Credit and Trust: Fruit Markets in the Mekong Delta

Credit and Trust: Fruit Markets in the Mekong Delta

June 14, 2013

The economic literature suggests that in markets where legal institutions are weak, such as Viet Nam, parties will rely on private ordering to assure performance of complex transactions. This paper examines fruit  markets  in  the  Mekong Delta. While  transactions  in  this  market  could  be  simple  (spot  market transactions), parties frequently make them more complex by adding a credit component. A survey of 180 farmers and 47 middlemen in the Mekong Delta's pomelo fruit market produces little evidence that private  ordering  mechanisms  are  playing  a  substantial  role  in  assuring  contractual  performance in somewhat complex market transactions. As  a  result,  in  the  absence  of  credible  legal  institutions  and effective  private  ordering  mechanisms,  there  are  significant  transaction  costs  built  into  the  pomelo market.  This paper recommends the creation of a simple reputation mechanism, not unlike those now employed in online auction markets, which, if implemented, can improve efficiencies in the market while lowering risks for both farmers and middlemen.

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