A Simple Model of Contract Enforcement Institutions

We demonstrate that in highly productive economies contract enforcement institutionsare endogenously established, and partnership contracts correct inefficient land allocation. In lessproductive economies, however, such institutions are not established, and partnership contracts arenot formed. In economies with intermediate productivity levels, multiple Nash equilibria exist; thatis, contract enforcement institutions are established in the high Nash equilibrium whereas they arenot formed in the low Nash equilibrium. In this case, institutional quality can be diverse acrosseconomies. We also prove that improvement in institutional quality reduces within-country inequal-ity. All these outcomes are consistent with cross-country observations.