Contract enforcement in the early transition of an unstable economy

Abstract

How were contracts among firms enforced in the early phase of a transition economy when firms lacked experience with commercial contracts or legal procedures? What were their views of their new business environment? We interviewed a sample of Bulgarian firms, including private, state-owned and cooperative firms in 1994. Consistent with Williamson's [Williamson, O., 1994. Institutions of economic development and reform. In: Bruno, M., Pleskovic, B. (Eds.), Proceedings of the World Bank Annual Bank Conference on Development Economics, World Bank, Washington, DC, pp. 171–197] theories, complex contracts were quite limited, sometimes implying the breakdown of important markets, but we also found that even spot-market contracts had severe problems of bilateral dependency. Having been “burned” in previous transactions, firms were very cautious in dealing with new potential trading partners and tried to work closely with trustworthy counterparts. These results are consistent with Klein et al. [Klein, B., Crawford, R., Alchian, A., 1978. Vertical integration, appropriable rents, and the competitive contracting process. J. Law Econ. 21, 297–326] theory.