Unbundling Institutional Reform: a Natural Experiment in a Peruvian Textile Cluster, 1988-2008

Matthew Bird (Harvard Business School)

Abstract: Evidence suggests that at the macro-level property rights have a greater influence on long-run economic performance than contracting institutions. It may be easier for actors to find alternative sources of contract enforcement than it is to defend against a predatory state. However, a micro-level natural experiment in a textile cluster in Lima, Peru indicates otherwise. Following property rights reforms in Peru, a pernicious small-business multiplier effect set in, creating new contract enforcement problems. The leading obstacle to individual firm growth shifted from one of ex ante property rights in the 1980s to ex post contract enforcement in the 2000s. This new context created 'play of the game' problems both between and within firms, which forced entrepreneurs to 'rationally' stay small, preventing them from specializing in order to export and capture gains from trade. At the micro-level, contracting institutions may matter just as much if not more when operating in concert with property rights institutions, indicating that both should be bundled when enacting reforms such as those proposed by the UN Commission for the Legal Empowerment of the Poor. Otherwise, unexpected and pernicious effects may result.