Paper #1031

Title:

Fragile markets: An experiment on judicial independence

Authors:

Benito Arruñada and Marco Casari

Date:

April 2007 (Revised: May 2016)

Abstract:

Contract enforcement does not only affect single transactions but the market as a whole. We compare alternative institutions that allocate enforcement rights to the different parties to a credit transaction: either lenders, borrowers, or judges. Despite all parties having incentives to enforce and transact, the market flourishes or disappears depending on the treatment: paying judges according to lenders' votes maximizes total surplus and equity; and a similar result appears when judges are paid according to average earnings in society. In contrast, paying judges according to borrowers' votes generates the poorest and most unequal society. These results suggest that parties playing the role of borrowers understand poorly the systemic consequences of their decisions, triggering under-enforcement, and hence wasting profitable trade opportunities.

Keywords:

impersonal exchange, third-party enforcement, steps of reasoning, other-regarding preferences, judicial independence.

JEL codes:

C91, C92, D53, D63, D72, K40

Area of Research:

Behavioral and Experimental Economics / Business Economics and Industrial Organization

Published in:

Journal of Economic Behavior and Organization, Forthcoming

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