The Community Mechanism of Contract Enforcement: What are the Differences between Rural Communities and Industrial Clusters?

Because of asymmetric information, markets tend to fail due to moral hazard, adverse selection, and holdup. Such problems tend to be serious in the context of the dynamic development of an economy, where new technologies are continuously adopted, new products are widely introduced, and new markets are successively developed. But if markets fail to function, an economy is unlikely to develop. Thus, the question is how such market failures can be reduced so as to stimulate market-based development. In this chapter we would like to explore whether effective mechanisms exist that reduce the extent of market failures by inducing the cooperative behaviors of transacting parties in developing countries.