Self Governance in Social Networks of Information Transmission
This paper studies the problem of self governance in a model in which information flows are governed by the community structure. In each round of an infinitely repeated game, an agent and an investor, who is selected from a finite set of investors, play a trust game. Investors receive information only from their own social contacts and may act upon after receiving news about opportunistic behavior. We explore the social networks leading to self governance and emphasize how the architecture of such networks is shaped by the technology with which surplus can be created in each round. We formally show how the details of the transactions determine the density and cohesiveness of the social network. An application to the interaction between formal and informal institutions of exchange is provided, and it is shown that markets may harm networked relationships by deteriorating the monitoring quality.JEL classification numbers: D85, C73, L14, D82.
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