On the determinants and consequences of informal contracting

As documented by Macauley and others, informal contracts are pervasive in modern economies. Yet, systematic empirical evidence on them is still limited. In this paper, we provide a framework to investigate the determinants and consequences of informal contracting. First, we present an illustrative model that organizes key predictions from the theoretical literature. Next, we discuss selected empirical works that shed light on the model's relevance and testability. Overall, we find combined support for most theoretical predictions from the model, and we observe that significant progress has been made over time at measuring key determinants of informal contracting such as the parties’ discount factor and fallback option. We conclude by discussing strategies for testing theoretical predictions for which conclusive evidence is still missing.