The Politics of Order in Informal Markets: Evidence From Lagos

Abstract

Property rights are important for economic exchange, but in much of the world they are not publicly provided. Private market organizations can fill this gap by providing an institutional structure to enforce agreements, but with this power comes the ability to extort from the group’s members. Under what circumstances will private organizations provide a stable environment for economic activity? Using original survey data collected from 1,878 randomly sampled traders across 269 markets, 68 market leaders, and 55 government revenue collectors across 57 local governments in Lagos, Nigeria, along with market case studies, I find that strong markets maintain sophisticated institutions to support trade not in the absence of government, but rather as a response to active interference. I argue that market organizations develop and enforce pro-trade institutions when threatened by politicians they perceive as predatory, and when the organization can respond with threats of its own. Under such a balance of power, the organization will not extort because it needs the support of the traders it represents in order to keep threats credible.