New Work from Landa and Richman on Relational Contracts

Relational contracting is a perennial theme at SIOE's annual meeting, and 2017 was no different.  A number of presentations (see, e.g., Greg Buchak's interesting paper on online peer-to-peer loans) at this year's meeting underscored the role informal enforcement institutions have played in both modern and pre-modern economies, and they were indicative of the striking historical and geographical diversity in this literature.  The research presented was also richly interdisciplinary, partaking in a long tradition in the field.

All of those qualities were on display at a panel at this year's meeting discussing recent books by Janet Landa and Barak Richman.  These books build on Janet's pioneering work and Barak's important contributions while also breaking new ground.  The summary for Janet's Economic Success of Chinese Merchants in Southeast Asia: Identity, Ethnic Cooperation and Conflict is as follows:

This book provides an original analysis of the economic success of Overseas Chinese merchants in Southeast Asia: The ethnically homogeneous group of Chinese middlemen is an informal, low-cost organization for the provision of club goods, e.g. contract enforcement, that are essential to merchants’ success. The author’s theory - and various extensions, with emphasis on kinship and other trust relationships - draws on economics and the other social sciences, and beyond to evolutionary biology. Empirical material from her fieldwork forms the basis for developing her unique, integrative and transdisciplinary theoretical framework, with important policy implications for understanding ethnic conflict in multiethnic societies where minority groups dominate merchant roles.

Barak's Stateless Commerce: The Diamond Network and the Persistence of Relational Exchange is summarized as follows:

In Stateless Commerce, Barak Richman uses the colorful case study of the diamond industry to explore how ethnic trading networks operate and why they persist in the twenty-first century. How, for example, does the 47th Street diamond district in midtown Manhattan—surrounded by skyscrapers and sophisticated financial institutions—continue to thrive as an ethnic marketplace that operates like a traditional bazaar? Conventional models of economic and technological progress suggest that such primitive commercial networks would be displaced by new trading paradigms, yet in the heart of New York City the old world persists. Richman’s explanation is deceptively simple. Far from being an anachronism, 47th Street’s ethnic enclave is an adaptive response to the unique pressures of the diamond industry.

Ethnic trading networks survive because they better fulfill many functions usually performed by state institutions. While the modern world rests heavily on lawyers, courts, and state coercion, ethnic merchants regularly sell goods and services by relying solely on familiarity, trust, and community enforcement—what economists call “relational exchange.” These commercial networks insulate themselves from the outside world because the outside world cannot provide those assurances.

Extending the framework of transactional cost and organizational economics, Stateless Commerce draws on rare insider interviews to explain why personal exchange succeeds, even as most global trade succumbs to the forces of modernization, and what it reveals about the limitations of the modern state in governing the economy.

Both books are self-recommending and make thoughtful contributions to an area of inquiry that only grows in academic and policy importance.

Matt Jennejohn