The Politics of Order in Informal Markets: Evidence from Lagos

Working Paper
Published on 25 October 2016


Property rights are important for economic exchange, but in much of the world they are not publicly provided. Private market organizations can fill this gap by providing an institutional structure to enforce agreements, but with this power comes the ability to extort from the group's members. Under what circumstances will private organizations provide a stable environment for economic activity? Using survey data collected from 1,878 randomly sampled traders across 269 markets, 68 market leaders, and 55 government revenue collectors in Lagos, Grossman (2016) finds that strong markets maintain institutions to support trade not in the absence of government, but rather as a response to active interference. The author argues that organizations develop pro-trade institutions when threatened by politicians they perceive as predatory, and when the organization can respond with threats of its own. Under this balance of power, the organization will not extort because it needs trader support to keep threats credible.