Legal Institutions and the Structure of Informal Networks

38 Pages Posted: 16 Jun 2003

See all articles by Ethan Bueno de Mesquita

Ethan Bueno de Mesquita

Harvard University - Department of Government

Matthew Stephenson

Harvard Law School; Institute for Corruption Studies

Date Written: April 2003

Abstract

The relationship between government-provided contract enforcement and informal trade networks raises important sociological, political, and economic questions. When economic activity is embedded in complex social structures, what are the implications of governmental contract enforcement for the scope and nature of economic relations? What determines whether individuals rely on formal legal institutions or informal networks to sustain trade relationships? Do effective legal institutions erode informal networks? To address these questions, we develop a model in which a trade-off exists between size and sustainability of networks. By adding the possibility of enforceable contracts, we provide a theoretical explanation for the coexistence of legal contract enforcement and an informal economy. We find that legal enforcement has little effect on networks unless the cost of law drops below a certain threshold, at which point small decreases in the cost of law have dramatic effects on network size and the frequency of use of the legal system.

JEL Classification: K12, C72, Z13

Suggested Citation

Bueno de Mesquita, Ethan and Stephenson, Matthew Caleb, Legal Institutions and the Structure of Informal Networks (April 2003). Harvard Law and Economics Discussion Paper No. 419. Available at SSRN: https://ssrn.com/abstract=416421 or http://dx.doi.org/10.2139/ssrn.416421

Ethan Bueno de Mesquita

Harvard University - Department of Government ( email )

1737 Cambridge Street
Cambridge, MA 02138
United States

Matthew Caleb Stephenson (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States
617-495-9863 (Phone)

Institute for Corruption Studies

Stevenson Hall 425
Normal, IL 61790-4200
United States

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