Credit Constraints and Contract Enforcement

Powers Dennis ()
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Powers Dennis: University of St. Thomas

The B.E. Journal of Economic Analysis & Policy, 2006, vol. 6, issue 1, 27

Abstract: This paper demonstrates that credit constraints can lead to the inability to enforce contracts, thereby creating inefficiency. If time elapses between the contract period and the enforcement period, a credit constrained agent that uses the proceeds of trade to fund consumption faces a greater cost to enforce a contract than an unconstrained agent. This allows the other party to a contract to hold up the credit constrained agent, thereby creating inefficiency. This is demonstrated for two types of enforcement mechanisms; enforcement of a one-time trade via the courts, and enforcement of a long-term trade via a punishment strategy.

Keywords: contract enforcement; credit constraints; hold-up (search for similar items in EconPapers)
Date: 2006
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DOI: 10.2202/1538-0653.1156

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