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 differ 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 specifically 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.