How does Relationship-Based Governance Accommodate New Entrants? Evidence from the Cycle Rickshaw Rental Market
24 Pages Posted: 12 Apr 2010 Last revised: 9 Nov 2016
Date Written: November 9, 2016
Abstract
Relationship-based contract enforcement is commonly thought to limit market expansion. In contrast, this paper illustrates how relationship-based contract governance accommodates new entrants into market exchange using a case study of the cycle-rickshaw rental market in a city in central India. Migrants face a higher penalty for default that introduces a gap between the ex ante risk for out-of-network agents and the ex post risk. As a result, cycle rickshaw owners are more likely to rent to migrants and migrants are more likely to participate in rental contracts. With primary data on multi-dimensional measures of migrant status, we confirm that migrant status is a significant predictor of rental contract participation, even controlling for other variables that moderate the rickshaw driver's ability to own a cycle-rickshaw. Our findings thus introduce a new perspective into current understandings of relationship-based contract governance.
Keywords: Urban informal sector, Contract enforcement, Rural to urban migration
JEL Classification: L14, L92, O15, O17, O18, J61, R23
Suggested Citation: Suggested Citation
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