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Market Emergence, Trust and Reputation

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  • Marcel Fafchamps

Abstract

First draft: February 1996. This draft: November 1996. Drawing insights from survey work on enterprise finance and from the literature on credit and labor markets, this paper investigates the spontaneous emergence of markets in the presence of heterogeneous agents and commitment failure. We show that courts and other formal market institutions are not a prerequisite for market exchange to take place. Fully decentralized markets can spontaneously emerge and discipline themselves. Exchange is not anonymous but based on mutual trust and on the sharing of information among agents. Economic efficiency is not fully achieved. Screening costs lead to closed-shop markets and segmented equilibria. The permanent exclusion of cheaters from future trade can be self-enforcing and self-emerging if breach of contract is interpreted as a sign of impending bankruptcy.

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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 96016.

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Handle: RePEc:wop:stanec:96016

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Cited by:
  1. Fafchamps, Marcel, 1997. "Trade credit in Zimbabwean manufacturing," World Development, Elsevier, vol. 25(5), pages 795-815, May.
  2. Gagliardi, Francesca, 2008. "Institutions and economic change: A critical survey of the new institutional approaches and empirical evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 37(1), pages 416-443, February.
  3. Oomes, Nienke, 2003. "Local trade networks and spatially persistent unemployment," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 2115-2149, September.
  4. weijland, Hermine, 1999. "Microenterprise Clusters in Rural Indonesia: Industrial Seedbed and Policy Target," World Development, Elsevier, vol. 27(9), pages 1515-1530, September.
  5. Javier Escobal D’Angelo, 2001. "Costos de transacción en la agricultura peruana: una primera aproximación a su medición e impacto," Documentos de Investigación dt30, Grupo de Análisis para el Desarrollo (GRADE).

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