The Complementarity between Community and Government in Enforcing Norms and Contracts, and their interaction with Religion and Corruption
72 Pages Posted: 17 Apr 2018 Last revised: 24 Apr 2019
Date Written: April 1, 2019
We investigate the complementarity between informal communities and formal government enforcement of norms of reciprocation and exchange. We observe that, in a cross-country analysis, GDP is positively correlated with a measure of confidence in reliance on others within a community, and with the interaction of the that measure and a measure of Rule of Law - suggesting that informal community and formal enforcement can be complements. We introduce a model in which people exchange informally within their community as well as externally on a market. We show that informal community and formal enforcement are complements: the news that someone was convicted of cheating on the market leads that person to be ostracized by their community, bolstering incentives. Although transactions within a community can be less directly beneficial than those on a wider market, doing some transactions within a community and others on a formal market lowers overall costs of enforcement and is still welfare-enhancing compared to either extreme for a wide range of costs of formal enforcement. We also show that religion can enhance the complementarity between community and formal enforcement, while corruption undermines it.
Keywords: Religion, Community, Government, Police, Contracts, Enforcement, Laws, Trust, Corruption, Norms
JEL Classification: C72, C73, D23, D73, H11, K12, O17, P48, P51, Z12
Suggested Citation: Suggested Citation