# **I. Introduction**

To what extent do firms use different mechanisms, such as trust, law, and third-parties, to support the fulfillment of their agreements to buy and sell goods and services? How do firms combine these mechanisms? How do answers to these questions vary across countries? Williamson (1979) refers to such combinations of mechanisms as transactional governance structures. In the 40 years since he introduced this concept, there has been little progress in ascertaining which governance structures are most commonly used. This is surprising given the consensus in the literature that levels of development are associated with the effectiveness of arrangements for enforcing agreements (Williamson 1985; North 1990; Greif 2001). Although the quantitative importance of such arrangements to growth and productivity is extremely difficult to pin down, there is ample evidence that it is large.<sup>1</sup> The absence of evidence on the use of different arrangements for enforcing agreements – transactional governance structures – is troubling also, because any diagnosis of the causes of a country's ailments will depend on an assessment of the behavior of its firms in critical areas of activity. Given the absence of any absolute standard to guide such an assessment, rigorously comparative, cross-country data are necessary for such a diagnosis, as for example implemented by the World Governance Indicators or Doing Business. While there are many datasets on individual elements of governance, such as the strength of legal institutions or country trust levels, there is no clear overall picture capturing how firms enforce agreements. Stated starkly, currently there exists no systematic methodology or data that would allow us to draw any conclusion on, for example, whether firms in La Paz, Bolivia, rely more or less on legal institutions or trust than firms in La Paz, Argentina, or, indeed, La Paz, Arizona.

The aim of this paper is to fill this gap in the literature. The paper presents and analyzes the responses of 3,430 firms to a newly designed survey question that is posed to representative samples of firms in six South American countries. Given the use of survey weights, our estimates characterize the use of governance structures in a very large part of economic activity. The application here is to a small number of countries, but the methodology is sufficiently general that it could be applied in any country or region in the world, producing results that are exactly comparable to those presented below.

> <sup>1</sup> It is notoriously difficult to quantify the relationship between arrangements for enforcing agreements and economic performance, largely because of the issue addressed in this paper, data availability. Nevertheless, there is enough evidence to conclude that understanding the process of development could benefit from more focus on transactional arrangements and the quantitative consequences of problems with such arrangements.  Nunn (2007) shows that contract enforcement explains more of the pattern of trade than physical capital and skilled labor combined. In a cross-country study, Kovac and Spruk (2016) find that a country with a one standard deviation higher level of transaction costs is 44% poorer as a result. Boehm (2018) calculates, under a set of conservative assumptions, that on average countries would grow by 18% if enforcement costs were zero. Boehm and Oberfeld (2018) find that a feasible reduction in court congestion alone in India would increase productivity by 5%. In a small survey of Romanian firms, Murrell and Paun (2010) asked about the willingness-to-pay for first-best institutions and found that the transaction costs of exchange are as high as 23% of value added. Even for a very developed and organized market, US usedcar wholesaling, Larsen (2018) found that the surplus lost in the bargaining process represents on average 14% of the first-best surplus.

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