Institutional credibility and informal institutions: The case of extralegal land development in China

Abstract

The credibility of informality has become a fertile frontier in the study of institutions as is evidenced by the Credibility Thesis and its applications. Whereas the preceding contribution by Liu and Zhang (this special issue) examined whether, and if so, under what preconditions informal institutions could be formalized, the current article assesses how informal institutions establish their credibility over time. Focusing on competing informal institutions in a developing context, this article explores the mechanisms through which informal rules cumulate their credibility while challenging the formal ones. This article identifies two fundamental mechanisms that contribute to the increasing credibility of informal rules. First, political bargaining lead to ineffective enforcement of formal institutions and low risk of violation of formal rules; Second, institutional challengers' competition for informal practices ironically facilitates their unorganized coordination and resolves their problems of collective action. The interactions of these two fundamental mechanisms help institutional challengers increase the scale of their informal practice and enhance the credibility of informal rules. This article employs the extralegal land development in Shenzhen, China, as an extreme case. Nearly half of the permanent residents in Shenzhen are living in extralegal houses built on state-owned land by villagers whose rural land has been nationalized by the government. The findings can shed light on the credibility of informal rules in other fields.