The Complementarity Between Community and Government in Enforcing Norms and Contracts, and Their Interaction with Religion and Corruption

We investigate the complementarity between informal communities and formal government enforcement of norms of reciprocation and exchange. We introduce a model in which people exchange informally within their community as well as externally on a market. We show that informal community and formal enforcement are complements: the news that someone was convicted of cheating on the market leads that person to be ostracized by their community, bolstering incentives. Although transactions within a community can be less directly beneficial than those on a wider market, doing some transactions within a community and others on a formal market lowers overall costs of enforcement and is still welfare-enhancing compared to either extreme for a wide range of costs of formal enforcement. We also show that religion can enhance the complementarity between community and formal enforcement, while corruption undermines it. We discuss how community can play an important role in a country's development