Economic Growth with Standardized Contracts

This paper is motivated by the observation that individuals sometimes tend to use a contract just because others have done so before. To put it more technically, the cost of executing a transaction under an existing standard seems to be much lower than doing so under a new innovation. The economic consequences of contract standardization are analyzed within an ordinary overlapping generations model. The main implications of contract standardization are that (i) financial history matters in the growth process, (ii) early formation of the system may create a drag on economic growth and (iii) the effect may be non-monotonic because the system may be modernized at some point.