Legal Institutions and Informal Networks

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Legal Institutions and Informal Networks

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Title: Legal Institutions and Informal Networks
Author: Bueno de Mesquita, Ethan; Stephenson, Matthew Caleb

Note: Order does not necessarily reflect citation order of authors.

Citation: Ethan Bueno de Mesquita & Matthew Stephenson, Legal Institutions and Informal Networks, 18 J. Theoretical Pol. 40 (2006).
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Abstract: The relationship between third-party contract enforcement and informal networks raises important sociological, political, and economic questions. When economic activity is embedded in social structures, what are the implications of third-party contract enforcement for the scope and nature of economic relations? What determines whether individuals rely on formal legal institutions or informal networks to sustain trade relationships? Do legal institutions erode informal networks? We develop a model in which a trade-off exists between size and sustainability of networks. By adding the possibility of fee-based, enforceable contracts, we provide a theoretical explanation for the coexistence of legal contract enforcement and an informal economy. We find that legal enforcement has little effect on networks until law becomes sufficiently inexpensive, at which point small decreases in the cost of law have dramatic effects on network size and the frequency of use of the legal system.
Published Version: http://jtp.sagepub.com/content/18/1/40.abstract
Other Sources: http://home.uchicago.edu/~bdm/PDF/networks.pdf
http://www.law.harvard.edu/programs/olin_center/papers/pdf/419.pdf
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=416421
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:11352712
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