The Incentive Complementarity Between Formal and Informal Enforcement

Matthew Jackson and Yiqing Xing

Journal of the European Economic Association, 2024, vol. 22, issue 5, 2294-2328

Abstract: We introduce a model in which people exchange some goods and services informally in their community and others formally on a market. We show that enforcement by informal communities and a formal market are complements: If communities ostracize individuals who are caught cheating on the market, this bolsters incentives to comply with exchanges in both settings. Although transactions within a community generate lower gains from trade than those on the wider market, the enhanced incentives from simultaneously transacting in communities and on the overall market can be welfare-enhancing compared with either extreme. We discuss the implications of informal community exchanges in a country’s development as well as how moral or religious beliefs enhance the complementarity between community and formal enforcement.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:22:y:2024:i:5:p:2294-2328.

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