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Development and the Interaction of Enforcement Institutions

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Author Info
Dhillon, Amrita (Department of Economics, University of Warwick)
Rigolini, Jamele (The World Bank & University of Warwick)

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Abstract

We 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. We 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 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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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/publications/twerp_748.pdf
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Publisher Info
Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 748.

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Length: 22 pages
Date of creation: 2006
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Handle: RePEc:wrk:warwec:748

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Related research
Keywords: Contracts; Institutions; Corruption; Reputation; Uncertainty.;

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Find related papers by JEL classification:
D02 - Microeconomics - - General - - - Institutions: Design, Formation, and Operations
D7 - Microeconomics - - Analysis of Collective Decision-Making
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August. [Downloadable!] (restricted)
  2. Pierpaolo Battigalli & Giovanni Maggi, 2003. "Costly Contracting in a Long-Term Relationship," Working Papers 249, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  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. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June. [Downloadable!] (restricted)
  5. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November. [Downloadable!] (restricted)
  6. Alesina, Alberto & Perotti, Roberto, 1996. "Income distribution, political instability, and investment," European Economic Review, Elsevier, vol. 40(6), pages 1203-1228, June. [Downloadable!] (restricted)
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  7. Johannes Horner, 2002. "Reputation and Competition," American Economic Review, American Economic Association, vol. 92(3), pages 644-663, June. [Downloadable!]
  8. Avinash Dixit, 2003. "On Modes of Economic Governance," Econometrica, Econometric Society, vol. 71(2), pages 449-481, March. [Downloadable!] (restricted)
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  9. Besley, Timothy & Coate, Stephen & Loury, Glenn, 1994. "Rotating Savings and Credit Associations, Credit Markets and Efficiency," Review of Economic Studies, Blackwell Publishing, vol. 61(4), pages 701-19, October. [Downloadable!] (restricted)
  10. Greif, Avner & Milgrom, Paul & Weingast, Barry R, 1994. "Coordination, Commitment, and Enforcement: The Case of the Merchant Guild," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 745-76, August. [Downloadable!] (restricted)
  11. Rachel E. Kranton, 2003. "Competition and the Incentive to Produce High Quality," Economica, London School of Economics and Political Science, vol. 70(279), pages 385-404, 08. [Downloadable!] (restricted)
  12. W. Bentley MacLeod, 2006. "Reputations, Relationships and the Enforcement of Incomplete Contracts," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  13. William Pyle, 2005. "Contractual Disputes and the Channels for Interfirm Communication," Journal of Law, Economics and Organization, Oxford University Press, vol. 21(2), pages 547-575, October. [Downloadable!] (restricted)
  14. Dilip Mookherjee, 1999. "Contractual Constraints on Firm Performance in Developing Countries," Boston University - Institute for Economic Development 98, Boston University, Institute for Economic Development. [Downloadable!]
  15. Knack, Stephen & Keefer, Philip, 1997. "Does Social Capital Have an Economic Payoff? A Cross-Country Investigation," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1251-88, November.
  16. Franklin Allen, 1984. "Reputation and Product Quality," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 311-327, Autumn. [Downloadable!] (restricted)
  17. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)
  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. Esfahani, Hadi Salehi, 1991. "Reputation and uncertainty Toward an explanation of quality problems in competitive LDC markets," Journal of Development Economics, Elsevier, vol. 35(1), pages 1-32, January. [Downloadable!] (restricted)
  20. Acemoglu, Daron & Johnson, Simon & Robinson, James A., 2005. "Institutions as a Fundamental Cause of Long-Run Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 6, pages 385-472 Elsevier. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Francois, Patrick, 2008. "Norms and Institution Formation," CEPR Discussion Papers 6735, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Guido Tabellini, 2008. "The Scope of Cooperation: Values and Incentives," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
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