The Role of Institutions in the Contractual Process

Abstract:     
This work first describes how exchange is organized in an institutional environment with laws, courts and markets focusing on the dual effect of this environment. Institutions enjoy specialization advantages in safeguarding exchange but they also make possible new forms of opportunism, causing new costs of exchange. Institutions are therefore subject to the standard trade-off of specialization advantages and exchange costs. Three perverse tendencies are identified and discussed: In the legal field, there is a surplus of mandatory rules and, at the same time, a deficit in default rules. Second, courts' activity is biased against second-party enforcement, the quasi-judicial role of the parties and the market. Third, market enforcement is based on reputational assets that are badly exposed to opportunism, often of judicial origin.

Note: This is a description of the article and not the actual abstract.

Keywords: contracts, institutions, enforcement, safeguards

JEL Classification: L14, K00, K20

Accepted Paper Series