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Village versus Market Social Capital: An Approach to Development

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  • Krishna B. Kumar

    (USC Marshall School of Business)

  • John G. Matsusaka

    (USC Marshall School of Business)

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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File URL: http://128.118.178.162/eps/dev/papers/0408/0408003.pdf
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Bibliographic Info

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
Date of revision:
Handle: RePEc:wpa:wuwpdc:0408003

Note: Type of Document - pdf; pages: 50
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Web page: http://128.118.178.162

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Keywords: Human capital; Transactions; Institutions; Dynamics;

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References

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Cited by:
  1. Kingston, Christopher, 2007. "Parochial corruption," Journal of Economic Behavior & Organization, Elsevier, vol. 63(1), pages 73-87, May.
  2. Mueller, Holger M & Philippon, Thomas, 2006. "Family Firms, Paternalism and Labour Relations," CEPR Discussion Papers 6017, C.E.P.R. Discussion Papers.
  3. Mueller, Holger M & Philippon, Thomas, 2006. "Concentrated Ownership and Labour Relations," CEPR Discussion Papers 5776, C.E.P.R. Discussion Papers.
  4. Elisabeth Caucutt & Krishna B. Kumar, 2007. "Education For All: A Welfare-Improving Course for Africa?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(2), pages 294-326, April.
  5. Alexandre Janiak & Quentin David & Etienne Wasmer, 2008. "Local Social Capital and Geographical Mobility: A Theory," Sciences Po publications 3668, Sciences Po.
  6. Besley, Timothy J. & Ghatak, Maitreesh, 2009. "The de Soto Effect," CEPR Discussion Papers 7259, C.E.P.R. Discussion Papers.
  7. Kingston, Christopher, 2008. "Social structure and cultures of corruption," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 90-102, July.
  8. Lyons, Michal & Brown, Alison, 2010. "Has Mercantilism Reduced Urban Poverty in SSA? Perception of Boom, Bust, and the China-Africa Trade in Lomé and Bamako," World Development, Elsevier, vol. 38(5), pages 771-782, May.

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