Demand For Contract Enforcement in A Barter Environment

Anna Rubinchik () and Roberto Samaniego ()

No WP2011/15, Working Papers from University of Haifa, Department of Economics

Abstract: Do greater potential gains from trade enhance or erode contracting institutions? In an anonymous exchange environment traders can sign a contract, hence agreeing to interact with the assigned partner, or wait till the next match. Any contract can be endorsed (for a pay) by the enforcement agency, which then observes the interaction with a positive probability known to the traders and punishes the detected infractors. The agency enforces only those contracts that are paid for, and a trader freely chooses whether to endorse his contract. Demand for contract enforcement is the highest amount a proposer of a contract is ready to pay to the agency (in a stationary subgame perfect equilibrium). It may be strictly positive, as we show, even when contracts are broken. Surprisingly, larger potential gains from exchange may dampen the demand, but not always: they may boost the demand for 'high quality' agencies (that oversee the interactions frequently enough).

Keywords: Contracting institutions; third party enforcement; demand for contracts; gains from trade (search for similar items in EconPapers)
JEL-codes: H11 H41 K42 O17 (search for similar items in EconPapers)
Pages: 35
New Economics Papers: this item is included in nep-mic
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Journal Article: Demand for contract enforcement in a barter environment (2013)
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