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Trust and Social Collateral

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Author Info
Markus Mobius
Adam Szeidl

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Abstract

This paper builds a theory of informal contract enforcement in social networks. In our model, relationships between individuals generate social collateral that can be used to control moral hazard when agents interact in a borrowing relationship. We define trust between two agents as the maximum amount that one can borrow from the other, and derive a simple reduced form expression for trust as a function of the social network. We show that trust is higher in more connected and more homogenous societies, and relate our trust measure to commonly used network statistics. Our model predicts that dense networks generate greater welfare when arrangements typically require high trust, and loose networks create more welfare otherwise. Using data on social networks and behavior in dictator games, we document evidence consistent with the quantitative predictions of the model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13126.

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Date of creation: May 2007
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Handle: RePEc:nbr:nberwo:13126

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Find related papers by JEL classification:
D02 - Microeconomics - - General - - - Institutions: Design, Formation, and Operations
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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  1. Attila Ambrus & Markus Mobius & Adam Szeidl, 2007. "Consumption Risk-sharing in Social Networks," Economics Working Papers 0079, Institute for Advanced Study, School of Social Science. [Downloadable!]
  2. Stephen Leider & Markus M. Möbius & Tanya Rosenblat & Quoc-Anh Do, 2007. "How much is a friend worth?: directed altruism and enforced reciprocity in social networks," Working Papers 07-11, Federal Reserve Bank of Boston. [Downloadable!]
  3. Jordahl, Henrik, 2007. "Inequality and Trust," Working Paper Series 715, Research Institute of Industrial Economics. [Downloadable!]
  4. Oliver Falck & Michael Fritsch & Stephan Heblich, 2008. "The Apple doesn't Fall far from the Tree: Location of Start-Ups Relative to Incumbents," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  5. Quoc-Anh Do & Stephen Leider & Markus M. Mobius & Tanya Rosenblat, 2009. "What Do We Expect from Our Friends?," Working Papers 09-2009, Singapore Management University, School of Economics. [Downloadable!]
  6. Quoc-Anh Do & Stephen Leider & Markus M. Mobius & Tanya Rosenblat, 2008. "Directed Altruism and Enforced Reciprocity in Social Networks," Working Papers 17-2008, Singapore Management University, School of Economics. [Downloadable!]
  7. Shawn Cole & Xavier Giné & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2009. "Barriers to household risk management: evidence from India," Staff Reports 373, Federal Reserve Bank of New York. [Downloadable!]
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