Markets rest on institutions that ensure individuals can commit to keep their contractual obligations. The literature has focused both on formal contract-enforcing institutions, where contracts can be enforced by a third party such as a court of law, and informal institutions where the parties enforce an informal contract themselves. Self-enforcing agreements are particularly important in international trade because the jurisdictions of courts of law often do not extend beyond national borders, particularly at a relatively early stage of economic development. One branch of the literature explores whether liberal political institutions such as limited government and the rule of law, which are necessary for a well functioning court system, lead to the expansion of markets or vice versa. A particular focus of attention in this literature is the endogenous emergence of market supporting institutions in the early history of international trade. This is an important question to the extent that development failure is caused by an absence of this type of institution. A second branch of the literature looks at what types of institutions are required to support the supply of high quality goods and services. The concern here rests on recognition that developing countries often lack well functioning formal contract-enforcement institutions. The question becomes one of whether informal institutions such as social networks that do exist in developing countries can support the delivery of high quality (or efficient) outcomes in the absence of formal institutions. While intuition might suggest that formal and informal institutions serve as substitutes, a key insight from this literature is that formal and informal institutions can in fact complement one another.
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