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European Review of Agricultural Economics Advance Access originally published online on February 27, 2008
European Review of Agricultural Economics 2008 35(1):75-91; doi:10.1093/erae/jbn001
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© Oxford University Press and Foundation for the European Review of Agricultural Economics 2008; all rights reserved. For permissions, please email journals.permissions@oxfordjournals.org

Investment with weak contract enforcement: evidence from Hungary during transition

Azeta Cungu1, Hamish Gow2, Johan F. M. Swinnen3,4 and Liesbet Vranken3,5

1 Food and Agriculture Organisation of the United Nations, Rome, Italy
2 Michigan State University, East Lansing, MI, USA
3 LICOS Centre for Institutions and Economic Performance, Catholic University of Leuven, Belgium
4 Department of Economics, Catholic University of Leuven, Belgium
5 VITO Flemish Institute for Technological Research, Mol, Belgium

Corresponding author: Azeta Cungu, Food and Agriculture Organisation of the United Nations (FAO), Viale delle Terme di Caracalla, 100153 Rome, Italy. E-mail: azeta.cungu{at}fao.org

Received May 2004; final version received December 2007

This paper aims to provide empirical evidence relating to the importance of contract enforcement for development. Survey data on Hungarian farms are used to estimate the impact of contract hold-ups on investment. We find that investment is affected by a variety of factors. Contract breaches in the form of delayed payments have a non-linear effect on investment: at high levels, they significantly deter the investment, but not at low levels.

Keywords: hold-ups, contract enforcement, reforms, economic transition

JEL classification: Q12, O16, P31


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