Imperfect Contract Enforcement

51 Pages Posted: 23 Mar 2002 Last revised: 5 Sep 2021

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: March 2002

Abstract

We model imperfect contract enforcement when repudiators and their victims default to spot trading. The interaction between the contract and spot markets under improved enforcement can exacerbate repudiation and reduce contract execution, harming all traders. Improved contract execution benefits traders on the excess side of the spot market by attracting potential counter-parties, but harms them by impeding their exit from contracts found to be unfavorable. Multiple equilibria and multiple optima are possible, with anarchy a local optimum, perfect enforcement a local minimum and imperfect enforcement a global optimum. LDCs exhibit parameter combinations such that imperfect enforcement is optimal from their side of international markets. The model thus rationalizes the internationally varying patterns of imperfect enforceability observable in survey data.

Suggested Citation

Anderson, James E. and Young, Leslie S.F., Imperfect Contract Enforcement (March 2002). NBER Working Paper No. w8847, Available at SSRN: https://ssrn.com/abstract=305073

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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