The Political Determinants of Economic Exchange

How do citizens react to political connections when the rule of law is weak? This project estimates the impact of political connections on trust in economic exchange in Senegal and, when exchange occurs, it explores whether buyers prefer formal or informal contracts.

Confidence that a deal will be honoured during the basic exchange of goods is fundamental for encouraging private-sector development. Political features can moderate this confidence and affect a host of important development outcomes, including trade, contracting, and foreign investment. Yet, what happens when the state’s rule of law is not distributed evenly amongst citizens, where certain individuals’ privileged access to state institutions provides them greater power to dishonour a contract? This characterises the political context in the bulk of low-income countries (LICs). Building on fieldwork conducted in Senegal in 2015 and 2016, the researcher will implement a novel field experiment in Dakar to test the effect of political connections on confidence in exchange. While past work has suggested a link between political power and economic exchange in LICs, few rigorous studies have been conducted on the topic, or have examined the relationship from this perspective.

In July 2016, the principal investigator created a sales business in Senegal with the support of APIX, the Senegalese state’s primary investment agency. As part of his randomised field experiment in Dakar, he will hire enumerators as traders, and have them develop political connections to be randomly signalled to buyers during door-to-door transactions. Traders will then offer a good (phone credit) to households. As part of the deal, buyers must give the traders money for the good, with the expectation that the good will be delivered to the household the following week. Political connections are expected to decrease potential buyers’ acceptance of this contract, if the buyers are non-connected. This is because buyers are wary of doing business with sellers that they perceive to be immune from punishment in the case of reneging. Buyers will also be offered the opportunity to sign a formal contract at a small cost, or to rest instead on the implicit informal contract of the exchange. The researcher predicts that absent their own political connections, buyers will opt for formal contracts with politically connected sellers as a form of additional protection.

The interaction of political-power relations and the market has direct consequences for citizens’ everyday lives, and for overall economic development and growth. As trust behind private exchange is essential for building economies, examining how this trust manifests itself in the wake of uneven political privilege is essential to understanding patterns of growth in the private sector of LICs. This project will provide estimates of the impact of political power on how actors in the private sphere conduct business and contract with one another, informing policies on the development of contract enforcement and property rights.