Contracts & Cartels: Reconciling Competition and Development Policy
Abstract: It has become conventional wisdom that effective competition policy is a necessary ingredient to economic development. But competition policy should be secondary to the more pressing priority of securing contract rights, and sometimes competition policy is at odds with the priority of securing contract rights. This is because in undeveloped legal systems, cartels are sometimes necessary to enforce contracts. When courts and other public instruments are unable to reliably enforce contracts, private ordering systems often arise to mobilize a group of affiliated merchants to direct coordinated punishments against parties who breach contracts. Yet such coordinated punishments is akin to a group boycott that normally invites antitrust scrutiny. This chapter focuses on this tension between the well-understood harms of group boycotts as restraints on competition and the unappreciated benefits of group boycotts as a pro-competitive solution to court failures. The chapter pays particular attention to development needs in India, which (in addition to hosting the conference that preceded this volume) is home both to courts that historically have not achieved the degree of reliable contract enforcement and to a burgeoning diamond industry that for generations has relied on cartel-like instruments to secure transactions. Accordingly, those who seek to wipe out India’s cartels in the name of competition policy should be careful not to undermine the diamond industry, which is an important contributor to India’s economic growth.
