Paper #521

Title:

The role of institutions in the contractual process

Author:

Benito Arruñada

Date:

December 2000 (Revised: April 2003)

Abstract:

Human beings increase their productivity by specializing their resources and exchanging their products. The organization of exchange is costly, however, because specialized activities need coordination and incentives have to be aligned. This work first describes how these exchanges are organized in an institutional environment. It then focuses on the dual effect of this environment- as with any other specialized resource, institutions may be used for expropriation purposes. They enjoy specialization advantages in safeguarding exchange but they also make possible new forms of opportunism, causing new costs of exchange. Three perverse tendencies are identified:In the legal field, there is a surplus of mandatory rules and, at the same time, a deficit in default rules. Second, courts’ activity is biased against the quasi-judicial role of the parties and the market. Third, Market enforcement is based on reputational assets that are badly exposed to opportunism.

Keywords:

Contracts, institutions, enforcement, safeguards

JEL codes:

L14, K00, K20

Area of Research:

Business Economics and Industrial Organization

Published in:

B. Deffains and T. Kirat, eds., Law and Economics in Civil Law Countries, The Economics of Legal Relationships Series, vol. 6, Elsevier Science, Amsterdam, 2001, pp. 149-167

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