To Friends Everything, to Strangers the Law? An Experiment on Contract Enforcement and Group Identity

23 Pages Posted: 7 Oct 2015

See all articles by Marian Panganiban

Marian Panganiban

Max Planck Institute for Research on Collective Goods

Date Written: October 5, 2015

Abstract

Although the role of formal and informal institutions in promoting economic growth and sustaining exchange relations is now well established, explaining and differentiating how informal and formal rules affect individual behavior remain a challenge. This study aims to distill the essential characteristics of formal and informal institutions and disentangle their effects on trust and performance in exchange relations through a laboratory experiment. Formal institutions are modeled as third-party contract enforcement while informal institutions are represented as shared group identity. Results show that trust choices increase as contract enforcement increases but are not affected by shared group identity. However, performance is more likely to occur in interactions with in-group members than out-group members.

Keywords: institutions, exchange relations, contract enforcement, group identity, laboratory experiments

JEL Classification: C72, C91, D03, D81

Suggested Citation

Panganiban, Marian, To Friends Everything, to Strangers the Law? An Experiment on Contract Enforcement and Group Identity (October 5, 2015). Available at SSRN: https://ssrn.com/abstract=2669984 or http://dx.doi.org/10.2139/ssrn.2669984

Marian Panganiban (Contact Author)

Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

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