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On the Efficient Allocation of Enforcement Rights

Detail Summary
Date 13 November 2006
Time 11:45 - 13:15
Location Oudemanhuispoort


In an experiment we study market outcomes under alternative incentive structures for a third-party enforcer. Our transactions resemble an anonymous credit market where lenders can give loans and borrowers can repay them. In case of default, judges are free to enforce repayment but are paid differently in each of three treatments. Paying judges according to lender’s votes, maximizes surplus and the equality of earnings. In contrast, paying judges according to borrowers’ votes triggers insufficient enforcement, destroying the market and producing the lowest surplus and the most unequal distribution of earnings. Lastly, judges paid the average earnings of borrowers and lenders achieve results close to lenders’ voting. These treatments motivate similarly the key decision makers towards efficiency but pose them cognitive problems of unequal difficulty. So, because borrowers face the hardest problem when voting about enforcement they fail to vote for enforcement even if they would benefit from it. We conclude that incentives are not enough for designing these institutions because, when enforcement rights are allocated to different classes of people, the difficulty of the social problem changes, and those deciding are not always able to solve

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