DP1506 Trust and Search in Vietnam's Emerging Private Sector

Author(s): Stephan Haggard, John McMillan, Christopher Woodruff
Publication Date: November 1996
Keyword(s): Contracting, Search, Transition, Vietnam
JEL(s): O12, O17, P21
Programme Areas: Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1506

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.