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The Journal of Law, Economics, and Organization V18 I1
© 2002 Oxford University Press

Original Article

Courts and Relational Contracts

Simon Johnson, John McMillan and Christopher Woodruff

Simon Johnson, Massachusetts Institute of Technology
John McMillan, Stanford University
Christopher Woodruff, University of California, San Diego

Abstract

Post-communist countries offer new evidence on the relative importance of courts and relationships in enforcing contracts. Belief in the effectiveness of courts has a significant positive effect on the level of trust shown in new relationships between firms and their customers. Well-functioning courts also encourage entrepreneurs to try out new suppliers. Courts are particularly important when specific investments are needed for a relationship to develop. While relationships can sustain existing interactions, workable courts help new interactions to start and develop.


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