The rule of law is crucial for economic activity, but political interference introduces complexities. This study investigates how state selective enforcement affects market trust and fairness.
Key Insight: Political connections create moral hazard by biasing expectations regarding legal protection.
We designed an innovative field experiment within the Senegal business context to understand these dynamics.
Our design randomly assigned treatments involving employee signaling of political connections and offering formal contracts during transactions.
Data & Methods:
- Country Context: Senegal
- Research Design: Randomized controlled trial (RCT) in a real sales business
- Treatments Tested:
- Employee signaled political connection(s)
- Offered formal contract(s)
Findings: Two major effects were observed.
First, buyers exhibited significantly less willingness to trade with sellers possessing political connections.
Second, while formal contracts generally increased exchange rates, their impact was disproportionately felt by politically connected buyers.
Significance: These results demonstrate that political connections negatively influence economic trust and outcomes in developing contexts like Senegal. They also highlight the limitations of relying solely on state institutions (formal contracts) to address politically-driven biases.
