The relational underpinnings of formal contracting and the welfare consequences of legal system improvement
journal contribution
posted on 2024-11-01, 13:45authored byBenjamin Hermalin, Qiang LiQiang Li, Anthony Naughton
We consider how parties' formal contracts are underpinned by their ongoing relationship and how welfare changes as the legal system improves. Regardless of impatience, the parties write formal contracts that they would not honor-despite stipulated penalties-if they interacted only once. The change in welfare with an improvement in the legal system can be ambiguous and even non-monotonic.