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Governance and contract choice: Theory and evidence from groundwater irrigation markets

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  • Michler, Jeffrey D.
  • Wu, Steven Y.

Abstract

This paper examines the role governance institutions play in the adoption of contracts. We develop a simple model of the contracting relationship in a setting where unverifiable outcomes exist and use it to interpret data on groundwater irrigation contracts in Bangladesh. A distinguishing feature of this market is the variety of village-level institutions which impose different degrees of punishment for contract violation. Consistent with the model, we find households adopt contracts that rely on unverifiable outcomes, which are not formally contractible, when punishment for contract violation is weak. Conversely, households adopt contracts that rely on formally contractible and verifiable outcomes when punishment is severe. This evidence is consistent with contract terms being chosen optimally given what is or is not formally contractible.

Suggested Citation

  • Michler, Jeffrey D. & Wu, Steven Y., 2020. "Governance and contract choice: Theory and evidence from groundwater irrigation markets," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 129-147.
  • Handle: RePEc:eee:jeborg:v:180:y:2020:i:c:p:129-147
    DOI: 10.1016/j.jebo.2020.09.031
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    More about this item

    Keywords

    Contract enforcement; Formal and relational contracting; Verifiability problem; Institutions; Bangladesh;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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