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Spontaneous Market Emergence

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Author Info
Marcel Fafchamps

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Abstract

Drawing insights from the literature on credit and labor markets and from the author`s own survey work on contractual practices among manufacturers and traders in Africa, this paper investigates the spontaneous emergence of markets in the presence of heterogeneous agents. Using a dynamic game setting, we derive precise conditions under which relational contracting spontaneously emerges and deters opportunistic breach of contract even in the absence of formal market institutions. Exclusion of cheaters from future trade is not required for exchange to begin. Markets at early stages of development are characterized by trade based on mutual trust and on the sharing of information among acquaintances. As markets develop, newcomers may be excluded from trade when screening costs are high and agents long lived. Reputational equilibria in which cheaters are permanently excluded from trade are not decentralizable unless markets are already developed and breach of contract is interpreted as a sign of impending bankruptcy. Market emergence is a path dependent process.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 138.

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Date of creation: 2003
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Handle: RePEc:oxf:wpaper:138

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Related research
Keywords: market institutions; information sharing; networks; social capital; path dependence;

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Find related papers by JEL classification:
O1 - Economic Development, Technological Change, and Growth - - Economic Development
K0 - Law and Economics - - General
P5 - Economic Systems - - Comparative Economic Systems

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  1. Fafchamps, Marcel & Minten, Bart, 1998. "Relationships and traders in Madagascar," MTID discussion papers 24, International Food Policy Research Institute (IFPRI). [Downloadable!]
  2. 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. [Downloadable!] (restricted)
  3. Kandori, Michihiro, 1992. "Social Norms and Community Enforcement," Review of Economic Studies, Blackwell Publishing, vol. 59(1), pages 63-80, January. [Downloadable!] (restricted)
  4. Kali, Raja, 1999. "Endogenous Business Networks," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 615-36, October.
  5. Marcel Fafchamps, 2002. "Returns to social network capital among traders," Oxford Economic Papers, Oxford University Press, vol. 54(2), pages 173-206, April.
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  6. 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.
  7. Fafchamps, Marcel, 1997. "Trade credit in Zimbabwean manufacturing," World Development, Elsevier, vol. 25(5), pages 795-815, May. [Downloadable!] (restricted)
  8. Marris, Peter, 1971. "African Businessmen in a Dual Economy," Journal of Industrial Economics, Blackwell Publishing, vol. 19(3), pages 231-45, July. [Downloadable!] (restricted)
  9. Fafchamps, M. & Gunning, J.W. & Oostendorp, R., 1999. "Inventories and Risk in African Manufacturing," Working Papers Series 99-19, Centre for the Study of African Economies, University of Oxford.
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  10. Rasmusen, Eric, 1996. "Stigma and Self-Fulfilling Expectations of Criminality," Journal of Law & Economics, University of Chicago Press, vol. 39(2), pages 519-43, October.
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  11. Ellison, Glenn, 1994. "Cooperation in the Prisoner's Dilemma with Anonymous Random Matching," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 567-88, July. [Downloadable!] (restricted)
  12. Himbara, David, 1994. "The failed Africanization of commerce and industry in Kenya," World Development, Elsevier, vol. 22(3), pages 469-482, March. [Downloadable!] (restricted)
  13. Ghosh, Parikshit & Ray, Debraj, 1996. "Cooperation in Community Interaction without Information Flows," Review of Economic Studies, Blackwell Publishing, vol. 63(3), pages 491-519, July. [Downloadable!] (restricted)
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  14. 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. [Downloadable!] (restricted)
  15. Bernstein, Lisa, 1992. "Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry," Journal of Legal Studies, University of Chicago Press, vol. 21(1), pages 115-57, January.
  16. 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.
  17. 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. [Downloadable!] (restricted)
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  18. Kranton, Rachel E, 1996. "Reciprocal Exchange: A Self-Sustaining System," American Economic Review, American Economic Association, vol. 86(4), pages 830-51, September. [Downloadable!] (restricted)
  19. North, Douglass C, 1991. "Institutions," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 97-112, Winter. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  21. Fafchamps, Marcel, 1996. "The enforcement of commercial contracts in Ghana," World Development, Elsevier, vol. 24(3), pages 427-448, March. [Downloadable!] (restricted)
  22. 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. [Downloadable!] (restricted)
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