Culture and the Cost of Contract Enforcement

What explains cross-country differences in the cost of contract enforcement? Previous findings suggest that fewer legal complexities support lower contract enforcement costs. In addition, recent work finds that individuals may rely on informal, cultural means to enforce agreements. Building from these two main bodies of work, this paper seeks to understand the variation of the costs of enforcing contracts by examining how informal cultural enforcement mechanisms may substitute or complement formal legal procedures ultimately shaping the costs of contract enforcement. Cultural measures of trust, individualism, individual responsibility and an overall culture index dominate legal formalism suggesting a substitution effect. These results suggest that variation in contract enforcement costs may be better explained from cross-country differences in culture than formal legal rules.