Yugank Goyal Yugank Institutions in Informal Markets Institutions in Informal Markets Yugank Goyal Institutions in Informal Markets Instituties in informele markten Proefschrift ter verkrijging van de graad van doctor aan de Erasmus Universiteit Rotterdam op gezag van de rector magnificus Prof.dr. H.A.P. Pols en volgens besluit van het College voor Promoties De openbare verdediging zal plaatsvinden op donderdag 16 juni 2016 om 09.30 uur door Yugank Goyal geboren te Agra, India 1A_BW Goyal_Stand.job Promotiecommissie Promotors: Prof.dr. H.-B. Schäfer Prof.dr. K. Heine Overige leden: Dr. P.T.M. Desmet Prof.dr.dr. h.c. E. Schanze LL.M. Prof.dr. N.J. Rickman 1B_BW Goyal_Stand.job This thesis was written as part of the European Doctorate in Law and Economics programme A collaboration between 2A_BW Goyal_Stand.job 2B_BW Goyal_Stand.job ACKNOWLEDGEMENTS Lauren Berlant, Professor of English in University of Chicago sums up my motivation for writing this thesis: “Most of the writing we do is actually a performance of stuckness. It is a record of where we got stuck on a question for long enough to do some research and write out the whole knot…” I would like to pay my gratitude to those who helped me perform. I thank my supervisor, Professor Hans-Bernd Schäfer, whose guidance, energy and understanding were an inspiration for me. I also thank Professor Klaus Heine, my second supervisor, whose ideas and encouragement for my work were extremely valuable. From both my supervisors, I learned how to ask the right and important questions; and once asked, how to investigate them. I am grateful to Professors Stefan Voigt, Michael Faure and Luigi Franzoni for their continued support and encouragement. I am also grateful to Professor Pauline Westerman who gave me valuable insights on my initial drafts. I thank many people who inspired and supported me throughout this journey. Few names stand out: C. Raj Kumar, Padmanabha Ramanujam, Stephen Marks, Kathleen Modrowski, Jay Krishnan, YSR Murthy, Michael Davis, NS Gopalakrishnan, Reto Hilty, Kung-Chung Liu, Aseem Prakash, Barbara Harris-White, Amit Bindal, Girish Yadav, Ranjan Ghosh, Dwarika Uniyal, Mohsin Khan, Prashant Iyengar, Lakshmi Arya, Shiv Swaminathan, Vikas Kathuria, Brajesh Ranjan, Ashwini Vasanthakumar, Rehan Abeyratne, Rafaella Bisceglia, Alberto Casarotto, Roxana Vasile, Arun Kaushik, Vijay Chander, Ramakant Rautray, Vineeta Tyagi, Anja Fröhnell, Isabel Schwegel, Karoline Aleksova, Lena-Maria Müller, Sheetal Verma, Malte Petersen, Sadhana Stülpnagel, Ana Patricia, Salaheddin Salah, Hark Empen, Arne Empen, Robert Prior, Mereike Brunswig, Christabel Randolph, Abhinandan Malik, Geeta Soekhlall, Kashika Chaddha, Ketan Mukhija, Rahul Vashistha, Pranjal Pandey, Prankur Misra and Charlotte Newman. You all taught me how to think without forgetting how to laugh during this time. Of particular help in my fieldwork were Nitin Anand, Kapil Batra, Rishi Gupta, Sandeep Poptani, Bharat Singh, Parul Garg, Amit Kumar Singh and Kamal Deep (for Agra), Pankaj Pathak (for Delhi), and Amrit Raj (for Dhanbad and also for inspiring me in my work throughout). 3A_BW Goyal_Stand.job I cannot thank enough, my batch-mates in EDLE 2012 group, for their positive spirit and beautiful friendship. I am very grateful to my colleagues and faculty at the Ronald Coase Institute (2013 in Xiamen, China), where I learned articulation of ideas. I am indebted to the Harvard Law School’s Institute for Global Law and Policy for helping me expand my scholarship and beliefs. I thank my parents, Vijay Kumar Goyal and Manju Goyal for their unconditional love; my brother Yugansh Goyal for his faith and support; his wife Purva and their little son Madhav for being light of our lives; and most importantly, my late grandmother Sheela Devi Goyal, whose innocent ignorance of my work was the only meaningful reality of it all. 3B_BW Goyal_Stand.job CONTENTS CHAPTER ONE: LAW, DEVELOPMENT AND INSTITUTIONS - A VIEW THROUGH INFORMAL MARKETS ........................................................................................................................... 6 1. Law and Development (L&D) and Informality .......................................................................... 6 1.1 Contribution to the Existing Literature ............................................................................... 7 1.2 What is the argument, not about? ......................................................................................... 8 1.3 Law and Economics Framework........................................................................................... 9 2. Law and Development (L&D) .................................................................................................... 10 2.1 Intellectual History of L&D ................................................................................................. 10 2.2 Scholarship as it Stands Today............................................................................................ 12 2.3 The Need for Recognition of Informal Institutions in L&D ............................................. 12 3. Informal Markets ......................................................................................................................... 13 4. Transaction Costs......................................................................................................................... 15 5. The Emergence of Intermediaries to Address Transaction Costs ........................................... 17 6. A Brief Synopsis of the Three Cases .......................................................................................... 18 6.1 Agra’s Footwear Cluster ...................................................................................................... 19 6.2 Dhanbad’s Coal Mafia ......................................................................................................... 19 6.3 Delhi’s Sex Work .................................................................................................................. 19 7. Methodology ................................................................................................................................. 20 7.1 Case Study, Interviews and Surveys ................................................................................... 22 7.2 Limitations ............................................................................................................................ 25 7.3 Inspiration for the Method .................................................................................................. 26 7.4 Agra’s Footwear Cluster ...................................................................................................... 28 7.5 Dhanbad’s Coal Mafia ......................................................................................................... 30 7.6 Delhi’s Sex Work .................................................................................................................. 32 8. A Brief Overview of Findings ..................................................................................................... 34 9. Chapter One Summary ............................................................................................................... 35 CHAPTER TWO: GUARANTEES AND TRADE CREDIT IN INFORMAL MARKETS: EVIDENCE FROM AGRA’S FOOTWEAR INDUSTRY (INDIA) ............................................................................ 36 1. Financial Intermediaries in Informal Markets ......................................................................... 36 2. The Concepts of Trade Credit and Guarantee Contracts ........................................................ 38 2.1 Trade Credit .......................................................................................................................... 38 2.2 Guarantee Contracts ............................................................................................................ 39 3. Agra’s Footwear Industry ........................................................................................................... 40 2 4A_BW Goyal_Stand.job 4. Institution of Trade Credit and Guarantors in the Market ..................................................... 42 4.1 The Trade Credit Chain....................................................................................................... 42 4.2 The Informal Institution of Parchi ...................................................................................... 44 4.2.1 Solving the Credible Commitment Problem .................................................................. 44 4.2.2 Solving the Liquidity Problem ......................................................................................... 45 4.3 Monitoring and Enforcement .............................................................................................. 46 4.4 Salient Features of the Parchi System ................................................................................. 48 4.5 The Value of Interest Rates on the Parchis ........................................................................ 50 5. What differentiates Informal Markets in Ordering Trade Credit and Guarantees ............. 52 5.1 Trade Credit .......................................................................................................................... 52 5.2 Guarantee Contract .............................................................................................................. 55 6. Path Dependency of Institutions in Informal