Department of Economics
University of Delaware
Working Paper #2005-11
Contract Enforcement in the Early Transition to a Market Economy
Kenneth Koford
and
Jeffrey B. Miller**
University of Delaware
ABSTRACT
How were contracts among firms enforced in the early phase of a transition economy when firms lacked experience with commercial contracts or legal procedures? What were their views of their new business environment? We interviewed a sample of Bulgarian firms, including private, state-owned and cooperative firms in 1994. Consistent with Williamson’s (1994) theories, complex contracts were quite limited, sometimes implying the breakdown of important markets, but we also found that even spot-market contracts had severe problems of bilateral dependency. Having been "burned" in previous transactions, firms were very cautious in dealing with new potential trading partners and tried to work closely with trustworthy counterparts. These results are consistent with Klein, Crawford and Alchian’s (1978) theory.
* The co-author of this paper, Kenneth J. Koford died after the paper was first submitted. He was a wonderful friend and colleague and was instrumental in all aspects of the paper. This research was supported by the Center for Institutional Reform and the Informal Sector (IRIS) at the University of Maryland from a grant from the U.S. Agency for International Development under Cooperative Agreement No. DHR-0015-A-00-0031-00 which is administered by the Office of Economic and Institutional Reform, Center for Economic Growth, Bureau for Global Programs, Field Support and Research. Anastassia Miteva, Kamen Atanassov and Dimitrina Dimitrova provided invaluable assistance in designing and conducting the survey as well as providing research assistance.
** Contact: Jeffrey Miller, Department of Economics, University of Delaware, Newark, Delaware 19716: Email: millerj@lerner.udel.edu.
JEL codes: P5,P48, I22, K12
Keywords: Bulgaria, contract enforcement, contract institutions, contract law, legal institutions