Formal and Informal Institutions in a Transition Economy: The Case of Vietnam

Summary We examine the role of informal and formal institutions behind the growth of private sector in Vietnam since the official recognition of private enterprises in the early 1990s. We show that firms have increasingly taken on risks in their transactions in spite of weak formal institutions. Risk-taking by firms can be explained by the use of informal institutions such as relational contracts and networks along with recourse to emerging formal institutions such as written contracts. Our results suggest that informal institutions remain important as mechanisms of risk management even as the economy matures and new formal institutions gradually develop.