Study of Károly Mike in Journal of Institutional Economics

A research study under the title “Combining formal and informal contract enforcement in a developed legal system: a latent class approach” was published by Gábor Kiss and Károly Mike, research fellow at HÉTFA Research Institute, in one of the most prestigious international journals, the Journal of Institutional Economics.

The paper examines which guarantees companies use in their contractual relationships. It assumes that parties must make their business promises credible to each other. In favour of credibility they should always rely on a number of guarantees: legal order, morality, incentives arising from the continuation of relationship, personal and corporate reputation and community standards. Typical combinations of these guarantees can be identified based on surveys conducted among heads of SMEs. The first type is “bilateral governance”, when the parties make their promises credible without using third parties, relying solely on morality and the long-term nature of relationship. The second type is “external management”, where law, personal and market reputation and social standards are emphasized. At the same time, most contacts are characterized by “comprehensive management”, where all mechanisms are strongly presented. An important lesson from the study is that the successful entrepreneurial economy requires both a legal order and a variety of informal mechanisms.