State capacity has recently become the workhorse of development scholarship. One reason why state capacity matters is that expanding the state legal capacity may increase trade where social institutions cannot govern agency relations (Greif, 1993). However, the state itself may be captured, and thus expanding the state could generate adverse results. Furthermore, the state may crowd-out pre-existing informal mechanisms of contract enforcement.
Estimating the impact of the state is challenging, because state formation is endogenous, and because in the absence of a functioning state, there is usually no data. I create a delivery business in the Democratic Republic of the Congo, involving traders and customers who learned to operate without the state, and randomly introduce state contracts. I find that state contracts strongly reduce shirking. However, the results uncover an ethnic bias in contract enforcement by the state: only some ethnic groups can draw on the state’s legal capacity, and customers anticipate this bias. Furthermore, ex-ante,
The author finds that state contracts, when they are enforceable, and coethnicity are substitutes to solve commitment problems that prevent trade in the presence of agency relations. These results suggest that while social institutions govern some agency relations, they also govern the state administration, therefore distorting the impact of state legal capacity.
This research was funded under the Private Enterprise Development in Low-Income Countries (PEDL) Programme
Sanchez de la Sierra, R. Ethnic State Capacity and Contract Enforceability. (2013) 53 pp