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Trust in Cohesive Communities

  • Felipe Balmaceda
  • Juan Esconar

    ()

This paper studies which social networks maximize trust and cooperation when agreements are implicitly enforced. We study a repeated trust game in which trading opportunities arise exogenously and the social network determines the information transmission technology. We show that cohesive communities, modeled as social networks of complete components, emerge as the optimal community design. Cohesive communities generate some degree of common knowledge of transpired play that allows players to coordinate their punishments and, as a result, yield relatively high equilibrium payoffs. Our results provide an economic rationale for the commonly argued optimality of cohesive social networks.

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File URL: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120130604173048.pdf
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Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 295.

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Date of creation: 2013
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Handle: RePEc:edj:ceauch:295
Contact details of provider: Web page: http://www.dii.uchile.cl/cea/

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  12. Ronald Fischer, 2008. "Economic performance, creditor protection and labor inflexibility," Documentos de Trabajo 250, Centro de Economía Aplicada, Universidad de Chile.
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  22. Alexander Wolitzky, 2013. "Cooperation with Network Monitoring," Review of Economic Studies, Oxford University Press, vol. 80(1), pages 395-427.
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