Dysfunctional Non-Market Institutions and the Market

20 Pages Posted: 12 Apr 2004

See all articles by Richard J. Arnott

Richard J. Arnott

Boston College; National Bureau of Economic Research (NBER)

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: July 1988

Abstract

There is a widespread belief that when significant market failure occurs, there are strong incentives for non-market institutions to develop which go at least part of the way to remedying the deficiency. We demonstrate that this functionalist position is not in general valid. In particular, we examine a situation where insurance is characterized by moral hazard. We show that when market insurance is provided, supplementary mutual assistance between family and friends (unobservable to market insurers) -- a form of non-market institution -- will occur and may be harmful. This example suggests that non-market institutions can arise spontaneously even though they are dysfunctional.

Suggested Citation

Arnott, Richard J. and Stiglitz, Joseph E., Dysfunctional Non-Market Institutions and the Market (July 1988). NBER Working Paper No. w2666. Available at SSRN: https://ssrn.com/abstract=439589

Richard J. Arnott (Contact Author)

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Joseph E. Stiglitz

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