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Trust and Social Collateral

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Author Info

  • Karlan, Dean
  • Mobius, Markus
  • Rosenblat, Tanya
  • Szeidl, Adam

Abstract

This paper builds a theory of trust based on informal contract enforcement in social networks. In our model, network connections between individuals can be used as social collateral to secure informal borrowing. We de…ne network-based trust as the highest amount one agent can borrow from another agent, and derive a reduced-form expression for this quantity which we then use in three applications. (1) We predict that dense networks generate bonding social capital that allows transacting valuable assets, while loose networks create bridging social capital that improves access to cheap favors like information. (2) For job recommendation networks, we show that strong ties between employers and trusted recommenders reduce asymmetric information about the quality of job candidates. (3) Using data from Peru, we show empirically that network-based trust predicts informal borrowing, and we structurally estimate and test our model. 

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 13026.

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Date of creation: 01 Feb 2009
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Publication status: Published in Quarterly Journal of Economics, August 2009, vol. 124 no. 3, pp. 1307-1361
Handle: RePEc:isu:genres:13026

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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Keywords: trust; social networks;

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