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Endogenous institutional selection, building trust, and economic growth

Bodoh-Creed, Aaron L.

Games and Economic Behavior, 2019, vol. 114, issue C, 169-176

Abstract: Private-order market institutions founded on trust-based relational contracts suffer adverse selection and moral hazard problems, while public-order market institutions have a limited capacity to enforce contracts. I model agent selection between contract enforcement institutions and demonstrate that the state's contract enforcement capacity is complementary to private-order contract enforcement institutions for low to moderate levels of public-order enforcement capacity. This suggests that initial improvements to public-order institutions cause the accumulation of trust and result in economic growth in both institutions. However, I show that the private-order institution must collapse once the public-order contract enforcement capacity is too great.

Keywords: Institutions; Trust; Institutional selection (search for similar items in EconPapers)
JEL-codes: H10 K12 O17 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:gamebe:v:114:y:2019:i:c:p:169-176