Abstract:

This paper is about private governance or private legal systems. In addition to the inherent constraints (difficulty to access to information, limited enforcement mechanisms, etc.) emphasized by advocates of transaction cost economics, the inadequacy of the legal system in developing countries increases the importance of private governance. There are two different forms of private governance, spontaneous and centralized. In spontaneous private governance, since information is easily disseminated through social networks, the behavior of parties is mostly controlled by social norms. Those who engage in undesirable behavior are subject to collective punishment. The characteristics of the group in centralized governance make it difficult to obtain accurate information and collective punishment. Thus, economic and social order is provided under the leadership of various organizations such as associations and market intermediaries. Despite their advantages, the common consensus on whether private forms of governance can provide effective governance is that they can complement, not replace, the formal legal system.

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