Rule Enforcement, Collective Action, and Growth: Micro Evidence and Mechanisms from Peru

Aug 2019
Using a unique empirical setting, 1,000 vendors in 90 traditional markets in Lima, we find that social ties among market founders are key to the emergence of formal (third-party) enforcement of market norms, and that formal enforcement is key to collective action and growth. Markets that are more likely to use formal disciplinary actions against vendors who disregard market norms make larger collective investments, provide more collective services, and exhibit more regular payment of dues. They also experienced higher growth from 2007–2017, following the entry of modern supermarkets. Some markets were established by vendors from the same neighborhoods, with the opportunity to have developed stronger social ties. These informal ties turn out to be a key determinant of the strength of markets' formal institutions. Taking advantage of this historical characteristic as an instrumental variable, we infer that formal enforcement has a causal effect on collective action and growth.