Endogenous Enforceability of Private Agreements and the Role of Institutional Agents∗

Abstract

The purpose of this paper is to show that the determination of what is enforceable in a given society and what is not matters for social welfare. In order to achieve this, we present an economy with multiple groups of agents, each one of which faces a hold-up problem. The hold-up would stop to exist if agents could commit not to renegotiate their original agreement, but any private contract with such a clause is not renegotiation-proof. We show that the solution to this problem requires a broader contract between the agents and the enforcement authority, which we call the social contract. We also show that the social contract is renegotiation-proof if it specifies two conditions: i) an economy-wide delegate responsible for the enforcement of the social contract and ii) a set of non-enforceable private contracts