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

See all articles by Matthew O. Jackson

Matthew O. Jackson

Stanford University - Department of Economics; Santa Fe Institute; Canadian Institute for Advanced Research (CIFAR)

Yiqing Xing

Johns Hopkins University - Carey Business School

Date Written: April 1, 2019

Abstract

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

Jackson, Matthew O. and Xing, Yiqing, The Complementarity between Community and Government in Enforcing Norms and Contracts, and their interaction with Religion and Corruption (April 1, 2019). 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 )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
1-650-723-3544 (Phone)

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

Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

Canadian Institute for Advanced Research (CIFAR) ( email )

180 Dundas Street West, Suite 1400
Toronto, Ontario
Canada

Yiqing Xing

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://yiqingxing.com

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