Abstract
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.
Keywords
Adverse selection, Limited enforcement, Relational contracts, Contract breach;
JEL codes
- D82: Asymmetric and Private Information • Mechanism Design
- D86: Economics of Contract: Theory
- K12: Contract Law
- O17: Formal and Informal Sectors • Shadow Economy • Institutional Arrangements
Reference
David Martimort, and Aggey Simons (Semenov), “One-Sided Enforcement in a Model with Persistent Adverse Selection”, TSE Working Paper, n. 26-1704, January 2026.
See also
Published in
TSE Working Paper, n. 26-1704, January 2026