Order with Some Law: Complementarity versus Substitution of Formal and Informal Arrangements
Sérgio G. Lazzarini
Insper Institute of Education and Research
Gary J. Miller
Washington University in Saint Louis - Department of Political Science
Todd R. Zenger
Washington University in Saint Louis - John M. Olin Business School
The Journal of Law, Economics, and Organization, Vol. 20, No. 2, pp. 261-298, 2004
While some argue that incomplete incentive contracts facilitate the self-enforcement of informal dealings, other authors submit that they substitute for or 'crowd out' social norms supporting informal arrangements. We use experimental evidence to test these theories by manipulating the extent to which individuals transact repeatedly and the level of contract costs. We find that, by enforcing contractible exchange dimensions, contracts facilitate the self-enforcement of noncontractible dimensions. This complementarity effect is particularly important when repetition is unlikely and thus self-enforcement is difficult. Although our data suggest the existence of reciprocity as an alternative, informal enforcement mechanism, we do not find evidence that contracts substitute for this social norm.
Accepted Paper Series
Date posted: June 24, 2004
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.422 seconds