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The Debasement of Contracts and the Decline of Capital Markets

Michael C. Jensen

Social Science Electronic Publishing (SSEP), Inc.; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

THE WORLD CAPITAL SHORTAGE, Alan Heslop, ed., The Bobbs-Merrill Company Inc., Indianapolis, Indiana, 1977

The basic problem in the conflict between political democrary and free markets is the following: individuals, you and I, can make ourselves and our families better off in two major ways: (1) By expending time and other resources operating in the private sector to produce goods and services (be they art, automobiles, film, or education) which other people wish to buy. (2) By expending our resources in the political sector to get the government to change the rules of the game to reallocate wealth from others in society to ourselves. In the first of these activities we generally make other people better off and in the second, we make them worse off: We make them worse off for two reasons: (1) The direct effects of the wealth transfers, and (2) The indirect effects caused by the reduced incentive to produce—examples include income taxes, restrictions on production such as our former farm programs and licensing restrictions on entry into various professions or markets, and the attenuation of property rights caused by significantly increased uncertainty over what will be the future rules of the game.

Number of Pages in PDF File: 20

Keywords: Political Economy, politics, markets, free enterprise

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Date posted: November 30, 2003  

Suggested Citation

Jensen, Michael C., The Debasement of Contracts and the Decline of Capital Markets. THE WORLD CAPITAL SHORTAGE, Alan Heslop, ed., The Bobbs-Merrill Company Inc., Indianapolis, Indiana, 1977. Available at SSRN: http://ssrn.com/abstract=442701 or http://dx.doi.org/10.2139/ssrn.442701

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Michael C. Jensen (Contact Author)
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Harvard Business School ( email )
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National Bureau of Economic Research (NBER) ( email )
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European Corporate Governance Institute (ECGI) ( email )
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