The collusion trap: Theory with evidence from informal markets in Lagos, Nigeria

Informal actors often compete with formal or regulated ones. Regulated actors therefore can be natural allies in government attempts to enforce laws and regulations. Yet they often are not. We argue that the lack of cooperation stems from a collusion trap. Collectively, formal actors are better off if informal actors are removed; individually, some can benefit from their presence. We demonstrate these dynamics in the context of Lagos, Nigeria, where millions of informal street vendors compete with traders in licensed markets. We draw on original survey data from 1,179 market traders across 199 associations and qualitative interviews with organization leaders, market traders, street vendors, and government officials in two markets with varying organizational capacity. We show how a negative equilibrium emerges in which limited state enforcement encourages wholesale traders, who can profit from street vendors’ distribution network, to collude with street vendors. Association leaders also prefer to extract rents from some street vendors. The implication is that societal collusion makes it even more difficult for governments and organizations to enforce laws and regulations.