School Brown Bag: Devesh Rustagi

 Market exposure and rules of cooperation

Abstract:  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. I use plausibly exogenous variation in market exposure across settlements of the Arsi Oromo people in Ethiopia. Initially, these settlements did not have access to markets and carried out exchange through reciprocal obligations. In 1892, Menelik conquered these settlements and established garrisons at places that offered geographical protection. These garrisons inadvertently evolved into markets. Conditional on fixed effects for market location and clans to account for pre-existing differences, I find that groups closer to markets have stronger norms of cooperation and better quality of rules than groups further away. These effects arise because of asymmetric information and lack of third-party verification, which create a demand for rules in the absence of which no one benefits from the gains of exchange. A falsification test shows that exposure to markets without asymmetric information, school and village administration has no effect on rules.