Contract Enforcement and Government Incentives
Conference Paper No. F31, The 4th Annual International Conference on Transition Economics
Posted: 10 Jun 2000
In the absence of constraints on the state based on rule of law, there is a dilemma facing the state: when the state has the incentives to enforce contracts, it also has the incentives for predation. We demonstrate that information available to the state can determine the outcome in such a tradeoff. A "full information" regime permits the state to engage in unlimited predation which chokes off private incentives. A "no information" regime does not provides the state with incentives for contract enforcement resulting in opportunistic behavior from private investors. Under a "gray information" regime, the state can limit its predation and also has incentives to enforce some contracts, leading to better private incentives and limited private opportunistic behavior.
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