Trade Implies Law: The Power of the Weak

32 Pages Posted: 21 May 2000 Last revised: 17 Jan 2022

See all articles by James E. Anderson

James E. Anderson

Boston College - Department of Economics; National Bureau of Economic Research (NBER)

Leslie Young

The Chinese University of Hong Kong (CUHK) - Department of Finance

Date Written: May 2000

Abstract

Without the rule of law, traders who incur trading costs can be held up by counter-parties who are stronger in anarchic bargaining. The favourable terms which the latter extract can overcrowd that side of the market, dissipating the benefits. We establish plausible necessary and sufficient conditions for a move from anarchy toward the rule of law to benefit all traders. The rule of law might be delayed, not only by the difficulties of setting up legal institutions, but by monopolistic traders that have meantime emerged to address the inefficiencies of anarchic trade. These monopolistic traders must also guarantee atomistic traders against holdup.

Suggested Citation

Anderson, James E. and Young, Leslie S.F., Trade Implies Law: The Power of the Weak (May 2000). NBER Working Paper No. w7702, Available at SSRN: https://ssrn.com/abstract=228993

James E. Anderson (Contact Author)

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3691 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Leslie S.F. Young

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong
852 2609 7421 (Phone)

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