ABSTRACT
We develop a simple model of trade with imperfect contract enforcement. Courts force the execution of defaulted contracts with parametric probability. In political economic equilibrium, the enforcement of contracts between agents of sovereign nations must be at a level mutually agreed between nations. The enforcement probability may be low, with the reluctant nation being associated with low levels of economic development in terms of model parameters. Low enforcement equilibrium can be a trap, as a better equilibrium may exist discretely far away. The model is replete with ‘paradoxical’ comparative statics, such as the paradox of immiserating bargaining power. We define a tariff equivalent of imperfect enforcement which is useful in empirical investigations of trade and security.
Makau, Stephen W, Enforcement and Construction of International Trade Contracts (August 11, 2022).
Leave a Reply