Private-order Institutions Research Articles

The Choice of Contract-enforcement Institutions: A Review

All public- and private-order institutions have strengths and weaknesses when it comes to the enforcement of contracts. In general, the availability of a low-cost legal system and multilateral reputation institutions is found to be more important for the long-term development of a country than bilateral reputation and private enforcement. The efficiency and cost of institutions differ considerably from place to place. The studies have observed that the cost of using private-order institutions is often lower than public-order institutions in underdeveloped economies. While the existing literature has substantially added to our understanding of contract-enforcement institutions, the issue of complementarity among these institutions has only recently received attention. Investigating this issue may considerably enhance our understanding of enforcement institutions and their economic impact. JEL: K12, K42

Endogenous Institutional Selection, Building Trust, and Economic Growth

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.

DEFYING MERCANTILISM: ILLICIT TRADE, TRUST, AND THE JAMAICAN SEPHARDIM, 1660–1730

AbstractRecent historians have highlighted the importance of the web of illicit commercial transactions which connected competing imperial networks to create an integrated Atlantic economy but have paid little attention to how co-operation worked across borders. Of necessity, participants acted without the legal institutions which are often afforded a central role in narratives of modernization. In the case of Jamaica, a hub of illicit trade, most merchants found it difficult to survive in this high-risk environment but members of the Sephardic diaspora, a traditional, communitarian group, had competitive advantages which they exploited with vigour. They did not rely on innate attributes of kinship, ethnicity, or religion. They closed entry and built on a favourable historical and geographical legacy to cultivate attributes which maintained high levels of social discipline with credible rewards and punishments which were reinforced by their outsider status. Their competitive advantages did stimulate retaliation but also allowed the Sephardim to combine with the Christian elite to capture rent-seeking opportunities. Far from falling away as modernization gained pace, the Sephardic diaspora survived and flourished by constructing the strong private-order institutions needed in large swathes of the economy where neither impersonal corporations, nor state enforcement mechanisms, were able to manage risk.

Institutions and Economic Growth in Historical Perspective: Part 2

This is Part 2 of a two-part paper which surveys the historical evidence on the role of institutions in economic growth. The paper provides a critical scrutiny of a number of stylized facts widely accepted in the growth literature. It shows that private-order institutions have not historically substituted for public-order ones in enabling markets to function; that parliaments representing wealth holders have not invariably been favourable for growth; and that the Glorious Revolution of 1688 did not mark the sudden emergence of either secure property rights or economic growth. Economic history has been used to support both the centrality and the irrelevance of secure property rights to growth, but the reason for this is conceptual vagueness. Secure property rights require much more careful analysis, distinguishing between rights of ownership, use and transfer, and between generalized and particularized variants. Similar careful analysis would, we argue, clarify the growth effects of other institutions, including contract-enforcement mechanisms, guilds, communities, serfdom, and the family. Greater precision concerning institutional effects on growth can be achieved by developing sharper criteria of application for conventional institutional labels, endowing institutions with a scale of intensity or degree, and recognizing that the effects of each institution depend on its relationship with other components of the wider institutional system. Part 2 of the paper examines how institutions are situated in wider institutional systems, explores alternative approaches to explaining institutions, and applies the arguments established in earlier sections to the institution of serfdom. It concludes by drawing the implications of both parts of the paper for institutions and economic growth in historical perspective.

Economic Institutions and the State: Insights from Economic History

What mechanisms account for the long-run differences in economic development across historical settings? Current scholarship has renewed the argument that institutions are essential for promoting market transactions, industrialization, trade, and economic growth. In particular, recent work in economic history offers valuable empirical and theoretical insights into the development of market-supporting institutions, their long-term consequences, and their relationship to state-building. The purpose of this review is to bring contributions in economic history to the attention of sociologists interested in the evolution of economic institutions. Drawing on salient historical cases, the article contrasts formal market-supporting institutions that are provided by the state with settings where such public provision fails and private-order institutions based on reputation effects within informal social networks offer an alternative. Moving beyond mere existence proofs that institutions matter, the review then discusses recent advances in understanding the precise mechanisms responsible for the persistent effects of institutions on economic development.

The law & economics of private prosecutions in industrial revolution England

Can the market provide law enforcement? This paper addresses this question by analyzing an historical case study: the system of private prosecutions that prevailed in England prior to the introduction of the police. I examine why this system came under strain during the Industrial Revolution, and how private clubs emerged to internalize the externalities that caused the private system to generate too little deterrence. The historical evidence suggests that these private order institutions were partially successful in ameliorating the problem of crime in a period when public choice considerations precluded the introduction of a professional police force.

