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Spontaneous Market Emergence

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  • Marcel Fafchamps

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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Bibliographic Info

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: 01 Jan 2003
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Handle: RePEc:oxf:wpaper:138

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

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References

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  1. Rasmusen, E., 1992. "Stigma and Self-Fulfilling Expectations of Criminality," Papers 92-019, Indiana - Center for Econometric Model Research.
  2. 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.
  3. 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.
  4. Marcel Fafchamps, 2002. "Returns to social network capital among traders," Oxford Economic Papers, Oxford University Press, vol. 54(2), pages 173-206, April.
  5. Kandori, Michihiro, 1992. "Social Norms and Community Enforcement," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 63-80, January.
  6. 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.
  7. 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.
  8. McMillan, John & Woodruff, Christopher, 1998. "Inter-Firm Relationships and Informal Credit in Vietnam," CEPR Discussion Papers 2036, C.E.P.R. Discussion Papers.
  9. Kali, Raja, 1999. "Endogenous Business Networks," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 615-36, October.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. Fafchamps, Marcel, 1996. "The enforcement of commercial contracts in Ghana," World Development, Elsevier, vol. 24(3), pages 427-448, March.
  15. Fafchamps, Marcel, 1997. "Trade credit in Zimbabwean manufacturing," World Development, Elsevier, vol. 25(5), pages 795-815, May.
  16. Marris, Peter, 1971. "African Businessmen in a Dual Economy," Journal of Industrial Economics, Wiley Blackwell, vol. 19(3), pages 231-45, July.
  17. Fafchamps, Marcel & Minten, Bart, 1998. "Relationships and traders in Madagascar," MTID discussion papers 24, International Food Policy Research Institute (IFPRI).
  18. Himbara, David, 1994. "The failed Africanization of commerce and industry in Kenya," World Development, Elsevier, vol. 22(3), pages 469-482, March.
  19. Parikshit Ghosh & Debraj Ray, 1995. "Cooperation in Community Interaction Without Information Flows," Boston University - Institute for Economic Development 64, Boston University, Institute for Economic Development.
  20. Kranton, Rachel E, 1996. "Reciprocal Exchange: A Self-Sustaining System," American Economic Review, American Economic Association, vol. 86(4), pages 830-51, September.
  21. 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.
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Citations

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Cited by:
  1. Abigail Barr & Marcel Fafchamps & Trudy Owens, 2004. "The Resources and Governance of Non-Governmental Organizations in Uganda," CSAE Working Paper Series 2004-06, Centre for the Study of African Economies, University of Oxford.
  2. Kono, Hisaki, 2006. "Employment with connections: Negative network effects," Journal of Development Economics, Elsevier, vol. 81(1), pages 244-258, October.
  3. Yann Bramoullé & Sanjeev Goyal, 2009. "Favoritism," Cahiers de recherche 0941, CIRPEE.
  4. Marcus Noland, 2003. "Religion, Culture, and Economic Performance," Working Paper Series WP03-8, Peterson Institute for International Economics.
  5. Nienke Oomes, 2002. "Local Trade Networks and Spatially Persistent Unemployment," International Trade 0211004, EconWPA.
  6. Fali Huang, 2006. "The Transition from Relational to Legal Contract Enforcement," Working Papers 23-2006, Singapore Management University, School of Economics.
  7. Steven N. Durlauf & Marcel Fafchamps, 2004. "Social Capital," CSAE Working Paper Series 2004-14, Centre for the Study of African Economies, University of Oxford.
    • 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.
  8. Marcel Fafchamps & Marco J. van der Leij, 2006. "Scientific Networks and Co-authorship," Economics Series Working Papers 256, University of Oxford, Department of Economics.
  9. Marcel Fafchamps, 2004. "Social Capital and Development," Economics Series Working Papers 214, University of Oxford, Department of Economics.
  10. Joshua Charap & Jelena Pavlovic, 2009. "Development of the Commercial Banking System in Afghanistan," IMF Working Papers 09/150, International Monetary Fund.
  11. 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.
  12. 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.

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