HETFA Working Paper No. 2017/21

Károly Mike, Gábor Kiss (2017): Beyond the Informal/Formal Divide: How do Firms Combine Contract-enforcement Institutions? ISSN 2062-378X

In this paper Károly Mike and Gábor Kiss explore how a broad range of contract-enforcement institutions are combined in interfirm relationships under a developed legal system.

They analyse managerial survey data to identify ideal-types of governance strategies that rely on distinct combinations of institutions. They find three ideal-types: (1) bilateral governance, using morality and self-enforcement; (2) third-party governance, leaning on a mix of courts, reputation and community norms; and (3) comprehensive governance, relying heavily on all institutions.

Thus they realize that real choice at the level of governance is not between informal and formal institutions but between bilateral and third-party solutions on the one hand, and partial or comprehensive use of institutions, on the other. The number of relationships that use comprehensive governance is highest among the three groups, which means that institutions often serve as complements rather than substitutes.