Fragile Markets: An Experiment on Judicial Independence

Journal of Economic Behavior and Organization, 2016,129, 142-56

Universitat Pompeu Fabra, Economics and Business Working Paper No. 1031

35 Pages Posted: 1 May 2007 Last revised: 13 Aug 2016

Benito Arruñada

Pompeu Fabra University

Marco Casari

Purdue University - Department of Economics

Date Written: May 27, 2016

Abstract

Contract enforcement does not only affect single transactions but the market as a whole. We compare alternative institutions that allocate enforcement rights to the different parties to a credit transaction: either lenders, borrowers, or judges. Despite all parties having incentives to enforce and transact, the market flourishes or disappears depending on the treatment: paying judges according to lenders’ votes maximizes total surplus and equity; and a similar result appears when judges are paid according to average earnings in society. In contrast, paying judges according to borrowers’ votes generates the poorest and most unequal society. These results suggest that parties playing the role of borrowers understand poorly the systemic consequences of their decisions, triggering under-enforcement, and hence wasting profitable trade opportunities.

Keywords: Impersonal exchange, third-party enforcement, experiments, steps of reasoning, judges' incentives, repeated interaction

JEL Classification: C91, C92, D63, D72, K40

Suggested Citation

Arruñada, Benito and Casari, Marco, Fragile Markets: An Experiment on Judicial Independence (May 27, 2016). Journal of Economic Behavior and Organization, 2016,129, 142-56; Universitat Pompeu Fabra, Economics and Business Working Paper No. 1031. Available at SSRN: https://ssrn.com/abstract=983557 or http://dx.doi.org/10.2139/ssrn.983557

Benito Arruñada (Contact Author)

Pompeu Fabra University ( email )

Ramon Trias Fargas 25-27
Department of Economics and Business
Barcelona, 08005
Spain
+34 93 542 25 72 (Phone)
+34 93 542 17 46 (Fax)

HOME PAGE: http://www.econ.upf.edu/~arrunada

Marco Casari

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States
765-494-3598 (Phone)
765-496-1567 (Fax)

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