How do business associations support contract enforcement? Evidence from Hungary

Abstract

Business associations (BAs) are often mentioned among formal private-order institutions that support contract enforcement. Despite their ubiquity, evidence about their actual roles is still very limited. We explore empirically four mechanisms through which they can support the credibility of contractual commitments: member selection, norm enforcement, dispute resolution and information sharing. In a developed legal context, firm-level data from an economy-wide managerial survey show that BAs support contractual trust among members, in members by outsiders as well as in outsiders by members. Member selection and information sharing stand out as the most important mechanisms: They help all three relationship types. Dispute resolution helps overcome opportunism between members only. Formalized norm enforcement is a signal of trustworthiness for outsiders. Economic theory suggests that BAs can help establish trust beyond personal and local networks. We find strong evidence that they indeed do.