Testing for the Interaction of Formal and Informal Contracts
Abstract: As documented by Macauley (1963) and others, informal contracts are pervasive in modern economies. Yet, systematic empirical evidence on their importance and role is still limited. In this paper, we provide a methodological framework to test for the presence of informal contracts and their interaction with formal ones. First, we present a model that organizes the main testable predictions from economic theories of informal contracting. Next, we examine how, and to what extent, existing empirical works support the model’s predictions. Finally, we discuss strategies for testing theoretical predictions for which conclusive evidence is still missing, as well as unexplored research opportunities offered by available studies and data.
