Markets maintain institutions to support property rights & trade not in the absence of government, but rather in response to active government interference (predatory officials)

The politics of order in informal markets: Evidence from Lagos. Shelby Grossman. June 18, 2019. Forthcoming at World Politics. https://drive.google.com/file/d/1rzH2g4MEch3D_ff_A3kA8WJl4wdTPi2P/view

Abstract: Property rights are important for economic exchange, but in much of the world they are not publicly guaranteed. Private market associations can fill this gap by providing an institutional structure to enforce agreements, but with this power comes the ability to extort from group members. Under what circumstances do private associations provide a stable environment for economic activity? Using survey data collected from 1,179 randomly sampled traders across 199 markets in Lagos, I find that markets maintain institutions to support trade not in the absence of government, but rather in response to active government interference. I argue that associations develop pro-trade institutions when threatened by politicians they perceive to be predatory, and when the organization can respond with threats of its own; the latter is easier when traders are not competing with each other. In order to maintain this balance of power, the association will not extort because it needs trader support to maintain the credibility of its threats to mobilize against predatory politicians.

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1 Introduction
Outside of agriculture, more than half of workers in low-income countries are informally employed (Jütting, de Laiglesia and Jütting, 2009): they work in enterprises that are less regulated than similar activities in the same environment. Indeed, the informal sector accounts for an estimated 41% of developing countries’ GDP (Schneider, 2005). Yet public institutions rarely serve the needs of informal workers. For instance, informal entrepreneurs do not rely on courts for protection. Courts are often seen as biased, inefficient, and ill equipped to regulate off-the-book transactions – i.e., not worth the effort. Thus informal traders have no recourse to formal institutions if they are cheated. For example, the legal system would be of little help to a trader who buys what she thought were new smartphones, only to discover that they were refurbished and must be sold at a loss. A large body of work argues that private associations can step in to fill this regulatory gap by enforcing contracts,1 but this is not always the case. Although informal trade all over the world is organized into associations (Cross, 1998; Hummel, 2017), not all such groups promote trade. Indeed, many association leaders extort from their own traders. Markets in Lagos, Nigeria provide examples of both types of associations.

Some market association leaders in Lagos are a model of good governance and support a wide variety of policies that promote trade. For example, they impartially investigate customer complaints and organize market-wide boycotts of suppliers who cheat traders. By contrast, other market leaders extort from their traders, pocketing fees that they say will be used for services like market security. These leaders rarely intervene if a supplier wrongs a trader.