Contract Law and Development

Aristotelis Boukouras
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Aristotelis Boukouras: Georg-August-University Göttingen

No 61, Courant Research Centre: Poverty, Equity and Growth - Discussion Papers from Courant Research Centre PEG

Abstract: We relate the design of contract law to the process of development. In this paper, contract law de fines which private agreements are enforceable (i.e. are binding and enforced by courts) and which are not. Speci cally, we consider an economy where agents face a hold-up problem (moral hazard in teams). The resulting time-inconsistency problem leads to inefficiently low levels of eff ort and trading among agents. The solution to this problem requires a social contract which meets two conditions: (i) an economywide delegate (judge) responsible for the enforcement of the social contract and (ii) a set of non-enforceable private contracts (regulation). However, because this mechanism is costly, its effectiveness depends on the aggregate production of the economy. To capture the interaction between contract enforcement and development, we introduce a multiperiod economy and show that, in the early stages of development, the mechanism is infeasible. 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 (search for similar items in EconPapers)
JEL-codes: D02 D82 D86 K12 O12 O31 O43 (search for similar items in EconPapers)
Date: 2011-01-20
New Economics Papers: this item is included in nep-cta, nep-dev and nep-law
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Persistent link: https://EconPapers.repec.org/RePEc:got:gotcrc:061

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