Development and the Interaction of Enforcement Institutions

We examine how formal and informal contract enforcing institutions interact in a competitive market with asymmetric information where consumers do not observe quality before purchase. Firm level incentives for producing high quality can be achieved with an informal enforcement mechanism, reputation,...

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Main Authors:	Dhillon, Amrita, Rigolini, Jamele
Format:	Journal Article
Language:	EN
Published:	2012
Subjects:	Institutions: Design, Formation, and Operations D020 Asymmetric and Private Information D820 Contract Law K120 Illegal Behavior and the Enforcement of Law K420 Formal and Informal Sectors Shadow Economy Institutional Arrangements O170
Online Access:	http://hdl.handle.net/10986/5647

id	okr-10986-5647
recordtype	oai_dc
spelling	okr-10986-56472021-04-23T14:02:23Z Development and the Interaction of Enforcement Institutions Dhillon, Amrita Rigolini, Jamele Institutions: Design, Formation, and Operations D020 Asymmetric and Private Information D820 Contract Law K120 Illegal Behavior and the Enforcement of Law K420 Formal and Informal Sectors Shadow Economy Institutional Arrangements O170 We examine how formal and informal contract enforcing institutions interact in a competitive market with asymmetric information where consumers do not observe quality before purchase. Firm level incentives for producing high quality can be achieved with an informal enforcement mechanism, reputation, the efficacy of which is enhanced by consumers investing in "connectedness;" or with a formal mechanism, legal enforcement, the effectiveness of which can be reduced by means of bribes. We show that formal and informal enforcement mechanisms do not necessarily substitute each other: while high levels of judicial efficiency decrease consumers' incentives to connect, higher consumers' connectedness leads to higher levels of judicial efficiency. We then look at how the equilibrium institutional mix evolves with the level of development. In doing so we show the presence of a new, physical, channel that can affect institutions--i.e., the frequency of bad productivity shocks that, in less developed settings, can impact on firms' incentives to cheat. 2012-03-30T07:33:51Z 2012-03-30T07:33:51Z 2011 Journal Article Journal of Public Economics 00472727 http://hdl.handle.net/10986/5647 EN http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Journal Article
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	EN
topic	Institutions: Design, Formation, and Operations D020 Asymmetric and Private Information D820 Contract Law K120 Illegal Behavior and the Enforcement of Law K420 Formal and Informal Sectors Shadow Economy Institutional Arrangements O170
spellingShingle	Institutions: Design, Formation, and Operations D020 Asymmetric and Private Information D820 Contract Law K120 Illegal Behavior and the Enforcement of Law K420 Formal and Informal Sectors Shadow Economy Institutional Arrangements O170 Dhillon, Amrita Rigolini, Jamele Development and the Interaction of Enforcement Institutions
relation	http://creativecommons.org/licenses/by-nc-nd/3.0/igo
description	We examine how formal and informal contract enforcing institutions interact in a competitive market with asymmetric information where consumers do not observe quality before purchase. Firm level incentives for producing high quality can be achieved with an informal enforcement mechanism, reputation, the efficacy of which is enhanced by consumers investing in "connectedness;" or with a formal mechanism, legal enforcement, the effectiveness of which can be reduced by means of bribes. We show that formal and informal enforcement mechanisms do not necessarily substitute each other: while high levels of judicial efficiency decrease consumers' incentives to connect, higher consumers' connectedness leads to higher levels of judicial efficiency. We then look at how the equilibrium institutional mix evolves with the level of development. In doing so we show the presence of a new, physical, channel that can affect institutions--i.e., the frequency of bad productivity shocks that, in less developed settings, can impact on firms' incentives to cheat.
format	Journal Article
author	Dhillon, Amrita Rigolini, Jamele
author_facet	Dhillon, Amrita Rigolini, Jamele
author_sort	Dhillon, Amrita
title	Development and the Interaction of Enforcement Institutions
title_short	Development and the Interaction of Enforcement Institutions
title_full	Development and the Interaction of Enforcement Institutions
title_fullStr	Development and the Interaction of Enforcement Institutions
title_full_unstemmed	Development and the Interaction of Enforcement Institutions
title_sort	development and the interaction of enforcement institutions
publishDate	2012
url	http://hdl.handle.net/10986/5647
_version_	1764395804915662848

Development and the Interaction of Enforcement Institutions

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