Contract Enforcement and Economic Performance

Abstract

What is the relative importance of state and non-state institutions of contract and contract enforcement for economic activity? In particular, what is the role of state institutions in governing transactions? In developed and in developing countries contracts are governed by a multitude of state and non-state institutions. Different societies are likely to have different institutions depending on their history, culture, and political system. Contrary to conventional wisdom, exchange governed by the state is not necessarily more efficient than exchange governed by non-state mechanisms. The relative fficiency of different contract enforcement mechanisms depends on the characteristics of the good to be exchanged, the cost of the use of the mechanism, and the predictability of the outcome. State legal institutions do, however, have an important role to play. They can facilitate exchange among anonymous individuals and firms and provide impartial and predictable enforcement of contracts.