Social, Formal, and Political Determinants of Trade Under Weak Rule of Law: Experimental Evidence from Senegalese Firms

• Author: Abhit Bhandari
• DOI: http://doi.org/10.1177/00104140221089648
• Published date: 01 February 2023
• Date: 01 February 2023
• Subject Matter: Articles

Article

Comparative Political Studies

2023, Vol. 56(2) 163–192

© The Author(s) 2022

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DOI: 10.1177/00104140221089648

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Social, Formal, and

Political Determinants of

Trade Under Weak Rule

of Law: Experimental

Evidence from

Senegalese Firms

Abhit Bhandari

1



Abstract

How do f‌irms ensure secure exchange when the rule of law is weak and

contracting institutions privilege the politically connected? In developing

countries, f‌irms may use social, formal, or political heuristics when selecting

business partners, but how these factors jointly impact exchange remains

understudied. In this article, I develop these theoretical mechanisms and test

their impact with a conjoint experiment administered to 2389 formal and

informal f‌irms in Senegal. I f‌ind evidence in support of all three theories: To

varying degrees, social, state, and political factors simultaneously impact f‌irms’

sense of deal security and likelihood of exchange. The results demonstrate the

substantial inf‌luence of formal predictors of exchange even in an over-

whelmingly informal business environment, and also establish the counter-

vailing effects of political connections on trade. These f‌indings suggest that

f‌irms in developing countries must contend with an intricate political calculus

to ensure their growth.

1

Temple University, Philadelphia, PA, USA

Corresponding Author:

Abhit Bhandari, Department of Political Science, Temple University, 1115 Polett Walk,

Gladfelter 457, Philadelphia, PA 19122, USA.

Email: abhit.bhandari@temple.edu

Keywords

African politics, business and politics, politics of growth/development,

experimental research, political connections, contract enforcement, institutions

Introduction

In developing countries, informal inf‌luences coexist with formal institutions to

critically shape markets (North, 1991). How do f‌irms navigate the complex

interplay of formal and informal inf‌luences to ensure secure exchange when

the rule of law is weak? Existing research tends to test in isolation the in-

f‌luence of social factors like ethnic and religious ties, formal factors such as

state-backed contracts, and political factors such as connections to the state

(e.g., Grimard, 1997;Fisman, 2001). But the reality is more complex, and

f‌irms in developing contexts must often consider a conf‌luence of social,

formal, and political factors to ensure secure exchange. These tensions are

increasingly salient as emerging markets develop at breakneck speed, pitting

traditional, informal forms of doing business against formal, state-backed

regulations.

In this article, I develop a theory for how these seemingly competing

inf‌luences jointly affect f‌irms’decisions to do business. I argue that ethnic and

religious networks increase the likelihood of contract enforcement, and that

state-backed contracts similarly inspire conf‌idence in trade by decreasing the

perceived probability of contract breach. By contrast, the impact of political

connections on exchange is theoretically vaguer. There are numerous studies

highlighting the value of political connections for f‌irms in developing

countries (e.g., Fisman, 2001;Khwaja & Mian, 2005;Faccio, 2006), but the

full equilibrium is less understood: How do f‌irms’political connections affect

how other f‌irms perceive them, and does this in turn affect the likelihood of

exchange? I argue that politically connected business partners pose signif‌icant

risks under selectively enforced rule of law, as connections enable the sub-

version of state institutions during contract disputes. Because politically

connected trading partners are able to break contracts with relative impunity,

f‌irms avoid trading with them unless the political advantages outweigh the

heightened risks of defection.

To test the joint impact of these theoretical claims, I administered a survey

with an embedded conjoint experiment to 2389 f‌irms in Senegal, a country in

West Africa where social inf‌luences and formal state structures compete in a

rapidly modernizing business environment. My sample included f‌irms from

both the formal and informal economies—f‌irms that have registered and not

registered with the state, respectively—in order to gain theoretical leverage

from the different enforcement and recourse options available by sector.

1

From each f‌irm, I surveyed the employee responsible for the f‌irm’s deals and

164 Comparative Political Studies 56(2)