Order with Some Law: Complementarity vs. Substitution of Formal and Informal Arrangements
John M. Olin School of Business Working Paper
49 Pages Posted: 16 Dec 2001
Date Written: December 2001
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 non-contractible 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, evidence that contracts substitute for this social norm is not robust.
Keywords: Incomplete contracts, self-enforcement, reciprocity, crowding out, trust
JEL Classification: C7, C9, L14, Z13
Suggested Citation: Suggested Citation