The enforcement of mandatory rules against illegal contracts

ABSTRACT Academic attention on the effects of mandatory rules on illegal contracts has so far been primarily directed at the categorization of illegalities and the identification of those types of illegal contracts that should or should not be invalidated in accordance with the significance of their illegality. When defending the validity of certain categories of illegal contracts, current legal scholarship usually takes it for granted that competent regulatory agencies could monitor such contracts and enforce violated rules effectively. Our empirical studies of the practical enforcement of mandatory rules against illegal lottery sales in China suggest, however, that such an assumption is largely illusory. We argue that it is institutionally efficient that the courts transmit the information of illegal transactions to competent regulatory agencies when dealing with civil law matters involving illegality. Institutional reforms or technological changes should be implemented so as to incentivize judges to routinely transmit such information.