A BEJEAP Contributions article.

Abstract

We model imperfect contract enforcement when the victims of default resort to spot trading because the act of repudiation reveals a favorable outside option. We show that enforcement imperfection is essentially distinct from the contract incompleteness analyzed in the previous literature. 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 unfavorable contracts. 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 may often be optimal.

Submitted: February 5, 2006 · Accepted: August 17, 2006 · Published: November 13, 2006

Originally published in Contributions to Economic Analysis & Policy.

Recommended Citation

Anderson, James E. and Young, Leslie (2006) "Trade and Contract Enforcement," Contributions to Economic Analysis & Policy: Vol. 5 : Iss. 1, Article 30.
Available at: http://www.bepress.com/bejeap/contributions/vol5/iss1/art30