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Village versus Market Social Capital: An Approach to Development

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Author Info
Krishna B. Kumar (USC Marshall School of Business)
John G. Matsusaka (USC Marshall School of Business)

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Abstract

This paper presents a model of an economy in which traders use social capital to reduce transaction costs. A key assumption is that there are two types of social capital: “village” capital relies on personal networks and repeat play to guarantee contracts; “market” capital relies on third parties such as auditors and courts and is necessary for effective market institutions. Village capital is efficient for localized economies; market capital allows trade between strangers and greater specialization. The model shows how complementarity of social capital can prevent a village economy from transitioning to a market economy (industrializing) when market exchange becomes more efficient. The model helps understand persistent differences in wealth between countries and the reversal of economic fortune across countries in the last 500 years.

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Paper provided by EconWPA in its series Development and Comp Systems with number 0408003.

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Length: 50 pages
Date of creation: 05 Aug 2004
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Handle: RePEc:wpa:wuwpdc:0408003

Note: Type of Document - pdf; pages: 50
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Web page: http://129.3.20.41

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Related research
Keywords: Human capital Transactions Institutions Dynamics

Find related papers by JEL classification:
O - Economic Development, Technological Change, and Growth
P - Economic Systems

This paper has been announced in the following NEP Reports:

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  1. repec:att:wimass:1920412 is not listed on IDEAS
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    Other versions:
  3. Fafchamps, Marcel & Minten, Bart, 1998. "Relationships and traders in Madagascar," MTID discussion papers 24, International Food Policy Research Institute (IFPRI). [Downloadable!]
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  5. Timur Kuran, 1997. "Islam and Underdevelopment: An Old Puzzle Revisited," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 153(1), pages 41-, March.
  6. Steven Durlauf & Marcel Fafchamps, 2004. "Social Capital," Development and Comp Systems 0409060, EconWPA. [Downloadable!]
    Other versions:
    • Steven N. Durlauf & Marcel Fafchamps, 2004. "Social Capital," NBER Working Papers 10485, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    • Durlauf, Steven N. & Fafchamps, Marcel, 2005. "Social Capital," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 26, pages 1639-1699 Elsevier. [Downloadable!] (restricted)
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  8. Prescott, Edward C, 1998. "Needed: A Theory of Total Factor Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 525-51, August.
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  11. Marcel Fafchamps, 2002. "Returns to social network capital among traders," Oxford Economic Papers, Oxford University Press, vol. 54(2), pages 173-206, April.
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  13. Knack, Stephen & Keefer, Philip, 1997. "Does Social Capital Have an Economic Payoff? A Cross-Country Investigation," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1251-88, November.
  14. La Porta, Rafael, et al, 1997. "Trust in Large Organizations," American Economic Review, American Economic Association, vol. 87(2), pages 333-38, May. [Downloadable!] (restricted)
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  15. Simon Johnson & John McMillan, 2002. "Courts and Relational Contracts," Journal of Law, Economics and Organization, Oxford University Press, vol. 18(1), pages 221-277, April.
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  16. Besley, Timothy, 1995. "Nonmarket Institutions for Credit and Risk Sharing in Low-Income Countries," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 115-27, Summer. [Downloadable!] (restricted)
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  18. Daron Acemoglu & Simon Johnson & James A. Robinson, 2002. "Reversal Of Fortune: Geography And Institutions In The Making Of The Modern World Income Distribution," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1231-1294, November. [Downloadable!] (restricted)
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  19. Edward L. Glaeser & David Laibson & Bruce Sacerdote, 2002. "An Economic Approach to Social Capital," Economic Journal, Royal Economic Society, vol. 112(483), pages 437-458, November. [Downloadable!] (restricted)
  20. Alberto Bisin & Giorgio Topa & Thierry Verdier, 2004. "Religious Intermarriage and Socialization in the United States," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 615-664, June.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mueller, Holger M & Philippon, Thomas, 2006. "Concentrated Ownership and Labour Relations," CEPR Discussion Papers 5776, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Mueller, Holger M & Philippon, Thomas, 2006. "Family Firms, Paternalism and Labour Relations," CEPR Discussion Papers 6017, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Holger M. Mueller & Thomas Philippon, 2006. "Family Firms, Paternalism, and Labor Relations," NBER Working Papers 12739, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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