Contract Enforcement in the Soviet Economy

Few studies have attempted to examine analytically various aspects of the contract enforcement institutions in post-Soviet Russia. Researchers agree that the lack of legislation for improving the operation of the legal system, which in turn would enhance the ability of exchange, is producing severe obstacles for economic growth. After the collapse of the Soviet Union, when the administrative hierarchy was destroyed, Russia entered the period of market-oriented reforms with the only sort of contract enforcement mechanism: relational contracting. The latter, although being the only reliable mechanism supporting ongoing exchange in the economy in turmoil, impedes development of more efficient impersonal transactions. Thus, a more workable legal system should emerge to stimulate impersonal transactions. The role of the courts is expected to increase overtime and, eventually, to substitute relational contracting. (Greif and Kandel 1995; Johnson, McMillan and Woodruff 1999) While earlier studies provide important insights in the institutional workings of the Russian economy in transition, there is a flaw in the understanding of the actual role of legal contract enforcement in the Soviet system. Essentially it is based on the stylized fact that the Soviet command economy lacked any contract law and law enforcement and the centrally designed transactions were maintained via administrative system. This study focuses on the Soviet experience to outline the institutional conditions that existed at the start of Russian transition. The Soviet institutional infrastructure incorporated two official mechanisms and one informal mechanism for contract enforcement: administrative enforcement, the legal system, and unofficial relational contracting. By construction, administrative and legal