The Incentive Complementarity between Formal and Informal Enforcement

63 Pages Posted: 17 Apr 2018 Last revised: 27 Nov 2023

See all articles by Matthew O. Jackson

Matthew O. Jackson

Stanford University - Department of Economics; Santa Fe Institute

Yiqing Xing

Peking University - National School of Development

Date Written: January 31, 2021

Abstract

We introduce a model in which people exchange some goods and services informally in their community and others formally on a market. We show that enforcement by informal communities and a formal market are complements: if communities ostracize individuals who are caught cheating on the market, this bolsters incentives to comply with exchanges in both settings.

Although transactions within a community generate lower gains from trade than those on the wider market, the enhanced incentives from simultaneously transacting in communities and on the overall market can be welfare-enhancing compared to either extreme. We discuss the implications of informal community exchanges in a country's development as well as how moral or religious beliefs enhance the complementarity between community and formal enforcement.

Keywords: Community, Government, Contracts, Reputation, Enforcement, Laws, Courts, Trust, Religion, Corruption, Norms, Privacy

JEL Classification: C72, C73, D23, D73, H11, K12, O17, P48, P51, Z12

Suggested Citation

Jackson, Matthew O. and Xing, Yiqing, The Incentive Complementarity between Formal and Informal Enforcement (January 31, 2021). Johns Hopkins Carey Business School Research Paper No. 18-07, Available at SSRN: https://ssrn.com/abstract=3153842 or http://dx.doi.org/10.2139/ssrn.3153842

Matthew O. Jackson (Contact Author)

Stanford University - Department of Economics ( email )

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HOME PAGE: http://www.stanford.edu/~jacksonm

Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

Yiqing Xing

Peking University - National School of Development ( email )

Beijing, 100871
China

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