DP1506 | Trust and Search in Vietnam's Emerging Private Sector

Publication Date

30/11/1996

JEL Code(s)

Keyword(s)

Programme Area(s)

Abstract

This paper investigates how start-up firms in Vietnam operate in the face of two significant market frictions: a poorly developed legal system and inadequate market information. We argue that these two market frictions actually offset each other. Poor market information and the consequent difficulty of locating trading partners can help make self-enforcing contracts workable. Firms that have nowhere else to go will refrain from breaking their agreements. If it is difficult to locate alternative trading partners, firms will invest in maintaining their existing relationships. Our empirical analysis is consistent with this hypothesis.