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From families to formal contracts: An approach to development

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  • Kumar, Krishna B.
  • Matsusaka, John G.

Abstract

This paper develops a theory in which individuals can use one of two types of human/social capital to enforce contracts: "Local capital" relies on families and other personal networks; "market capital" relies on impersonal market institutions such as auditors and courts. Local capital is efficient when most trading is local, but only market capital can support trading between strangers that allows extensive division of labor and industrialization. We show that economies with a low cost of accumulating local capital (say, because people live close together) are richer than economies with a high cost of accumulation when long distance trade is difficult, but are slower to transition to impersonal market exchange (industrialize) when long distance trade becomes feasible. The model provides one way to understand why the wealthiest economies in 1600Â AD, China, India, and the Islamic Middle East, industrialized more slowly than the West. We report an array of historical evidence documenting the pre-industrial importance of family and kinship networks in China, India, and the Islamic world compared to Europe, and the modernization problems linked to local capital.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 90 (2009)
Issue (Month): 1 (September)
Pages: 106-119

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Handle: RePEc:eee:deveco:v:90:y:2009:i:1:p:106-119

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Web page: http://www.elsevier.com/locate/devec

Related research

Keywords: Human capital relevant to institutions Modernization Trading and transactions Rise of the West;

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Citations

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Cited by:
  1. Ken Tabata, 2013. "The Expansion of the Commercial Sector and the Child Quantity-Quality Transition in a Malthusian World," Discussion Paper Series 105, School of Economics, Kwansei Gakuin University, revised May 2013.
  2. Bauernschuster, Stefan & Falck, Oliver & Heblich, Stephan, 2010. "Social capital access and entrepreneurship," Munich Reprints in Economics 20137, University of Munich, Department of Economics.
  3. Shingo Ishiguro, 2011. "Relationships and Growth," Discussion Papers in Economics and Business 11-31-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised May 2013.
  4. Michi NISHIHARA & Takashi SHIBATA, 2013. "Preemption, leverage, and financing constraints," Discussion Papers in Economics and Business 13-05, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  5. Lindner, Ines & Strulik, Holger, 2011. "From Tradition to Modernity: Economic Growth in a Small World," Hannover Economic Papers (HEP) dp-478, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  6. Anjos, Fernando & Anchorena, Jose, 2008. "Social ties and economic development," MPRA Paper 35322, University Library of Munich, Germany, revised 09 Dec 2011.
  7. Álvaro Aguirre, 2011. "Contracting Institutions and Economic Growth," Working Papers Central Bank of Chile 643, Central Bank of Chile.
  8. Shingo Ishiguro, 2011. "Relationships and Growth," Discussion Papers in Economics and Business 11-31, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).

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