Secure property rights are a major predictor of economic growth, yet property rights in much of the world are a function of political power. Those with political connections have privileged access to state institutions, benefit from preferential contract enforcement, and face fewer risks of expropriation in the private sector. This dissertation examines how consumers and firms navigate the complex interaction between formal and informal institutions in these environments of selectively enforced rule of law. I use original experimental data from Senegal, a state that epitomizes political property rights. In Paper 1, I argue that political connections produce moral hazard in exchange and introduce biases in judicial enforcement. I present evidence from a field experiment in which I created and operated a sales company, randomizing political connections and formal contracts during transactions. The results show that asymmetric political connections decrease buyers’ propensities to trade and that formal contracts only increase exchange among connected buyers. This work challenges conventional wisdom and extant literature on the value of political connections and formal contracts in the private sectors of developing countries. Paper 2 examines how political connections and formal contracts, among other state and nonstate influences, affect the behavior of firms under selective rule of law. To illustrate the complicated decision calculus that firms face when social, formal, and political factors all motivate exchange, I implemented a conjoint experiment with 2,389 firm managers. The results show that firms avoid deals with partners that have low-to-mid-level political connections, yet seek out deals with the most highly connected firms—despite believing they are more likely to breach contracts. These results demonstrate the countervailing effects of political connections and suggest why consumers and firms may react to them differently. Finally, Paper 3 asks how firms enforce their property rights when deals go astray. I argue that contract formality can shape firms’ property security strategies and demand for rule of law, and test this using evidence from a survey experiment administered to firms in both the formal and informal economies. I present descriptive evidence that enforcement strategies differ by firm formality status and political connections. The experimental findings show that while formal contracts increase the use of legal enforcement institutions, they also widen the enforcement gap between formal and informal firms. Together, these papers present theory and evidence of politically determined economic behavior under selective rule of law. The results imply that political connections are a form of rent-seeking that can suppress overall trade and produce market inefficiencies. Under these conditions, state institutions may unintentionally exacerbate political and economic inequalities.

Previous studies by Thomson (1996) and Crookes (2002) in land rental markets of rural KwaZulu-Natal were based on the premise that rental markets brought about efficiency and equity gains. Indeed these gains were proven by econometric analyses in both studies. Poor households that lacked the labour, time and other resources to farm land prior to the introduction of the rental market, tended to leave their arable land idle. In participating in rental transactions, land transferred from these poor households to households with the resources and the willingness to farm; and rental income was earned by the poor households. The current 2003/4 survey sought to evaluate the gains in two new areas, Mhlungwini in the Estcourt District and Duduza in the Bergville District, not covered in previous studies. Institutional interventions, related to the land rental market, in Mhlungwini and Duduza, had started in 2000 and 1993 respectively. Equity and efficiency gains were again proven as Lyne (2004) reports. While Chapter 2 provides an in-depth review of literature related to the theory of economic institutions, Chapter 3 applies this knowledge to Thomson's (1996) pilot project on institutional reform. This project, in terms of its action research that bore the ex ante transaction costs of willing participants, set in motion a process of institutional change leading to the development of the land rental market. The introduction of a formal contract, approved by the tribal authorities, served to give credence to rental transactions. In addition, institutional changes were made to reduce the likelihood of crop damage by stray cattle on arable land, in order to encourage willingness of households to lease in land. Recommendations were made by Thomson (1996) to further increase the exclusivity of arable land property rights. Options were evaluated by the author for institutional reform of communal grazing resources. This is to prevent degradation of grazing land caused by overstocking. Recommendations were made to promote sustainable use of the land. Chapter 4, apart from briefly analyzing the current survey results, provides two comparative studies of institutional reform, the first related to Australian water resources and the second related to land registration experiences in Africa. The last section of the Chapter evaluates a proposal for introduction of formal financial services to rural farmers. / Thesis (M.A.)-University of KwaZulu-Natal, Pietermaritzburg, 2005.