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Development and the interaction of enforcement institutions

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  • Dhillon, Amrita
  • Rigolini, Jamele

Abstract

We examine how formal and informal contract enforcing institutions interact in a competitive market with asymmetric information where consumers do not observe quality before purchase. Firm level incentives for producing high quality can be achieved with an informal enforcement mechanism, reputation, the efficacy of which is enhanced by consumers investing in “connectedness;” or with a formal mechanism, legal enforcement, the effectiveness of which can be reduced by means of bribes. We show that formal and informal enforcement mechanisms do not necessarily substitute each other: while high levels of judicial efficiency decrease consumers' incentives to connect, higher consumers' connectedness leads to higher levels of judicial efficiency. We then look at how the equilibrium institutional mix evolves with the level of development. In doing so we show the presence of a new, physical, channel that can affect institutions—i.e. the frequency of bad productivity shocks that, in less developed settings, can impact on firms' incentives to cheat.

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Bibliographic Info

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

Volume (Year): 95 (2011)
Issue (Month): 1 ()
Pages: 79-87

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Handle: RePEc:eee:pubeco:v:95:y:2011:i:1:p:79-87

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Web page: http://www.elsevier.com/locate/inca/505578

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Keywords: Contracts; Institutions; Quality; Markets; Corruption; Reputation; Uncertainty;

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References

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Citations

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Cited by:
  1. Anna Rubinchik & Roberto Samaniego, 2013. "Demand for contract enforcement in a barter environment," Social Choice and Welfare, Springer, vol. 41(1), pages 73-97, June.
  2. 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).
  3. Tabellini, Guido, 2007. "The Scope of Cooperation: Values and incentives," CEPR Discussion Papers 6534, C.E.P.R. Discussion Papers.
  4. Francois, Patrick, 2008. "Norms and Institution Formation," CEPR Discussion Papers 6735, C.E.P.R. Discussion Papers.
  5. 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.
  6. 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).
  7. Gani, Azmat & Clemes, Michael D., 2013. "Modeling the effect of the domestic business environment on services trade," Economic Modelling, Elsevier, vol. 35(C), pages 297-304.

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