Social, Formal, and Political Determinants of Trade under Weak Rule of Law: Experimental Evidence from Senegalese Firms

Working Paper
Published on 2 October 2019
Authors
Abhit Bhandari

Abstract

When contracting institutions are weak or exploitable, firms in developing countries rely on a mixture of social and formal heuristics to select business partners. What is the relative importance of social and formal determinants of trade, and how do political considerations factor in firms' risk calculus? Politically connected partners can be at once risky and useful to firms: they can break contracts with relative impunity, but they also open access to lucrative markets. Bhandari (2019) implements a survey with a conjoint experiment among 2,389 formal and informal firms in Senegal. The results demonstrate the surprisingly large influence of formal predictors of exchange even in an overwhelmingly informal business environment, and also establish the countervailing effects of political connections on trade. This evidence suggests that firms in developing countries must contend with an intricate political calculus to ensure growth, thus complicating economic policy intended to develop the private sector.

Authors

Abhit Bhandari

Columbia University