Skip to main content
SpringerLink
Log in

Contract Enforcement and Trade

  • Published:
Journal of Industry, Competition and Trade Aims and scope Submit manuscript

Abstract

The main objective of this paper is to investigate the effect of contract enforcement on trade in a large sample of developing economies. The effects of three separate measures capturing contract enforcement (the time required to enforce a contract; the costs to enforce a contract; and the number of procedures required to enforce a contract) on trade were tested using the panel corrected standard errors method of estimation. The results show that the three measures of contract enforcement are negatively and statistically significantly correlated with trade. The findings lead to the conclusion that the ease of contract enforcement is crucial in order to facilitate the speed of trade in the developing group of countries.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

References

  • Acemoglu D, Antras P, Helpman E (2007) Contracts and technology adoption. Am Econ Rev 97(3):916-943

  • Acemoglu D, Johnson S, Robinson J (2001) The colonial origins of comparative development: an empirical investigation. Am Econ Rev 91(5):1369–1401

    Article  Google Scholar 

  • Anderson JE (2009) Does trade foster contract enforcement? Economic Theory 41(1):105–130

    Article  Google Scholar 

  • Anderson JE, Marcouiller D (2002) Insecurity and the pattern of trade: an empirical investigation. Rev Econ Stat 84(2):342–352

    Article  Google Scholar 

  • Anderson J, van Winccoop E (2004) Trade costs. J Econ Perspect 52:691–751

    Google Scholar 

  • Assche AV, Schwartz GA (2013) Contracting institutions and ownership structure in international joint ventures. J Dev Econ 103:124–132

    Article  Google Scholar 

  • Bartley T (2011) Transnational governance as a layering of rules: intersections of public and private standard. Theoretical Inquiries in Law 12:25–51

    Article  Google Scholar 

  • Becker GS (1968) Crime and punishment: an economic approach. J Polit Econ 76(2):169–217

    Article  Google Scholar 

  • Becker GS, Stigler GJ (1974) Law enforcement, malfeasance, and compensation of enforcers. J Leg Stud 3(1):1–18

    Article  Google Scholar 

  • Berthelon M, Freund C (2004) On the conservation of distance in international trade, World Bank policy Research department working paper 3293. World Bank, Washington, DC

    Google Scholar 

  • Bohnet I, Frey BS, Huck S (2001) More order with less law: on contract enforcement, trust and crowding. Am Polit Sci Rev 95(1):131–144

    Article  Google Scholar 

  • Dabla-Norris E, Freeman S (2004) Enforcement of property rights and underdevelopment. Rev Dev Econ 8(3):391–405

    Article  Google Scholar 

  • De Groot HLF, Linders GJ, Reitveld P, Subramananiam U (2004) The institutional determinants of bilateral trade patterns. Kyklos 57:103-123

  • Dixit A (2009) Governance, institutions and economic activity. Am Econ Rev 99(1):5–24

    Article  Google Scholar 

  • Francois J, Manchin M (2013) Institutions, infrastructure and trade. World Dev 46:165-175

  • Friedman DD (1981) Reflections on optimal punishment. Or: should the rich pay higher fines? Research in Law and Economics 3:185–205

    Google Scholar 

  • Friedman DD (1995) Making sense of English law enforcement in the eighteenth century. University of Chicago Law School Roundtable 2:475–505

    Google Scholar 

  • Gani A (2011) Governance and growth in developing countries. J Econ Issues XLV(1):19–39

    Article  Google Scholar 

  • Gani A, Scrimgeour F (2016) New Zealand’s trade with Asia and the role of good governance. Int Rev Econ Financ 42:36–53

    Article  Google Scholar 

  • Garoupa N (1997) The theory of optimal law enforcement. J Econ Surv 11(3):267–295

    Article  Google Scholar 

  • Gennaioli N (2013) Optimal contract with enforcement risk. J Eur Econ Assoc 11:59–82

    Article  Google Scholar 

  • Hall RE, Jones CI (1999) Why do some countries produce so much output per worker than others. Q J Econ 114(1):83–116

    Article  Google Scholar 

  • Helble M, Ben S, Wilson SJS (2007) Transparency and regional integration in the Asia Pacific, World Bank policy Research paper 4401. World Bank, Washington, D.C

    Google Scholar 

  • Kaplow L, Shavell S (1994) Accuracy in the determination of liability. J Law Econ 37(1):1–15

    Article  Google Scholar 

  • Kaufmann D, Kray A, Mastruzzi A (2012) World wide governance Indicators. World Bank, Washington, D.C. http://info.worldbank.org/governance/wgi/index.asp

    Google Scholar 

  • Landes WM, Posner RA (1975) The private enforcement of law. J Leg Stud 4(1):1–46

    Article  Google Scholar 

  • Levchenko AA (2007) Institutional quality and international trade. Rev Econ Stud 74:791–879

    Article  Google Scholar 

  • Moenius J, Berkowitz D (2011) Law, trade and development. J Dev Econ 96:451–460

    Article  Google Scholar 

  • North D (1990) Institutions, institutional change and economic performance. Cambridge University Press, Cambridge

    Book  Google Scholar 

  • North D (2005) Understanding the process of economic change. Princeton University Press, Princeton

    Book  Google Scholar 

  • Nunn N (2007) Relationship specificity, incomplete contracts and the pattern of trade. Q J Econ 122(2):569–600

