Reputation or Court : Individualism, Collectivism, and the Choice of Enforcement Mechanism in Exchange

Courts and reputation-based enforcement mechanisms are often employed to mitigate the problem of cheating in trade relationships. The choice between these two enforcement mechanisms in conducting trade is closely associated with cultural dispositions to individualism and collectivism. Nevertheless, the selection process of a court/formal or a reputation/informalenforcement mechanism and how it relates to the reliability of third-party enforcement is unknown. I designed a laboratory experiment in which the options for both a safe local trade and a risky yet more profitable long-distance trade are available. Long-distance trade is governed by either a formal or an informal enforcement mechanism. I examined the choice of informal versus formal enforcement mechanisms while controlling for the cultural disposition of subjects. I found that subjects with an individualist cultural orientation used formal enforcement when strong formal enforcement was available significantly more frequently than those with a collectivist orientation. A belief elicitation task revealed that those with individualistic cultural orientation perceive stranger trade partners as more cooperative than their collectivist counterparts when trades are registered in a strong court