets in which competing groups of traders choose enforcement strategies. The results of the analysis indicate that contract enforcement is probabilistic, but the probability depends on rules and processes. A stimulus to trade may induce traders to alter rules or processes to improve enforcement. Such positive knock-on effects occur when the elasticity of supply of traders is sufficiently high, while negative knock-on effects are possible when the elasticity is low. The model provides a useful structure of endogeneous enforcement that gives promise of explaining patterns of institutional development.
scientific article; zbMATH DE number 5598856