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Spontaneous Market Emergence

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  • Fafchamps Marcel

    (Department of Economics, Oxford University)

Abstract

Drawing insights from the literature and from the author's own survey work on contractual practices among manufacturers and traders in Africa, we study the transition from anonymous to personal to impersonal exchange. Using a dynamic game with heterogenous agents and information sharing, we derive precise conditions under which relational contracting spontaneously emerges and deters opportunistic breach even in the absence of formal market institutions. Exclusion of cheaters is not required for contracting to begin. As exchange develops, newcomers may be excluded from contracting when screening costs are high and agents long lived. Reputational equilibria in which cheaters are permanently excluded are not decentralizable unless contracting is already developed and breach of contract is interpreted as a sign of impending bankruptcy.

Suggested Citation

  • Fafchamps Marcel, 2002. "Spontaneous Market Emergence," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-37, June.
    • Handle: RePEc:bpj:bejtec:v:topics.2:y:2002:i:1:n:2
    DOI: 10.2202/1534-598X.1045
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    1. John McMillan & Christopher Woodruff, 1999. "Interfirm Relationships and Informal Credit in Vietnam," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(4), pages 1285-1320.
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    More about this item

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • K0 - Law and Economics - - General
    • P5 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems

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