Court-ship, kinship and business: a study on the interaction between the formal and the informal institutions and its effect on entrepreneurship

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In this paper we theoretically and empirically examine how the interaction between the formal court system and the informal loan network affects a household’s decision to start a business. We find that when the formal court system is weak, expansion of informal credit network leads to the proliferation of business. However, with a sufficiently strong court system, expansion of the credit network has a negative effect on business prospects. This result is explained by the contradictions between formal laws and norms used by informal networks. JEL codes K12; L26; O17