Formal law and customary change: A lab-in-field experiment in Ethiopia

• We test if customary courts adapt arbitrations when in competition with formal law.
• We find arbitration biases against women, and in favor of known plaintiffs.
• Introducing a formal law reduces such biases and arbitrations get closer to the law.
• Agents favored by the law do not use their increased bargaining power.
• Most effects come from changes in the custom, not from agents using the law.

Do customary courts strategically adapt arbitration outcomes if they face increased competition by the formal law? Through a lab-in-field experiment with villagers and real customary judges in rural Ethiopia, we show that post-arbitration payouts to agents disfavored by the customary system are downwardly biased. Introducing a costly formal law reduces these biases and draws the decisions of customary judges significantly closer to the law. At the same time agents advantaged by the law do not exploit their increased bargaining power. Instead, they make offers that are less advantageous to themselves and, in equilibrium, only a fraction of them make direct use of the formal law. Our results suggest that local customary dispute resolution institutions may have a role to play in shifting preexisting customs toward a desired outcome. In areas where formal legal institutions have limited outreach, the effects of increased competition between formal law and customary legal institutions may rise from changes in the latter, rather than from plaintiffs seeking justice under the rule of law.