In the popular imagination, a marketplace is somewhere you can expect to be cheated – so much so that the English language has several idioms, from buying a pig in a poke to letting the cat out of the bag, originating in sharp practice by 16^th century livestock traders.

Those giraffes you sold me, they won't mate. They just walk around, eating, and not mating… I want my money back. (Gladiator, 2000)

But what if a market is actually a place where values and ethics are essential to success?

The link between market exposure and civic values has long been debated by economists no less than Adam Smith and Karl Marx. A new working paper by Dr Devesh Rustagi attempts to settle the argument with results from experimental work in rural Ethiopia.

Market Exposure, Civil Values and Rules presents results from Dr Rustagi’s work with the Arsi Oromo People, who live in the Bale Mountains in southern Ethiopia.

The Arsi mainly trade in livestock. Livestock exchange is prone to market failure from asymmetric information – the vendor will know much more about the animal’s health than the buyer. An unethical merchant might conceal an animal’s illness in order to conclude a sale.

Dr Rustagi explains: “The Arsi homeland is an excellent place to study the influence of markets as they developed in an accidental way from short-lived military camps that Emperor Menelik established after defeating the Arsi - but then died shortly after. This allows me to study the influence of the market in isolation from other factors, such as urbanisation or the development of state and education.

“If I sold a sick cow to someone in my immediate social circle and it died, my personal reputation would be damaged. There is an incentive to me to be honest to people that I know, but no incentive to be honest outside my immediate circle.

“In a market setting, I am likely to sell to people I do not know in interactions that are short-lived. Do I cheat them, or do we find ways of co-operating so that the market trades good-quality livestock at fair prices?”

Dr Rustagi’s study has three main elements.

Members of the Arsi community from settlements near to, and far from, the market locations took part in a one-shot, anonymous public goods game to measure their propensity for conditional co-operation, or simply put, reciprocity - a proxy for civic values. This was followed up with data from two aspects of a forest management project which Arsi people are involved in. Members of the community give a certain number of hours to monitor their section of forest and prevent outsiders from gaining access. This is based on trust – no-one monitors the monitors – so a higher number of monitoring hours can stand as a proxy for higher civic values. The natural forest regeneration requires each group to put constraints on opportunistic behaviour by introducing and enforcing rules against rampant browsing by livestock at key points of the year when trees are young.

The study found that the greater distance the community lived from the market, the weaker their reciprocity in the game was; the fewer hours they gave to forest monitoring, and the less likely they were to have created rules about grazing. As an example, one hour increase in market distance led to a drop in reciprocity, time spent monitoring and rule formation by over 20 percentage points.

But why does market exposure lead to these findings?

To unpack the mechanisms Dr Rustagi conducted vignettes about two hypothetical cattle sales to add important detail about how markets function in the absence of a strong state.

He found that in groups far from markets, people do not need to trust strangers, as they sell and buy cattle with people from their own community – where, driven by reputational concerns, people behave honestly. The outlook people develop from these environments is insular – co-operate with known people but cheat otherwise.

But, in markets where people trade cattle with unknown people, these options are not available and there is no external authority to appeal to if a trader is dishonest. The Arsi Oromi have developed their own system of checks and sanctions. When meeting at the market, the Oromo people announce their clan membership. This enables a form of collective punishment to be applied should a trader cheat a customer and is a powerful incentive for the community to police itself. This allows people who regularly buy and sell in markets to learn to trust strangers and extend cooperation beyond their in-group to outsiders.

Dr Rustagi comments: “The empirical data showed that distance from the market shaped cultural norms, while the vignette studies revealed some of the mechanisms behind this effect.

“My evidence on the role of markets in shaping civic values and rules is an important contribution to our understanding of how economic organisation influences social change.”

• Market Exposure, Civic Values and Rules. Dr Devesh Rustagi. June 2024. Warwick Economics Research Paper No 1501Link opens in a new window