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Development and the interaction of enforcement institutions

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  • Dhillon, Amrita
  • Rigolini, Jamele

Abstract

The authors examine how institutions that enforce contracts between two parties-producers and consumers-interact in a competitive market with one-sided asymmetric information and productivity shocks. They compare an informal enforcement mechanism, reputation, the efficacy of which is enhanced by consumers investing in"connectedness,"with a formal mechanism, legal enforcement, the effectiveness of which can be reduced by producers by means of bribes. When legal enforcement is poor, consumers connect more with one another to improve informal enforcement. In contrast, a well-connected network of consumers reduces producers'incentives to bribe. In equilibrium, the model predicts a positive relationship between the frequency of productivity shocks, bribing, and the use of informal enforcement, providing a physical explanation of why developing countries often fail to have efficient legal systems. Firm-level estimations confirm the partial equilibrium implications of the model.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4090.

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Date of creation: 01 Dec 2006
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Handle: RePEc:wbk:wbrwps:4090

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Keywords: Economic Theory&Research; Insurance&Risk Mitigation; Markets and Market Access; Business Environment; Business in Development;

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References

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Citations

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Cited by:
  1. Tabellini, Guido, 2007. "The Scope of Cooperation: Values and incentives," CEPR Discussion Papers 6534, C.E.P.R. Discussion Papers.
  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. Rubinchik, Anna & Samaniego, Roberto M., . "Demand For Contract Enforcement in A Barter Environment," Working Papers WP2011/15, University of Haifa, Department of Economics, revised 06 Dec 2011.
  4. 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.
  5. 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.
  6. Francois, Patrick, 2008. "Norms and Institution Formation," CEPR Discussion Papers 6735, C.E.P.R. Discussion Papers.
  7. 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).

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