Contract Enforcement, Social Efficiency, and Distribution: Some Experimental Evidence

Posted: 26 Jul 2007

See all articles by Steven Y. Wu

Steven Y. Wu

Ohio State University (OSU) - Department of Agricultural, Environmental & Development Economics; IZA Institute of Labor Economics

Brian E. Roe

Ohio State University (OSU) - Department of Agricultural, Environmental & Development Economics

Abstract

We use economic experiments to investigate how different contract enforcement regimes affect efficiency and the distribution of surplus in a vertically coordinated market with buyer concentration. We find that if a third party (e.g., government) perfectly enforces contracts, social efficiency is enhanced. We also find that when third-party enforcement is imperfect, social efficiency will not necessarily decrease because trading partners find ways to self enforce contracts. However, opportunistic behavior by some traders leaves some sellers (growers) with ex post profits below reservation levels. Finally, partial or one-sided third-party enforcement causes significant efficiency losses by constraining subjects' ability to use informal enforcement instruments.

Suggested Citation

Wu, Steven Yu-Ping and Roe, Brian E., Contract Enforcement, Social Efficiency, and Distribution: Some Experimental Evidence. American Journal of Agricultural Economics, Vol. 89, No. 2, pp. 243-258, May 2007. Available at SSRN: https://ssrn.com/abstract=1002751 or http://dx.doi.org/10.1111/j.1467-8276.2007.00996.x

Steven Yu-Ping Wu (Contact Author)

Ohio State University (OSU) - Department of Agricultural, Environmental & Development Economics ( email )

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614-247-7494 (Phone)

HOME PAGE: http://www-agecon.ag.ohio-state.edu/people/display.cfm?User_ID=wu412

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Brian E. Roe

Ohio State University (OSU) - Department of Agricultural, Environmental & Development Economics ( email )

2120 Fyffe Rd
Columbus, OH 43210-1067
United States
614-688-5777 (Phone)

HOME PAGE: http://https://aede.osu.edu/our-people/brian-e-roe

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