Contract Law and Development
47 Pages Posted: 24 Jul 2013
Date Written: December 04, 2011
Abstract
We relate the design of contract law to the process of development. Contract law defines which private agreements are enforceable and which are not. Specifically, we consider an economy where agents face a hold-up problem. The resulting time-inconsistency problem leads to inefficiently low levels of effort and trading among agents. The solution to this problem requires a social contract which meets two conditions: (i) a judge responsible for the enforcement of the social contract and (ii) a set of non-enforceable private contracts. However, because this mechanism is costly, it is infeasible in the early stages of development. The appearance of enforcement institutions and regulation is delayed for the later stages. At this point of time, the hold-up problem is solved and this spurs economic growth further. Finally, the relationship between economic development and the evolution of contract law may be non-monotonic, which may explain why empirical studies fail to find a robust relationship between the two.
Keywords: contract law, development, enforcement institutions, hold-up, institutional agent, regulation, social contract
JEL Classification: D02, D82, D86, K12, O12, O31, O43
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
On the Evolution of the Firm Size Distribution: Facts and Theory
By Luis M. B. Cabral and José Mata
-
The Information Technology Revolution and the Stock Market: Evidence
By Bart Hobijn and Boyan Jovanovic
-
Aggregate Consequences of Limited Contract Enforceability
By Thomas F. Cooley, Ramon Marimon, ...
-
Aggregate Consequences of Limited Contract Enforceability
By Thomas F. Cooley, Ramon Marimon, ...
-
Aggregate Consequences of Limited Contract Enforceability
By Thomas F. Cooley, Vincenzo Quadrini, ...
-
The it Revolution and the Stock Market
By Jeremy Greenwood and Boyan Jovanovic
-
The it Revolution and the Stock Market
By Jeremy Greenwood and Boyan Jovanovic