Economic growth requires confidence in the state's ability to enforce secure exchange. But when states selectively enforce rule of law, political considerations can moderate the trust that buyers have in sellers. Bhandari (2019) argues that political connections produce moral hazard in exchange and introduce biases in judicial enforcement. Buyers avoid trade with relatively powerful sellers, and, in this context of unequal enforcement, formal contracts accentuate power inequities by only protecting politically connected buyers. The author created a legal business in Senegal to randomize whether salespeople signaled their political connections and offered formal contracts during transactions. The results show that relatively politically powerful sellers decreased - while formal contracts increased - buyers' propensities to trade. However, formal contracts only boosted trade among connected buyers. These findings show how asymmetric political connections can impede daily trade and intensify economic inequalities in developing contexts, while simultaneously demonstrating the limits of state institutions for mitigating politically-driven moral hazard.
