This paper presents a model of opportunistic behaviour in decentralized economic exchange and considers the impact of inadequate institutional framework of formal contract enforcement on economic performance. It is shown that (i) when the number of cheating traders is sufficiently large, inadequate institutions result in a loss of decentralized trading contracts, (ii) an adequate institutional ...

This paper describes a model economy where the size of the unofficial sector decreases as the degree to which financing contracts can be enforced in the official sector rises. Agents who choose to operate in the unofficial sector can avoid taxes, but have no access to official means of contract enforcement. Quantitative implications of the model are compared to the existing evidence on unoffici...

So far, we have focused on a complete market benchmark and studied its success and failure to match the data in several dimensions (business cycles, asset pricing and long run growth) and to understand optimal taxation. A key assumption in that context was perfect enforcement of contracts (in particular, perfect enforcement of state contingent claims). A key result in that context is perfect sm...

Genetically modified seeds offer farmers dramatic new innovations that revolutionize how they grow crops. An ever more concentrated supply industry is marketing these innovations in novel ways, using technology fees, product bundling, patent protecting contracts, and strict enforcement. Farmers face a choice between dramatic new technologies accompanied by restrictive contracts and conventional...

We analyze the impact of contract enforcement problems on the emergence of (involuntary) unemployment. In an experimental labor market where the trading parties can form long-term relationships, we compare a work environment where contracts are implicit in the sense that effort is observable, but not verifiable to a situation where contracts are “complete” and effort is enforced exogenously. In...

This paper examines the importance of market institutions in the transition from communism to a market economy. Blanchard and Kremer’s (1997) developed a partial equilibrium model explaining how, in the presence of imperfect information and incomplete contracts, liberalization causes the “disorganization” of traditional producer-supplier relationships in post-socialist economies and contributes...

This paper describes a dynamic, general equilibrium model designed to assess whether contractual imperfections in the form of limited enforcement can account for international differences in the organization of production. In the model, limited enforcement constrains agents to operate establishments below their optimal scale. As a result, economies where contracts are enforced more efficiently ...

We examine a randomized trial that allows separate identification of peer screening and enforcement of credit contracts. A South African microlender offered half its clients a bonus for referring a friend who repaid a loan. For the remaining clients, the bonus was conditional on loan approval. After approval, the repayment incentive was removed from half the referrers in the first group and add...

We develop a model of nonstationary relational contracts in order to study internal wage dynamics. Workers are heterogeneous and each worker’s ability is both private information and fixed for all time. Learning therefore occurs within employment relationships. The inferences, however, are confounded by moral hazard: the distribution of output is determined by both the worker’s type and by his ...

We present a model where the enforcement of international risk sharing contracts is costly. With non diversifiable enforcement costs, welfare is not necessarily maximized for perfect worldwide risk sharing. Some groupings, or “pools” of countries can deliver higher welfare, with higher diversification gains net of enforcement costs. We construct an exhaustive list of such pools of countries. Fo...