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Courts and Relational Contracts
Simon Johnson Massachusetts Institute of Technology (MIT) - Entrepreneurship Center; National Bureau of Economic Research (NBER) John McMillan Stanford Graduate School of Business; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) Christopher M. Woodruff University of California, San Diego - Graduate School of International Relations and Pacific Studies (IRPS) MIT Sloan Working Paper No. 4338-02; Stanford Law and Economics Olin Working Paper No. 227 Abstract: Post-communist countries offer new evidence on the relative importance of courts and relationships in enforcing contracts. Belief in the effectiveness of courts has a significant positive effect on the level of trust shown in new relationships between firms and their customers. Well-functioning courts also encourage entrepreneurs to try out new suppliers. Courts are particularly important when specific investments are needed for a relationship to develop. While relationships can sustain existing interactions, workable courts help new interactions to start and develop.
JEL Classifications: D2, G0 Accepted Paper SeriesDate posted: February 12, 2002 ; Last revised: November 18, 2005Suggested CitationContact Information
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