Formal contracting and informal institutions

Abstract: Absent states to enforce contracts, societies develop alternative institutions based on the social structure to generate trust and trade (Greif 1990). However,  when social groups are fragmented, trade opportunities across groups are lost. Even in weak states, introducing state-backed contracts can provide minimal guarantees needed to expand trade, but introducing a third-party intermediary can also crowd out the pre-existing social equilibria. In this study, I draw on random assignment between traders and buyers of the two starkest identities in Eastern Congo and evaluate the effect of access to state backed contracts on trade. To understand whether this can be scaled-up, I examine whether contracts are trusted because they solve a holdup problem or because of other information they might signal about traders.

Funders: Russell Sage Foundation Small Grants in Behavioral Economics; Center for the Study of Development Strategies

Below is a photo of the team at work: