Development and the Interaction of Enforcement Institutions

Amrita Dhillon () and Iamele Rigolini

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

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

Keywords: Contracts; Institutions; Corruption; Reputation; Uncertainty. (search for similar items in EconPapers)
JEL-codes: D02 D7 L14 O12 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2006
New Economics Papers: this item is included in nep-reg and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://warwick.ac.uk/fac/soc/economics/research/w ... s/2008/twerp_748.pdf

Related works:
Journal Article: Development and the interaction of enforcement institutions (2011)
Journal Article: Development and the interaction of enforcement institutions (2011)
Working Paper: Development and the Interaction of Enforcement Institutions (2006)
Working Paper: Development and the interaction of enforcement institutions (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:748

Access Statistics for this paper

More papers in The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Margaret Nash ().