Markets and Rules of Cooperation

Abstract: Much of the modern trade among humans occurs via markets, yet our understanding of how market exposure shapes our values and institutions is still poor. I investigate a long-standing debate in economics on whether markets foster or deplete unwritten (norms) and written (bylaws) rules that constrain opportunistic behavior and foster cooperation. Answering this question is very difficult because markets are not randomly assigned. I use variation in market exposure across groups of the Arsi Oromo people in Ethiopia, who have common ancestry, religion, and occupation. Markets emerged inadvertently from garrisons that Menelik - the emperor of Ethiopia - established at strategic locations after defeating the Arsi. These markets are held twice a week and are characterized by asymmetric information and the absence of third-party verification. I measure norms as the individual propensity to cooperate if others do the same via a public goods games in the strategy method. Bylaws are measured as written down regulations on the use of natural resource. I find that groups more exposed to markets have stronger norms of cooperation as well as better quality of regulations. This finding is consistent with models where asymmetric information and incomplete contracts create a demand for norms and bylaws, in the absence of which neither party would benefit from the gains of trade. In line with such a mechanism, I find no effect when exposure is from markets without asymmetric information. Survey and experimental data also show that individuals closer to markets hold optimistic beliefs about cooperation and rule following by strangers.