One-Sided Enforcement in a Model with Persistent Adverse Selection

Résumé

We study a repeated buyer-seller relationship with persistent adverse selection and one-sided enforcement, where a prepaid seller can breach by taking the money and running. The optimal stationary contract depends on enforcement strength and the discount factor. Three regimes arise. With a strong legal system, penalties deter breach and the optimal static contract can be repeated. With a weak system, the penalty caps transfers, forcing bunching among efficient (low-cost) types. With a very weak system, compliance relies on relational rents, causing large downward distortions. Strengthening public enforcement relaxes both incentive and enforcement constraints, reducing allocative inefficiency.

Mots-clés

Codes JEL

Référence

David Martimort et Aggey Simons (Semenov), « One-Sided Enforcement in a Model with Persistent Adverse Selection », TSE Working Paper, n° 26-1704, janvier 2026.