Outlaw Economics: Doing Business on the Fringes of the State. A Review Essay

History often reveals itself at the margins. Hegemony becomes tangible at its peripheries, claims to legitimacy are most emphatically articulated where challenged, and rules are best observed in their breach. For this reason, historians have long been drawn to the study of border zones where sovereignty was contested or subverted rather than tacitly accepted. This work by historians is complemented by, although rarely integrated with, research in other disciplines—most notably in anthropology, sociology, economics, and political science. Social scientists have been particularly interested in the question of economic organization, of how individuals and groups structure commercial exchanges in conditions of insecure property rights and unreliable recourse to official contract enforcement. Such research is frequently motivated by public policy concerns, especially the complex issue of institution-building in transition economies and so-called crisis states. While generally more circumspect about the prescriptive powers of their discipline, historians will nonetheless recognize that the defining characteristics of a contemporary crisis state—limited authority of a central government, weak institutions, ineffectual bureaucracies, widespread corruption—also apply to most, if not all pre-modern polities. Therefore, the study of actors on the fringes of political and legal regimes holds the potential to produce important theoretical insights into the construction of alternative, private-order institutions that are of significance beyond a particular period, region, or methodology.

Emergence of Endogenous Legal Institutions: Property Rights and Community Governance in the Italian Alps

This article examines changes in institutions that protected property rights in the Alps between the thirteenth and the nineteenth century and, in particular, alternative management systems adopted for the common pastures and forests in about 200 communities. Over time, private-order institutions in the form of charters replaced informal arrangements sustained by the long-run interaction among villagers. Although costly to run, the charters accomplished several tasks that increased resource use efficiency.

Trade, Institutions, and Credit

Within economics there has been a mounting interest in institutions. Virtually all the work to date on institutions has examined a single institution. The problem is that in many settings the performance of the institution under examination is affected by other, unexamined institutions. This paper examines the relationship between two types of private-order institutions that facilitated trade in a specific setting—Mexican California during the 1830s and 1840s. The surviving evidence suggests that a multilateral institution enabled merchants to extend credit to their retail customers, and a similar multilateral institution enabled the merchants to extend credit to one another. The relationship between these institutions makes them of particular interest. This relationship arose because local communities imposed costs on merchants that affected their trade with one another. The barriers to entry and exit posed by these costs, in turn, facilitated the operation and persistence of the institution that supported intermerchant trade. They also precluded other organizational forms such as the vertical integration of wholesalers.

Trade Without Law: Private-Order Institutions in Mexican California

Trade prospered in absence of law in California during the 1830s and 1840s. Merchants, through intermerchant trade and the partnerships they organized to buy goods abroad, played a central role in trade. This article examines the private-order institution that facilitated intermerchant trade. The hypothesis is that a particular type of private-order institution, a coalition, governed agency relations among merchants in California. Within the coalition, a reputation mechanism mitigated the commitment problem inherent in having individuals handle goods that they did not own by linking a merchant's past behavior and his future payoff. Evidence from the merchants' business correspondence supports the hypothesis. A game-theoretic model of a coalition is presented. The model provides insight into the punishment merchants imposed on cheaters, the expansion of the coalition in the 1830s, and its collapse around the time of the gold rush in 1848–1849

Behind the market stage where real societies exist ‐ part I: The role of public and private order institutions

This two‐part article is an attempt to clarify the social conditions upon which the viability and efficiency of the market system rest. It strives to show that the ‘embeddedness’ thesis, that is, an explanation based upon the existence of long‐run personal ties involving the use of reputation mechanisms among transactors, cannot fully elucidate the question as to how the problem of trust is solved in market societies. As explained in Part I, there are difficulties of both theoretical and empirical/historical kinds and these explain why the ‘market order’ needs to be sustained by private and public order institutions. In Part II, the role of generalised morality in backing or supplementing such institutions is discussed in the light of game theory, and particular emphasis is put on the ability of moral norms to sustain honest behaviour by generating the right kind of preferences and establishing trust. The vexed problem of the dynamics of norm emergence and erosion is then addressed with a view to showing that norms of generalised morality — perhaps contrary to moral norms in small groups — cannot be easily created by fiat nor be expected to evolve spontaneously when they are needed to make economic exchanges viable. Ultimately, the cultural endowment of a society plays a determining role in shaping its specific growth trajectory, and history therefore matters. Finally, to illustrate the theoretical discourse, reference is made to present‐day Third World countries. It is argued that economic development is especially difficult in countries where norms of limited‐group morality prevail and do not readily give way to generalised morality.

Has the industrial revolution been crowded out? Some reflections on Crafts and Williamson

This chapter surveys the historical evidence on the role of institutions in economic growth and points out weaknesses in a number of stylized facts widely accepted in the growth literature. It shows that private-order institutions have not historically substituted for public-order ones in enabling markets to function; that parliaments representing wealth holders have not invariably been favorable for growth; and that the Glorious Revolution of 1688 in England did not mark the sudden emergence of either secure property rights or economic growth. Economic history has been used to support both the centrality and the irrelevance of secure property rights to growth, but the reason for this is conceptual vagueness. Secure property rights require much more careful analysis, distinguishing between rights of ownership, use, and transfer, and between generalized and particularized variants. Similar careful analysis would, we argue, clarify the growth effects of other institutions, including contract-enforcement mechanisms, guilds, communities, serfdom, and the family. Greater precision concerning institutional effects on growth can be achieved by developing sharper criteria of application for conventional institutional labels, endowing institutions with a scale of intensity or degree, and recognizing that the effects of each institution depend on its relationship with other components of the wider institutional system.