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

See all articles by Sérgio G. Lazzarini

Sérgio G. Lazzarini

Insper Institute of Education and Research

Gary J. Miller

Washington University in St. Louis - Department of Political Science

Todd Zenger

University of Utah

Date Written: December 2001

Abstract

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

Lazzarini, Sérgio Giovanetti and Miller, Gary J. and Zenger, Todd R., Order with Some Law: Complementarity vs. Substitution of Formal and Informal Arrangements (December 2001). John M. Olin School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=293803 or http://dx.doi.org/10.2139/ssrn.293803

Sérgio Giovanetti Lazzarini (Contact Author)

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil
55-11-45042387 (Phone)

HOME PAGE: http://www.sergiolazzarini.insper.edu.br/indexelazza.html

Gary J. Miller

Washington University in St. Louis - Department of Political Science ( email )

One Brookings Drive
Campus Box 1063
St. Louis, MO 63130
United States
314-935-5874 (Phone)
314-935-5856 (Fax)

Todd R. Zenger

University of Utah ( email )

David Eccles School of Business
1655 East Campus Center Drive
Salt Lake City, UT 84112
United States
801 585-3981 (Phone)
801 581-7939 (Fax)

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