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Spontaneous Market Emergence

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  • Fafchamps Marcel

    ()
    (Department of Economics, Oxford University)

Abstract

Drawing insights from the literature and from the author's own survey work on contractual practices among manufacturers and traders in Africa, we study the transition from anonymous to personal to impersonal exchange. Using a dynamic game with heterogenous agents and information sharing, we derive precise conditions under which relational contracting spontaneously emerges and deters opportunistic breach even in the absence of formal market institutions. Exclusion of cheaters is not required for contracting to begin. As exchange develops, newcomers may be excluded from contracting when screening costs are high and agents long lived. Reputational equilibria in which cheaters are permanently excluded are not decentralizable unless contracting is already developed and breach of contract is interpreted as a sign of impending bankruptcy.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 2 (2002)
Issue (Month): 1 (June)
Pages: 1-37

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Handle: RePEc:bpj:bejtec:v:topics.2:y:2002:i:1:n:2

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  1. Marcel Fafchamps & Jan Willem Gunning & Remco Oostendorp, 1999. "Inventories and risk in African manufacturing," CSAE Working Paper Series 1999-19, Centre for the Study of African Economies, University of Oxford.
  2. Greif, Avner, 1994. "Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 912-50, October.
  3. John McMillan & Christopher Woodruff, 1999. "Interfirm Relationships And Informal Credit In Vietnam," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1285-1320, November.
  4. Ghosh, Parikshit & Ray, Debraj, 1996. "Cooperation in Community Interaction without Information Flows," Review of Economic Studies, Wiley Blackwell, vol. 63(3), pages 491-519, July.
  5. Marcel Fafchamps & Bart Minten, 2000. "Returns to Social Network Capital among Traders," Development Working Papers 145, Centro Studi Luca d\'Agliano, University of Milano.
  6. Rasmusen, E., 1992. "Stigma and Self-Fulfilling Expectations of Criminality," Papers 92-019, Indiana - Center for Econometric Model Research.
  7. Marris, Peter, 1971. "African Businessmen in a Dual Economy," Journal of Industrial Economics, Wiley Blackwell, vol. 19(3), pages 231-45, July.
  8. Ellison, Glenn, 1994. "Cooperation in the Prisoner's Dilemma with Anonymous Random Matching," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 567-88, July.
  9. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  10. Bernstein, Lisa, 1992. "Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry," The Journal of Legal Studies, University of Chicago Press, vol. 21(1), pages 115-57, January.
  11. Michi Kandori, 2010. "Social Norms and Community Enforcement," Levine's Working Paper Archive 630, David K. Levine.
  12. Fafchamps, Marcel & Minten, Bart, 1998. "Relationships and traders in Madagascar," MTID discussion papers 24, International Food Policy Research Institute (IFPRI).
  13. McMillan, John & Woodruff, Christopher, 1999. "Dispute Prevention without Courts in Vietnam," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 637-58, October.
  14. Kali, Raja, 1999. "Endogenous Business Networks," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 615-36, October.
  15. Kranton, Rachel E, 1996. "Reciprocal Exchange: A Self-Sustaining System," American Economic Review, American Economic Association, vol. 86(4), pages 830-51, September.
  16. Montgomery, James D, 1991. "Social Networks and Labor-Market Outcomes: Toward an Economic Analysis," American Economic Review, American Economic Association, vol. 81(5), pages 1407-18, December.
  17. Fafchamps, Marcel, 1996. "The enforcement of commercial contracts in Ghana," World Development, Elsevier, vol. 24(3), pages 427-448, March.
  18. Himbara, David, 1994. "The failed Africanization of commerce and industry in Kenya," World Development, Elsevier, vol. 22(3), pages 469-482, March.
  19. Fafchamps, Marcel, 1997. "Trade credit in Zimbabwean manufacturing," World Development, Elsevier, vol. 25(5), pages 795-815, May.
  20. Simon Johnson & John McMillan & Christopher Woodruff, 2000. "Entrepreneurs and the Ordering of Institutional Reform: Poland, Slovakia, Romania, Russia and Ukraine Compared," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(1), pages 1-36, March.
  21. Lang, William W. & Nakamura, Leonard I., 1990. "The dynamics of credit markets in a model with learning," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 305-318, October.
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Citations

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Cited by:
  1. Yann Bramoullé & Sanjeev Goyal, 2009. "Favoritism," Cahiers de recherche 0941, CIRPEE.
  2. Steven Durlauf & Marcel Fafchamps, 2004. "Social Capital," Development and Comp Systems 0409060, EconWPA.
    • Durlauf, Steven N. & Fafchamps, Marcel, 2005. "Social Capital," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 26, pages 1639-1699 Elsevier.
  3. Kono, Hisaki, 2006. "Employment with connections: Negative network effects," Journal of Development Economics, Elsevier, vol. 81(1), pages 244-258, October.
  4. Fali Huang, 2006. "The Transition from Relational to Legal Contract Enforcement," Development Economics Working Papers 22441, East Asian Bureau of Economic Research.
  5. Jain, Tarun & Sood, Ashima, 2012. "How does relationship-based governance accommodate new entrants? Evidence from the cycle rickshaw rental market," MPRA Paper 37424, University Library of Munich, Germany.
  6. Barr, Abigail & Fafchamps, Marcel & Owens, Trudy, 2005. "The governance of non-governmental organizations in Uganda," World Development, Elsevier, vol. 33(4), pages 657-679, April.
  7. Marcel Fafchamps & Marco J. van der Leij, 2006. "Scientific Networks and Co-authorship," Economics Series Working Papers 256, University of Oxford, Department of Economics.
  8. Abigail Barr & Marcel Fafchamps & Trudy Owens, 2004. "The Resources and Governance of Non-Governmental Organizations in Uganda," Development and Comp Systems 0409047, EconWPA.
  9. Nienke Oomes, 2002. "Local Trade Networks and Spatially Persistent Unemployment," International Trade 0211004, EconWPA.
  10. Joshua Charap & Jelena Pavlovic, 2009. "Development of the Commercial Banking System in Afghanistan: Risks and Rewards," IMF Working Papers 09/150, International Monetary Fund.
  11. Marcel Fafchamps, 2004. "Social Capital and Development," Economics Series Working Papers 214, University of Oxford, Department of Economics.
  12. Marcus Noland, 2003. "Religion, Culture, and Economic Performance," Working Paper Series WP03-8, Peterson Institute for International Economics.

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