Dispute prevention without courts in Vietnam

Abstract

Vietnam's firms contract without shadow of law and only partly in shadow of future. Although contracting rests in part on threat of loss of future business, firms often are willing to renegotiate following a breach, so retaliation is not as forceful as in standard repeated-game story and not as effective a sanction. To ensure agreements are kept, firms rely on other devices to supplement repeated-game incentives. Firms scrutinize their trading partners. Community sanctions are occasionally invoked. Transactions with greater risk of reneging are supported by more elaborate governance structures. Ongoing relationships among firms serve to reduce transaction costs of market: costs of locating trading partners, of negotiating and monitoring contracts, and of enforcing agreements and settling disputes. In an economy in midst of deep reform, transaction costs are especially severe because normal market-supporting institutions are still being built. We examine in this article how Vietnam's firms use ongoing relationships to maintain agreements. For a snapshot of an economy in process of building institutions, we use a 1995-1997 survey of privately owned manufacturing firms in Hanoi and Ho Chi Minh City. The new ways of doing business in Vietnam have been devised at ground level. The bottom-up reform process has relied on de facto decentralization of economic activity, while leaving in place formal institutions of central planning. Although Vietnam's government has introduced few policies to foster private sector, the owners of private business have worked out their own ad hoc strategy for economic development which is popular, oral rather than in