Order with a Little Bit of Law: Complementarity vs. Substitution of Formal and Informal Arrangements*

While some argue that incomplete contracts facilitate the self-enforcement of informal dealings, other authors submit that they substitute for or “crowd out” social norms supporting informal arrangements. We use experimental evidence to test these theories by manipulating the probability that buyers and sellers will continue transacting and contract costs. We find that, by enforcing contractible exchange dimensions, contracts facilitate the self-enforcement of noncontractible dimensions. This is crucial for low probabilities of continuation, when selfenforcement becomes more difficult. Although our data reveal the existence of reciprocity as an enforcement mechanism, evidence that contracts crowd out this social norm is not robust.