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 ...
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.
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