Working Paper: CEPR ID: DP2081
Authors: Simon Johnson; John McMillan; Christopher Woodruff
Abstract: The mix of formal and informal mechanisms for contract enforcement is examined using survey data from Poland, Romania, Russia, Slovakia and Ukraine. Using the size of trade credit to quantify the success of contracting, we ask: Do the courts have a perceptible effect on contracting? When can a firm rely on its customer to repay trade credit voluntarily? Which is more effective, the courts or relational contracting? Do trade associations play a role in contract enforcement? Does relational contracting entail inefficiencies? Is the reliance on relation contracting merely a transitory phenomenon, reflecting the inadequacy of these countries’ legal systems?
Keywords: courts; relational contracting; transition
JEL Codes: K12; M13; P30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Perceived court effectiveness (K41) | Trade credit granted (H81) |
| Relational contracting (L14) | Trade credit granted (H81) |
| Supplier obtaining information (L81) | Relational contracting (L14) |
| Long trading history (N23) | Relational contracting (L14) |
| High search costs (D83) | Relational contracting (L14) |
| Duration of supplier relationships (L14) | Trade credit granted (H81) |
| Relational contracting (L14) | Inefficiencies (D61) |
| Legal frameworks (K40) | Mitigation of inefficiencies (D61) |