Endogenous Enforcement Institutions
Abstract: The enforcement of contracts and property rights requires that violators are punished. However, punishments that are costly to administer may not be credible. In this paper we present a model where credible punishments depend on the social allocation of coercive power. We model society as a set of production ventures, whose members spend effort only if they can contract to share the receipts and if they are protected from external expropriation. Under decentralized enforcement, power is dispersed among the strong individuals in each venture, who are rewarded by a ruler for punishing violators. Under centralized enforcement, power is concentrated within the ruler, who directly punishes violators. By preventing violent expropriation across individuals, centralization allows to enforce the law through milder and hence more credible penalties. At the same time, centralization creates a temptation for the ruler to expropriate. Hence, centralized enforcement will be efficient when coercive power is more constrained and costly to use – for instance, due to the individuals’ ability to react or to the presence of moral constraints on the use of force.
