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Development and the interaction of enforcement institutions

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  • Dhillon, Amrita
  • Rigolini, Jamele

Abstract

We examine how formal and informal contract enforcing institutions interact in a competitive market with asymmetric information where consumers do not observe quality before purchase. Firm level incentives for producing high quality can be achieved with an informal enforcement mechanism, reputation, the efficacy of which is enhanced by consumers investing in “connectedness;” or with a formal mechanism, legal enforcement, the effectiveness of which can be reduced by means of bribes. We show that formal and informal enforcement mechanisms do not necessarily substitute each other: while high levels of judicial efficiency decrease consumers' incentives to connect, higher consumers' connectedness leads to higher levels of judicial efficiency. We then look at how the equilibrium institutional mix evolves with the level of development. In doing so we show the presence of a new, physical, channel that can affect institutions—i.e. the frequency of bad productivity shocks that, in less developed settings, can impact on firms' incentives to cheat.

Suggested Citation

  • Dhillon, Amrita & Rigolini, Jamele, 2011. "Development and the interaction of enforcement institutions," Journal of Public Economics, Elsevier, vol. 95(1), pages 79-87.
  • Handle: RePEc:eee:pubeco:v:95:y:2011:i:1:p:79-87 DOI: 10.1016/j.jpubeco.2010.09.013
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    Cited by:

    1. Shingo Ishiguro, 2011. "Relationships and Growth," Discussion Papers in Economics and Business 11-31, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    2. ROUGIER Eric, 2015. "\"The parts and the whole”: Unbundling and re-bundling institutional systems and their effect on economic development," Cahiers du GREThA 2015-12, Groupe de Recherche en Economie Théorique et Appliquée.
    3. Cecchi, Francesco & Melesse, Mequanint Biset, 2016. "Formal law and customary change: A lab-in-field experiment in Ethiopia," Journal of Economic Behavior & Organization, Elsevier, vol. 125(C), pages 67-85.
    4. Nishihara, Michi & Shibata, Takashi, 2014. "Preemption, leverage, and financing constraints," Review of Financial Economics, Elsevier, vol. 23(2), pages 75-89.
    5. Anna Rubinchik & Roberto Samaniego, 2013. "Demand for contract enforcement in a barter environment," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 41(1), pages 73-97, June.
    6. Bramoullé, Yann & Goyal, Sanjeev, 2016. "Favoritism," Journal of Development Economics, Elsevier, pages 16-27.
    7. Guido Tabellini, 2008. "The Scope of Cooperation: Values and Incentives," The Quarterly Journal of Economics, Oxford University Press, vol. 123(3), pages 905-950.
    8. Carla Altobelli & Gaetano Fausto Esposito, 2014. "Capitale fiduciario e sviluppo a livello regionale: un’analisi esplorativa del ruolo del capitale civico e morale," RIVISTA DI ECONOMIA E STATISTICA DEL TERRITORIO, FrancoAngeli Editore, vol. 2014(3), pages 5-39.
    9. Kvaløy, Ola & Olsen, Trond E., 2015. "The tenuous relationship between effort and performance pay," Journal of Public Economics, Elsevier, pages 32-39.
    10. Amir, Rabah & Burr, Chrystie, 2015. "Corruption and socially optimal entry," Journal of Public Economics, Elsevier, pages 30-41.
    11. Swinnen Johan & Vandeplas Anneleen, 2012. "Rich Consumers and Poor Producers: Quality and Rent Distribution in Global Value Chains," Journal of Globalization and Development, De Gruyter, pages 1-30.
    12. Francois, Patrick, 2008. "Norms and Institution Formation," CEPR Discussion Papers 6735, C.E.P.R. Discussion Papers.
    13. Gani, Azmat & Clemes, Michael D., 2013. "Modeling the effect of the domestic business environment on services trade," Economic Modelling, Elsevier, vol. 35(C), pages 297-304.

    More about this item

    Keywords

    Contracts; Institutions; Quality; Markets; Corruption; Reputation; Uncertainty;

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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