Institutions, Contracts and Organizations
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Institutions, Contracts and Organizations Perspectives from New Institutional Economics

Perspectives from New Institutional Economics

Edited by Claude Ménard

This outstanding book presents new original contributions from some of the world’s leading economists including Ronald Coase, Douglass C. North, Masahiko Aoki, Oliver E. Williamson and Harold Demsetz. It demonstrates the extent and depth of the New Institutional Economics research programme which is having a worldwide impact on the economics profession.
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Chapter 16: The state and the diversity of third-party enforcers

Yoram Barzel


16. The state and the diversity of thirdparty enforcers1 Yoram Barzel Definition The state consists of a set of individuals who are subject to a single ultimate third party that uses violence as a means for enforcement. Its territorial boundaries are demarcated by the reach of its enforcement power. The scope of the state is measured by the ratio of the value of all violencebacked third-party enforced agreements to the value of the gross product, inclusive of the imputed product, within these boundaries. INTRODUCTION The realization of the gains from specializing requires exchange, and exchange agreements must be enforced. The exchange parties may enforce the agreements themselves. Self-enforcement, however, works well only for some agreements, and third-party enforcement works better for others. At a cost, third parties will provide the principals to an agreement with an altered set of incentives such that they expect their net gains from interacting to exceed what they could attain under self-enforcement. The distinction between enforcers imposing costs by violence as distinct from those using long-term relations is fundamental to the theory of the state because of the difference in the kinds of agreements the two types of enforcers can enforce and the difference in their ability to abuse their power. I first argue that many individuals and organizations can supply third-party enforcement services, each with his own comparative advantage. The means of imposing costs for enforcement that third parties possess fall into two radically different categories. In one, third parties reduce the level...

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