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

Jeffrey Michler and Steven Y. Wu

Journal of Economic Behavior & Organization, 2020, vol. 180, issue C, 129-147

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.

Keywords: Contract enforcement; Formal and relational contracting; Verifiability problem; Institutions; Bangladesh (search for similar items in EconPapers)
JEL-codes: D82 L14 O12 Q15 Z13 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:180:y:2020:i:c:p:129-147

DOI: 10.1016/j.jebo.2020.09.031

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