How private contract enforcement mechanisms can succeed where public institutions fail: the case of Juhocukor a.s.

The enforcement of contracts is necessary fur efficient exchange and invest ment in economic activities. Contracts can be enforced through a variety of mechanisms, both public and private. However, in many developing and trans itional countries these public institutions ale either. absent or ineffecti ve in ensuring contract enforcement. Under such conditions, private enforce ment mechanisms may provide a suitable replacement for public enforcement i nstitutions. This may be done externally through a third party or internall y through self-enforcing agreements. This paper analyzes the use of "self-e nforcing" arrangements or "internal" private enforcement mechanisms. Using a case study of an agri-business in a transition economy - Juhocukor a.s., a Slovakian sugar processor - we show that the use of "internal" private co ntract enforcement mechanisms can have a significant positive effect on out put and efficiency for both partners to the exchange transaction in an envi ronment characterized by the absence or ineffectiveness of public enforceme nt institutions. (C) 2000 Elsevier Science B.V. All rights reserved.