Efficient contract enforcement

Thorsten Koeppl, Cyril Monnet and Erwan Quintin ()

Economic Theory, 2014, vol. 55, issue 1, 183 pages

Abstract: We study how the efficient choice of contract enforcement interacts with the efficient allocation of capital in a simple production economy. Contract enforcement makes trade possible but requires an aggregate investment of capital that is no longer available for production. In such an economy, more dispersion in ex-ante marginal products makes it optimal to invest more resources in enforcement. Furthermore, implementing the optimal allocation requires a specific distribution of the cost for enforcement across agents that is not monotonic and results in a redistribution of endowments. At the efficient solution, agents at the bottom of the endowment distribution benefit the most from investment in enforcement and these investments lead to a reduction in consumption and income inequality. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Enforcement; Institutions; Inequality; Human and physical capital; D31; D52; O11; O43 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (10)

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DOI: 10.1007/s00199-013-0745-3

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