Dispute Prevention Without Courts in Vietnam

TLDR: In this article, the authors examine how Vietnam's firms use ongoing relationships to maintain agreements and find that these relationships serve to reduce the transaction costs of the market: the costs of locating trading partners, of negotiating and monitoring contracts, and of enforcing agreements and settling disputes.

Abstract: Vietnam's firms contract without the shadow of the law and only partly in the shadow of the future. Although contracting rests in part on the threat of loss of future business, firms often are willing to renegotiate following a breach, so the retaliation is not as forceful as in the standard repeated-game story and not as effective a sanction. To ensure agreements are kept, firms rely on other devices to supplement repeated-game incentives. Firms scrutinize their trading partners. Community sanctions are occasionally invoked. Transactions with greater risk of reneging are supported by more elaborate governance structures. Ongoing relationships among firms serve to reduce the transaction costs of the market: the costs of locating trading partners, of negotiating and monitoring contracts, and of enforcing agreements and settling disputes. In an economy in the midst of deep reform, transaction costs are especially severe because the normal market-supporting institutions are still being built. We examine in this article how Vietnam's firms use ongoing relationships to maintain agreements. For a snapshot of an economy in the process of building institutions, we use a 1995-1997 survey of privately owned manufacturing firms in Hanoi and Ho Chi Minh City. The new ways of doing business in Vietnam have been devised at ground level. The bottom-up reform process has relied on de facto decentralization of economic activity, while leaving in place the formal institutions of central planning. Although Vietnam's government has introduced few policies to foster the private sector, "the owners of private business have worked out their own ad hoc strategy for economic development which is popular, oral rather than in the