Private Order Under Dysfunctional Public Order

51 Pages Posted: 28 Apr 2000

See all articles by John McMillan

John McMillan

CESifo (Center for Economic Studies and Ifo Institute)

Christopher M. Woodruff

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS)

Date Written: February 2000

Abstract

People's concern for their own reputation can support contracting between a pair of trading partners when one or both are locked in, and among multiple trading partners in close-knit communities where information flows freely. In communities where people can hide behind their anonymity, private order, if it is to operate at all, must be organized. Private-order organizations in notably diverse settings, from medieval Europe to present-day Mexico, work in similar ways. An organization such as a market intermediary or a trade association disseminates information about contractual breaches and coordinates the community's response to breaches. The usual sanction is to boycott the offender.

In countries making a transition from planned to market economies, private order acts in place of the inadequate legal system. We use data from a survey of firms in five transition economies in Eastern Europe and the former Soviet Union to show that in these transition economies social networks and informal gossip substitute for the formal legal system, while business networks and trade associations work in conjunction with the formal legal system.

JEL Classification: P21

Suggested Citation

McMillan, John and Woodruff, Christopher, Private Order Under Dysfunctional Public Order (February 2000). Michigan Law Review, Vol. 98. Available at SSRN: https://ssrn.com/abstract=221848 or http://dx.doi.org/10.2139/ssrn.221848

John McMillan (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Christopher Woodruff

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS) ( email )

9500 Gilman Drive
La Jolla, CA 92093-0519
United States
858-534-0590 (Phone)
858-534-3939 (Fax)

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