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Old Habits Are Hard to Change: A Case Study of Israeli Real Estate Contracts

Authors


  • For helpful comments I would like to thank Ronen Avraham, Tom Baker, Omri Ben-Shahar, Robert Cooter, Yuval Feldman, Mitu Gulati, Ehud Guttel, Shmuel Leshem, Ronald Mann, Scott Masten, Ariel Porat, Yuval Procaccia, Ed Rock, Yossi Yahav, Eyal Zamir, and participants at workshops at Tel Aviv University, Haifa University, the University of Texas, and the Hebrew University of Jerusalem.

Please address correspondence to: Doron Teichman, Faculty of Law, Hebrew University of Jerusalem, Mt. Scopus, Jerusalem 91905, Israel; email: teichman@mscc.huji.ac.il.

Abstract

This article presents a case study on the persistent dollarization norm in the Israeli real estate market. For many years Israeli real estate contracts have been denominated in American dollars. This contracting norm has remained surprisingly stable despite tremendous changes in the structure of the Israeli foreign currency market that severed the connection between the dollar and local inflation and added significant risks to exchange rates. Using an array of theoretical tools, I explain this puzzling phenomenon and demonstrate the centrality of social norms to the design of high-stakes contracts. Finally, I explore the interaction between social norms and the law and highlight the potential obstacles to regulating contracting norms.

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