Contracting Institutions

Abstract

Property rights institutions, including contract enforcement, are recognized as a fundamental determinant to economic performance. However, understanding how to secure property remains elusive. This paper attempts to provide a theoretical framework and empirical analysis to unpack the black box of property rights. The framework entails distinguishing between private and public protection and subsequent enforcement mechanisms. Previous findings suggest that informal, cultural rules underlie constraints on government predation. Following this logic, this study asks how contract enforcement is achieved – through formal or informal mechanisms? After controlling for reverse causality, the empirical results suggest that informal cultural mechanisms protect against private predation and support contracting institutions while the formal institutions are insignificant. These results are robust to a variety of model specifications, multiple instrumental variables and a range of control variables.

Keywords: Property Rights, Contract Enforcement, Informal Institutions, Formal Institutions, Culture

JEL Classification: F55, O17