Abstract

When Court enforcement is excessively difficult or costly, agents are often able to create "endogenous enforcement mechanisms", that is, to design agreements so that each party finds it optimal to carry them out (self-enforcing implicit contracts), thanks to the threat of sanctions affecting the defaulting party, imposed by direct counterparts in the relationship (bilateral enforcement) or by external agents, future potential partners (multilateral enforcement). In this paper it is shown, in a game theoretical framework, the main features and constraints of these endogenous enforcement devices through a survey of the models proposed in the literature. Self-enforcing contracts are viewed as Nash equilibria of repeated games sustained by termination-type and boycotting strategies. The prevailing enforcement mechanism depends on: the information available to internal and external agents; the kind of costs that agents are able to impose on the cheating part; the incentives to apply sanctions. The bilateral mechanism requires only that information is available to the direct counterpart; the effectiveness of sanctions depends on the existence of a flow of quasi-rents from continuing the relationship, caused by switching costs, specific investments or market disequilibrium. The working of a multilateral enforcement mechanism depends on an efficient external transmission of information. However, contractual enforcement is possible even if each single relationship does not generate quasi-rents, has a known endpoint and the agents' time horizon is finite. In some cases, auxiliary private institutions can emerge to gather and spread information and solve problems of punishment coordination. The working of markets and their efficiency is altered by enforcement problems.