    Article  Google Scholar 

  • Olson M (1996) Big bills left on the sidewalk: why some nations are rich and others are poor. J Econ Perspect 10:3–24

    Article  Google Scholar 

  • Polinsky AM, Shavell S (1992) Enforcement costs and optimal magnitude and probability of fines. J Law Econ 35:133–148

    Article  Google Scholar 

  • Posner EA (1999) A theory of contract law under conditions of radical judicial error, John M. Olin Law and Economics Working Paper NO. 80, (2nd series). The Law School, The University of Chicago

  • Posner IA (2002) Economic analysis of contract law after three decades: success or failure. Yale Law J 112:829–880

    Article  Google Scholar 

  • Pugel TA (2004) International economics. McGraw-Hill Irwin, Boston

    Google Scholar 

  • Ranjan P, Lee JY (2007) Contract enforcement and international trade. Econ Polit 39(4):1177–1203

    Google Scholar 

  • Rauch JE (2001) Business and social networks in international trade. J Econ Lit 39(4):1177–1203

    Article  Google Scholar 

  • Rodrik D (2007) One economics, many recipes: globalization, institutions and economic growth. Princeton University Press, Princeton

    Google Scholar 

  • Rodrik D, Subramanian A, Trebbi F (2004) Institutions rule: the primacy of institutions over geography and integration in economic development. J Econ Growth 9:131–165

    Article  Google Scholar 

  • Schwartz A, Scott RE (2003) Contract theory and the limits of contract law. Yale Law J 113:541–619

    Article  Google Scholar 

  • Shavell S (1993) The optimal structure of law enforcement. J Law Econ 36(1–2):255–287

    Article  Google Scholar 

  • Steers L, Se K (2010) Formal and informal institutions in a transition economy: the case if Vietnam. World Dev 38(11):1603–1615

    Article  Google Scholar 

  • Stigler GJ (1970) The optimum enforcement of laws. J Polit Econ 78(3):526–536

    Article  Google Scholar 

  • The World Bank. (2014). Doing business Report. Washington, DC.

  • Williamson OE (1975) Markets and hierarchies: analysis and antitrust implication. Free Press, New York, p 286

  • Williamson OE (2002) The theory of firm as governance structure: from choice to contract. J Econ Perspect 16(3):171–195

    Article  Google Scholar 

  • World Bank (2013) World development indicators CD ROM. World Bank, Washington, D.C.

  • Yu M (2010) Trade, democracy and gravity equation. J Dev Econ 2010:289–300

    Article  Google Scholar 

  • Yue M, Qu B, Zhang Y (2010) Judicial quality, contract intensity and trade: firm level evidence from developing and transation economies. J Comp Econ 38:146-159

Download references

Author information

Authors and Affiliations

  1. Department of Economics and Finance, College of Economics and Political Science, P.O. Box 20, Al Khod 123, Muscat, Oman

    Azmat Gani

Authors
  1. Azmat Gani
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Azmat Gani.

DATA APPENDIX

DATA APPENDIX

Exports (x): exports of goods and services as a percentage of gross domestic product.

Imports (m): imports of goods and services as a percentage of gross domestic product.

Relative price (ep and mp): The measure of the relative price is the real effective exchange. The source of data for ep and mp is the World Development Indicators (World Bank, 2013).

Trade liberalization (tl): Trade liberalization is measured by the applied tariff rate (simple mean, all products, in percentage). The source of data is World Bank’s World Development Indicators CD ROM 2013.

World income growth (wyg): Asian income growth is the real gross domestic product (GDP) growth rate (annual percentage) in each of the Asian countries in the sample. The source of data is World Bank’s World Development Indicators CD ROM 2013.

Domestic income growth (dyg): Domestic income growth is real GDP growth rate (annual percentage) of each of the sample countries. The source of data is World Bank’s World Development Indicators CD ROM 2012.

Contract enforcement (cnt): In this current study, contract enforcement is captured by three separate measures. First, the time required to enforce a contract. The variable is the number of calendar days from filing of the lawsuit in a court until the final determination and in appropriate cases, payment. The second measure of contract enforcement is the number of procedures and includes the steps to file the case, the steps for trial and judgement and the steps necessary to enforce the judgement. The third measure of the contract enforcement is the cost of enforcement and the cost is recorded as a percentage of the claim and includes three types of costs: court costs, enforcement costs and attorney fees. The source of the data for these three measures is the World Bank (2013), Doing Business 2013.

1.1 SAMPLE OF COUNTRIES

The sample of developing economies are Algeria; Bulgaria; China; Colombia; Costa Rica; Dominican Republic; Ecuador; Fiji; Hungary; Macedonia, FYR; Malaysia; Mexico; South Africa; Tonga; Tunisia; Venezuela, RB; Armenia; Bhutan; Bolivia; Cameroon; Georgia; Ghana; India; Kiribati; Lao PDR; Morocco; Nicaragua; Nigeria; Pakistan; Paraguay; Philippines; Samoa; Solomon Islands; Sri Lanka; Ukraine; Vietnam; Zambia.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Gani, A. Contract Enforcement and Trade. J Ind Compet Trade 18, 107–119 (2018). https://doi.org/10.1007/s10842-017-0252-5

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10842-017-0252-5

Keywords

JEL Classifications

Search

Navigation