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Efficient contract enforcement |
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| Authors: | Thorsten Koeppl Cyril Monnet Erwan Quintin |
| Affiliation: | 1. Department of Economics, Queen’s University, Kingston, ON, K7L 2B5, Canada 2. Department of Economics, University of Bern, Schanzeneckstrasse 1, 3001, Bern, Switzerland 3. Study Center Gerzensee, Dorfstrasse 2, 3115, Gerzensee, Switzerland 4. Wisconsin School of Business, University of Wisconsin, 975 University Avenue, Madison, WI, 53706, USA |
| Abstract: | We study how the efficient choice of contract enforcement interacts with the efficient allocation of capital in a simple production economy. Contract enforcement makes trade possible but requires an aggregate investment of capital that is no longer available for production. In such an economy, more dispersion in ex-ante marginal products makes it optimal to invest more resources in enforcement. Furthermore, implementing the optimal allocation requires a specific distribution of the cost for enforcement across agents that is not monotonic and results in a redistribution of endowments. At the efficient solution, agents at the bottom of the endowment distribution benefit the most from investment in enforcement and these investments lead to a reduction in consumption and income inequality. |
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