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

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