Identifying the Mechanisms of Extralegal Enforcement

Greg Buchak (University of Chicago)

Abstract: This paper studies the mechanisms by which a community enforces contracts absent a formal legal authority. While many studies of self-ordering and extralegal contracting focus on rule selection, there has been less focus on rule enforcement. Various mechanisms have been proposed, but there has been little quantitative analysis of whether these mechanisms are actually active and what this implies about the robustness of the community. Drawing on a unique dataset of anonymous and unsecured online peer-to-peer loans, this paper shows that forward-looking economic self-interest is primarily responsible for facilitating repayment. Social ties play an important but replaceable role as a costly signal and do little to directly motivate repayment. The results show that the combination of repeat play, a reliable information transmission mechanism, and costly entry is sufficient for effective extralegal enforcement.

Download the paper