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Development and the Interaction of Enforcement Institutions

Author Info

Listed author(s):
  • Dhillon, Amrita

    (Department of Economics, University of Warwick)

  • Rigolini, Jamele

    (The World Bank & University of Warwick)

Abstract

We examine how institutions that enforce contracts between two parties, producers and consumers, interact in a competitive market with one-sided asymmetric information and productivity shocks. We compare an informal enforcement mechanism, reputation, the efficacy of which is enhanced by consumers investing in “connectedness,” with a formal mechanism, legal enforcement, the effectiveness of which can be reduced by producers by means of bribes. When legal enforcement is poor, consumers connect more with one another to improve informal enforcement; in contrast, a well-connected network of consumers reduces producers’ incentives to bribe. In equilibrium, the model predicts a positive relationship between the the frequency of productivity shocks, bribing, and the use of informal enforcement, providing a physical explanation of why developing countries often fail to have efficient legal systems. Firm-level estimations confirm the partial equilibrium implications of the model

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_748.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 748.

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Length: 22 pages
Date of creation: 2006
Handle: RePEc:wrk:warwec:748
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Web page: http://www2.warwick.ac.uk/fac/soc/economics/

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Keywords: Contracts; Institutions; Corruption; Reputation; Uncertainty.;

Other versions of this item:

Find related papers by JEL classification:
  • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
  • D7 - Microeconomics - - Analysis of Collective Decision-Making
  • 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

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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. 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.
  3. Nishihara, Michi & Shibata, Takashi, 2014. "Preemption, leverage, and financing constraints," Review of Financial Economics, Elsevier, vol. 23(2), pages 75-89.
  4. 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.
  5. Bramoullé, Yann & Goyal, Sanjeev, 2016. "Favoritism," Journal of Development Economics, Elsevier, vol. 122(C), pages 16-27.
  6. Guido Tabellini, 2008. "The Scope of Cooperation: Values and Incentives," The Quarterly Journal of Economics, Oxford University Press, vol. 123(3), pages 905-950.
  7. Kvaløy, Ola & Olsen, Trond E., 2015. "The tenuous relationship between effort and performance pay," Journal of Public Economics, Elsevier, vol. 121(C), pages 32-39.
  8. Amir, Rabah & Burr, Chrystie, 2015. "Corruption and socially optimal entry," Journal of Public Economics, Elsevier, vol. 123(C), pages 30-41.
  9. Francois, Patrick, 2008. "Norms and Institution Formation," CEPR Discussion Papers 6735, C.E.P.R. Discussion Papers.
  10. 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.
  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, vol. 2(2), pages 1-30, January.
  12. 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.
  13. 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.

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