Property rights in a flea market economy

Marcel Fafchamps, Bart Minten
mtid discussion paper

This paper studies liberalized grain markets in Madagascar and examines how property rights are protected and contracts are enforced among agricultural traders. We find that the incidence of theft and breach of contract is low and that the losses resulting from such instances are small. This, however, does not result from reliance on legal institutions -- actual recourse to police and courts is fairly rare, except in cases of theft -- but from traders’ reluctance to expose themselves to opportunism. As a result, Malagasy grain trade resembles a flea market, with little or no forward contracting and high transactions costs. The dominant contract enforcement mechanism is trust-based relationships. Trust is established primarily through repeated interaction with little role for referral by other traders. Information on bad clients does not circulate widely, hence severely limiting group punishments for non payment.