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Endogenous institutional selection, building trust, and economic growth

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  • Bodoh-Creed, Aaron L.

Abstract

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 collapse once the public-order contract enforcement capacity is too great.

Suggested Citation

  • Bodoh-Creed, Aaron L., 2019. "Endogenous institutional selection, building trust, and economic growth," Games and Economic Behavior, Elsevier, vol. 114(C), pages 169-176.
    • Handle: RePEc:eee:gamebe:v:114:y:2019:i:c:p:169-176
    DOI: 10.1016/j.geb.2019.01.005
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    Cited by:

    1. Giacomo Calzolari & Leonardo Felli & Johannes Koenen & Giancarlo Spagnolo & Konrad O. Stahl, 2021. "Relational Contracts and Trust in a High-Tech Industry," CRC TR 224 Discussion Paper Series crctr224_2021_316, University of Bonn and University of Mannheim, Germany.
    2. Giacomo Calzolari & Leonardo Felli & Johannes Koenen & Giancarlo Spagnolo & Konrad O. Stahl, 2019. "Trust, investment and competition: theory and evidence from German car manufacturers," CESifo Working Paper Series 7680, CESifo.
    3. Parikshit Ghosh & Debraj Ray, 2023. "The Social Equilibrium of Relational Arrangements," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 179(3-4), pages 579-615.
    4. Li Zhao & Chu Yujing, 2020. "Endogenous Institutions and Economic Growth: Evidence from China," Financial Sciences. Nauki o Finansach, Sciendo, vol. 25(1), pages 54-77, March.

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    More about this item

    Keywords

    Institutions; Trust; Institutional selection;
    All these keywords.

    JEL classification:

    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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