Abstract

https://ssrn.com/abstract=2153113
 


 



Binding and Non-Binding Contracts: A Theoretical Appraisal


Elena D'Agostino


University of Messina

Maurizio Lisciandra


University of Messina - Department of Economics

August 25, 2014

MPRA - Munich Personal RePEc Archive, No. 53850

Abstract:     
In a fully self-enforcing environment, individuals can execute market transactions exclusively on the basis of trust. However, the presence of individuals showing self-regarding preferences causes serious impediments to the development and even the existence of market transactions. An enforcing legal system helps to control for the lack of trust existing in every modern society. The article provides a theoretical investigation accompanied by a numerical simulation of the impact of the introduction of a costly legal system that makes contracts binding. Therefore, it investigates the choice between legally binding contracts, which are costly to verify and enforce, and non-binding contracts, which simply rely on trust, in both one-shot and repeated interactions. We find that a legal system protecting property rights mainly produces benefits when effort is particularly valuable. In the other circumstances, the benefits are marginal. A subset of parameters also exists in which the legal system is detrimental. This is especially the case of standardized production. Finally, reputation unleashes its welfare-enhancing properties when effort is very valuable, otherwise the benefits are trivial.

Number of Pages in PDF File: 44

Keywords: contract choice; trust; contract enforceability; reputation; incomplete contracts

JEL Classification: C70; D02; D03; D86; K12


Open PDF in Browser Download This Paper

Date posted: September 27, 2012 ; Last revised: August 26, 2014

Suggested Citation

D'Agostino, Elena and Lisciandra, Maurizio, Binding and Non-Binding Contracts: A Theoretical Appraisal (August 25, 2014). MPRA - Munich Personal RePEc Archive, No. 53850. Available at SSRN: https://ssrn.com/abstract=2153113 or http://dx.doi.org/10.2139/ssrn.2153113

Contact Information

Elena D'Agostino
University of Messina ( email )
Piazza Pugliatti, 1
Messina, 98122
Italy
+39090719202 (Fax)
Maurizio Lisciandra (Contact Author)
University of Messina - Department of Economics ( email )
Piazza Pugliatti 1
Messina, 98122
Italy
+39 (0)906764620 (Phone)
HOME PAGE: http://https://sites.google.com/site/mlisciandra/
Feedback to SSRN


Paper statistics
Abstract Views: 433
Downloads: 39
Paper comments
No comments have been made on this paper