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Development and the interaction of enforcement institutions
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Dhillon, Amrita and Rigolini, Jamele (2006) Development and the interaction of enforcement institutions. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (Number 748).
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Abstract
We examine how institutions that enforce contracts between two parties, producers and consumers, interact in a competitive market with one-sided symmetric 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.
Item Type: | Working or Discussion Paper (Working Paper) | ||||
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Subjects: | H Social Sciences > HF Commerce | ||||
Divisions: | Faculty of Social Sciences > Economics | ||||
Library of Congress Subject Headings (LCSH): | Contracts, Group decision making, Related party transactions, Microeconomics, Commercial law | ||||
Series Name: | Warwick economic research papers | ||||
Publisher: | University of Warwick, Department of Economics | ||||
Place of Publication: | Coventry | ||||
Official Date: | 30 April 2006 | ||||
Dates: |
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Number: | Number 748 | ||||
Number of Pages: | 22 | ||||
Institution: | University of Warwick | ||||
Status: | Not Peer Reviewed | ||||
Access rights to Published version: | Open Access (Creative Commons) | ||||
Version or Related Resource: | Later published as: Dhillon, A. and Rigolini, J. (2011). Development and the interaction of enforcement institutions. Journal of Public Economics, 95(1-2), pp. 79-87. http://wrap.warwick.ac.uk/id/eprint/41729 | ||||
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