ABSTRACT

This chapter asks two questions: (1) Why should the state enforce private agreements? and (2) What roles regarding private agreements should the state play in addition to legal enforcement? Regarding question (1), enforcement permits parties who function in relatively large economies tomake credible promises to perform their agreements. The inability to make credible promises would severely limit parties’ ability to make short term supply contracts in volatile markets and to make long term supply contracts; and it would also severely limit parties’ ability to contract for the making of investments that are more productive in a contractual relationship than those investments would be elsewhere. The poor performance of transition economies with weak legal enforcement evidences the importance of being able to make credible promises to perform. Regarding question (2), Western states perform three roles in connection with enforceable contracts – they (1) regulate the contracting process, (2) supply parties with a stock of default rules to govern transactions, and (3) interpret private agreements in the course of resolving disputes. These notes will argue that the second function is unimportant and suggest how the first and third of these functions should be best performed.