Abstract
Private-order market institutions founded on trust-based relational contracts suffer adverse selection and moral hazard problems, while public-order market institutions have a limited capacity to enforce contracts. I model agent selection between contract enforcement institutions and demonstrate that the state's contract enforcement capacity is complementary to private-order contract enforcement institutions for low to moderate levels of public-order enforcement capacity. This suggests that initial improvements to public-order institutions cause the accumulation of trust and result in economic growth in both institutions. However, I show that the private-order institution must eventually collapse once the level of public-order contract enforcement capacity gets too large.
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