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

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  • Jain, Tarun
  • Sood, Ashima

Abstract

A large theoretical and empirical literature suggests that the salience of network-based ties in contract enforcement under relation-based governance systems limits market expansion. This paper illustrates the incorporation of new agents into market exchange under conditions of informal contract governance using a case study of the cycle-rickshaw rental market in a city in central India. Our analytical model formalizes features of this market through a higher penalty of default for migrants that introduces a gap between the ex ante risk for out-of-network agents and the ex post risk. The model predicts a sorting equilibrium such that migrants are more likely to participate in the rental contract. We test this prediction using primary survey data with multidimensional measures of migrant status and find that it is a significant predictor of rental contract participation, even controlling for credit access and other variables that moderate the rickshaw driver’s ability to own a cycle-rickshaw.

Suggested Citation

  • Jain, Tarun & Sood, Ashima, 2012. "How does relationship-based governance accommodate new entrants? Evidence from the cycle rickshaw rental market," MPRA Paper 37424, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:37424
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    References listed on IDEAS

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    Cited by:

    1. Gharad Bryan & Shyamal Chowdhury & Ahmed Mushfiq Mobarak, 2014. "Underinvestment in a Profitable Technology: The Case of Seasonal Migration in Bangladesh," Econometrica, Econometric Society, vol. 82, pages 1671-1748, September.
    2. Karthikeya Naraparaju, 2014. "Impediments to Contract Enforcement in Day Labour Markets: A Perspective from India," Working Papers id:6332, eSocialSciences.

    More about this item

    Keywords

    Urban informal sector; Contract enforcement; Rural to urban migration;

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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