Relational v. Legal Enforcement

At different times and in different cultures people have found different ways to enforce contractual agreements. In many societies, enforcement comes primarily through a network of relationships. Some argue that this is simply the result of cultural preferences, others that it is caused by an inadequate legal system . Some argue that it deters economic development, others disagree. Fali Huang of Singapore Management University’s School of Economics & Social Science, takes a look at the issues in The Transition from Relational to Legal Contract Enforcement. Here’s the abstract:

This paper studies the transition of contract enforcement institutions. The prevalence of relational contracts, low legal quality, strong cultural preference for personalistic relationships, low social mobility, and highly unequal endowment form a cluster of mutually reinforcing institutions that hinder economic development. The cultural element per se does not necessarily reduce social welfare though it may slow down the legal development, while the real problem lies in endowment inequality and low social mobility. Thus a more equal distribution of resources may be the ultimate key to unravel the above interlocking institutions. These results are generally consistent with the empirical evidence.

[Frank Snyder]