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Fall 2008
ISSN 0890-913X
Volume 24, Number 1

Remittances and Reputations in Hawala Money- Transfer Systems: Self-Enforcing Exchange on an International Scale

Emily C. Schaeffer, George Mason University
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TheJournalofPrivateEnterprise24(1),2008,95-117RemittancesandReputationsinHawalaMoney-TransferSystems:Self-EnforcingExchangeonanInternationalScaleEmilyC.SchaefferGeorgeMasonUniversityAbstractMigrantworkerremittancesoftentakeplaceoutsidethescopeofgovernmentenforcement.Throughanexaminationoftheinformalremittancetransfersystemofhawala,thispaperarguesthatself-enforcingexchangemechanismscansupporthighvolumetradeintheabsenceofformalcontractenforcement.Hawalanetworksemployexpostreputationmechanismsbetweenagentsandexantesignalingtoupholdobligationsunderconditionsofcontractuncertainty.JELCodes:D85,F33,G29,N25,P48,Z13Keywords:Hawala,Self-enforcement,Remittances,NetworksI.IntroductionTradeflourisheswhenindividualshaveconfidencethatothermembersofsocietywillhonorandenforceobligationsandpromises.Incountrieswheretheruleoflawisthemodusoperandi,contractlawservestoprovideconfidencebyconstrainingtraders,enforcingbreaches,andloweringtransactioncosts.However,whenthemachineryoflawisnotformallypresent,privatearrangementsoftenemergetomitigateconflictandsupportcooperation.Onefindsexamplesofefficientprivateenforcementinstitutionsthroughouthistoryandwithinthecontextofinternationaltrade(Landa,1981;Bernstein,1992;Grief,1993;Stringham,2003,2004;Leeson,2006).Inlieuofstateenforcement,privatearrangementsrelyonalternativemechanismstosustaincooperation.TheauthorwishestothankPeterBoettke,PeterLeeson,FredSautet,VirgilStorr,andseminarparticipantsatGeorgeMasonUniversityandtheMercatusCenterforhelpfulcomments.Thispaperalsobenefitedfromthesuggestionsoftwoanonymousreferees.Theusualdisclaimerapplies.95
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