Working Paper: CEPR ID: DP1506
Authors: Stephan Haggard; John McMillan; Christopher Woodruff
Abstract: This paper investigates how start-up firms in Vietnam operate in the face of two significant market frictions: a poorly developed legal system and inadequate market information. We argue that these two market frictions actually offset each other. Poor market information and the consequent difficulty of locating trading partners can help make self-enforcing contracts workable. Firms that have nowhere else to go will refrain from breaking their agreements. If it is difficult to locate alternative trading partners, firms will invest in maintaining their existing relationships. Our empirical analysis is consistent with this hypothesis.
Keywords: Vietnam; Transition; Contracting; Search
JEL Codes: O12; O17; P21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| search costs (D23) | contractual compliance (L14) |
| high search costs (D83) | investment in maintaining relationships (G31) |
| information about trading partners (F10) | trust (G21) |
| written contracts (L14) | trust in the legal system (K40) |
| sales growth (O49) | success in receiving credit from suppliers (L14) |
| high search costs (D83) | missed opportunities for efficient trades (G14) |
| market institutions development (O17) | need for formal laws (K40) |