The Impact of Social Ties and Third-Party Enforcement on Collective Action and Growth: Micro Evidence from Peru

Abstract

We address a key question that has emerged in prior research on history, institutions, and development: what is the development impact of third-party enforcement? Using precise data on enforcement and public good provision from 90 traditional markets, we find that markets with exogenously stronger historic ties among market founders exhibit, decades later, stronger third-party enforcement of market norms, more infrastructure investment and services for vendors, and greater compliance with dues obligations. Sales of these markets better withstood the entry of modern supermarkets into the Lima retail food market. The analysis contributes to prior research on the role of informal social enforcement in limiting free riding; cross-market variation in informal social enforcement cannot account for these results. It also advances research on the relative impacts of de facto and de jure institutions: only de facto enforcement varies across these markets; de jure institutions are identical.