This paper analyzes the role of third party intermediaries, such as courts and arbitrators, in contract enforcement. In our model, intermediaries compel contracted transfers and resolve disputes when requested to do so by the contracting agents. When the veriﬁability of information is limited, successful enforcement requires that dispute resolution costs be suﬀiciently great. Optimal enforcement systems economize on dispute resolution and information costs, and may involve establishment of speciﬁc systems tailored to particular groups. We show further that the “holdup problem” may be resolved via an appropriately designed dispute resolution system.
Ramey, Garey and Watson, Joel, "Contractual Intermediaries" (1999). Cowles Foundation Discussion Papers. 1484.