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Social embedding as a solution to a control problem? Evidence from Vietnamese small business* - page 4 / 52





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Markets for specific services in specific places from specific individuals do not exist and the

price is sometimes a matter of extended negotiation – often continuing beyond an initial

agreement – because the threat of exploitation is high and the basis for evaluation lacking.

The mutual selection of partners is fraught with danger because potential and actual partners

may misrepresent their capabilities and their intentions. Ensuring compliance with

agreements among partners is often difficult because although both parties can, at least in

principle, benefit from such exchanges (they are voluntary exchanges with voluntarily and

mutually chosen partners that are undertaken for gain), one partner may be further

advantaged if he or she renegotiates the exchange agreement after the other party has

invested some resources in the exchange by performing some tasks. Moreover, exchange is

subject to risks, such as the possibility of supply and demand changes or of uncertain

property rights, that transcend individual transactions and particular relationships. Each

consideration introduces a large amount of uncertainty into such exchanges and thereby

decreases the attractiveness of exchange, possibly decreasing the amount of economic

activity to far below that possible.

Embedding the economic exchanges in a formal legally-recognized institution such as

a regulatory state can reduce such uncertainty and increase economic activity (North 1990).

There are extensive laws governing commercial transactions and labor relations, protecting

both parties from risks. Yet, common observation suggests that across societies, despite the

size of the legal profession, firms and individuals are reluctant to resort to the legal system to

enforce agreements (Macauley 1963; Ellickson 1991). Moreover, it does not often seem to

be the case that “the authority of law is always perfectly sufficient to protect the meanest man

in the state (Smith 1976, p. 223).” The relevant state bureaus themselves are the indirect

outcomes of sustained successful exchange. In many developing and transitional economies,


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