Knowledge, trust and recourse: imperfect substitutes as sources of assurance in emerging economies

Abstract

Uncertainty prevents voluntary interactions, but institutions of trust and/or recourse can substitute for knowledge by making promises relatively credible. Trust and various sources of recourse are imperfect substitutes, however, as demonstrated by consideration of the trade‐offs between trust based on repeated dealings, recourse to informal private sanctions such as reputation threats, ostracism sanctions and third‐party dispute resolution through formal commercial organizations operating under customary law, and the state's coercive legal system. The problems of knowledge and interest imply that, though not perfect, private sources of trust and recourse are superior in emerging markets to state‐provided recourse.