How does relationship-based governance accommodate new entrants? Evidence from the cycle-rickshaw rental market

Relationship-based contract enforcement is commonly thought to limit market expansion. In contrast, this paper illustrates how relationship-based contract governance accommodates new entrants into market exchange using a case study of the cycle-rickshaw rental market in a city in central India. Migrants face a higher penalty for default that introduces a gap between the ex ante risk for out-of-network agents and the ex post risk. As a result, cycle-rickshaw owners are more likely to rent to migrants and migrants are more likely to participate in rental contracts. With primary data on multidimensional measures of migrant status, we confirm that migrant status is a significant predictor of rental contract participation, even controlling for other variables that moderate the rickshaw driver's ability to own a cycle-rickshaw. Our findings thus introduce a new perspective into current understandings of relationship-based contract governance.