Societies provide institutions that are costly to use, but able to enforce long-run relationships. We study the optimal decision problem of using self-governance for risk sharing or governance through enforcement provided by these institutions. Third-party enforcement is modelled as a costly...

"Contract enforcement is probabilistic, but the probability depends on rules and processes. A stimulus to trade may induce traders to alter rules or processes to improve enforcement. In the model of this paper, such a positive knock-on effect occurs when the elasticity of supply of traders is...