Contract Enforcement, Social Efficiency, and Distribution: Some Experimental Evidence

16 Pages Posted: 24 Apr 2020

See all articles by Steven Y. Wu

Steven Y. Wu

Purdue University - College of Agriculture; IZA Institute of Labor Economics

Brian Roe

affiliation not provided to SSRN

Date Written: May 2007

Abstract

We use economic experiments to investigate how different contract enforcement regimes affect efficiency and the distribution of surplus in a vertically coordinated market with buyer concentration. We find that if a third party (e.g., government) perfectly enforces contracts, social efficiency is enhanced. We also find that when third‐party enforcement is imperfect, social efficiency will not necessarily decrease because trading partners find ways to self enforce contracts. However, opportunistic behavior by some traders leaves some sellers (growers) with ex post profits below reservation levels. Finally, partial or one‐sided third‐party enforcement causes significant efficiency losses by constraining subjects' ability to use informal enforcement instruments.

Keywords: agricultural contracts, contract enforcement, contract regulation, incomplete contracts, relational contracts

Suggested Citation

Wu, Steven Y. and Roe, Brian, Contract Enforcement, Social Efficiency, and Distribution: Some Experimental Evidence (May 2007). American Journal of Agricultural Economics, Vol. 89, Issue 2, pp. 243-258, 2007, Available at SSRN: https://ssrn.com/abstract=3583739 or http://dx.doi.org/10.1111/j.1467-8276.2007.00996.x

Steven Y. Wu (Contact Author)

Purdue University - College of Agriculture ( email )

United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Brian Roe

affiliation not provided to SSRN

No Address Available

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