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How enforcement institutions affect markets

Benito Arru Ada and Marco Casari
Authors registered in the RePEc Author Service: Benito Arruñada

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: In an experiment we study market outcomes under alternative incentive structures for thirdparty enforcers. Our transactions resemble an anonymous credit market where lenders can give loans and borrowers can repay them. When borrowers default, judges are free to enforce repayment but are themselves paid differently in each of three treatments. First, paying judges according to lenders votes maximizes surplus and the equality of earnings. In contrast, paying judges according to borrowers votes triggers insufficient enforcement, destroying the market and producing the lowest surplus and the most unequal distribution of earnings. Lastly, judges paid the average earnings of borrowers and lenders achieve results close to those based on lender voting. We employ a steps-of-reasoning argument to interpret the performances of different institutions. When voting and enforcement rights are allocated to different classes of actors, the difficulty of their task changes, and arguably as a consequence they focus on high or low surplus equilibria.

Keywords: impersonal exchange; third-party enforcement; experiments; steps of reasoning; judges incentives; repeated interaction (search for similar items in EconPapers)
JEL-codes: C91 C92 D63 D72 K40 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2007-04
New Economics Papers: this item is included in nep-cbe, nep-cdm, nep-exp and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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