Working Paper: NBER ID: w8847
Authors: James E. Anderson; Leslie Young
Abstract: We model imperfect contract enforcement when repudiators and their victims default to spot trading. The interaction between the contract and spot markets under improved enforcement can exacerbate repudiation and reduce contract execution, harming all traders. Improved contract execution benefits traders on the excess side of the spot market by attracting potential counter-parties, but harms them by impeding their exit from contracts found to be unfavorable. Multiple equilibria and multiple optima are possible, with anarchy a local optimum, perfect enforcement a local minimum and imperfect enforcement a global optimum. LDCs exhibit parameter combinations such that imperfect enforcement is optimal from their side of international markets. The model thus rationalizes the internationally varying patterns of imperfect enforceability observable in survey data.
Keywords: Contract Enforcement; Trade Dynamics; International Trade; Less Developed Countries
JEL Codes: F10; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Improved contract enforcement (D86) | Increased rates of contract repudiation (G33) |
| Increased rates of contract repudiation (G33) | Fewer contracts being executed (L14) |
| Improved contract enforcement (D86) | Fewer contracts being executed (L14) |
| Improved contract enforcement (D86) | Decrease in expected profits of traders (F69) |