Ethnic Contract Enforceability

Monday, 9 January, 2017
Many states struggle to enforce contracts. The origin of the state's "legal capacity" to enforce contracts is often explained as a result of past choices by rulers. However, after transactions are made, contracts are enforced by administrators, whose incentives to enforce them diff er from those of rulers (Greif, 2007). In this paper, Sanchez de la Sierra (2016) randomly introduces state-backed contracts into the agency relationships between traders and customers of a market he created in the Democratic Republic of the Congo. The patterns of agents' shirking reflect that they expect contracts to be enforceable, but only by traders from ethnic groups who control the administration. Furthermore, state contracts, when applied among groups who can enforce them, generate higher volumes of trade speci fically by improving the expectations about the traders' future behavior, and can substitute for informal ethnic based contract enforcement, absent between ethnic groups. The results suggest that while social institutions govern agency relations, social institutions also govern the administration, which limits the impact of state capacity on contract enforceability and distorts the patterns of trade.