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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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  1. Kandori, Michihiro, 2002. "Introduction to Repeated Games with Private Monitoring," Journal of Economic Theory, Elsevier, vol. 102(1), pages 1-15, January.
  2. Paul R. Milgrom & Douglass C. North & Barry R. Weingast, 1990. "The Role Of Institutions In The Revival Of Trade: The Law Merchant, Private Judges, And The Champagne Fairs," Economics and Politics, Wiley Blackwell, vol. 2(1), pages 1-23, 03.
  3. Felipe Balmaceda & Ronald Fischer, 2010. "Economic performance, creditor protection, and labour inflexibility," Oxford Economic Papers, Oxford University Press, vol. 62(3), pages 553-577, July.
  4. Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, number 9780195300796, March.
  5. Spagnolo, Giancarlo & Lippert, Steffen, 2004. "Networks of Relations," SSE/EFI Working Paper Series in Economics and Finance 570, Stockholm School of Economics, revised 03 May 2005.
  6. Michi Kandori, 2010. "Social Norms and Community Enforcement," Levine's Working Paper Archive 630, David K. Levine.
  7. Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1995. "Social Norms and Random Matching Games," Games and Economic Behavior, Elsevier, vol. 9(1), pages 79-109, April.
  8. Bernstein, Lisa, 1992. "Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry," The Journal of Legal Studies, University of Chicago Press, vol. 21(1), pages 115-57, January.
  9. Itay Fainmesser, 2010. "Community Structure and Market Outcomes: A Repeated Games in Networks Approach," Working Papers 2010-14, Brown University, Department of Economics.
  10. David A. Miller & S. Nageeb Ali, 2009. "Enforcing Cooperation in Networked Societies," 2009 Meeting Papers 115, Society for Economic Dynamics.
  11. Alexander Wolitzky, 2013. "Cooperation with Network Monitoring," Review of Economic Studies, Oxford University Press, vol. 80(1), pages 395-427.
  12. Glen Ellison, 2010. "Cooperation in the Prisoner's Dilemma with Anonymous Random Matching," Levine's Working Paper Archive 631, David K. Levine.
  13. Kandori, Michihiro, 1992. "The Use of Information in Repeated Games with Imperfect Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 581-93, July.
  14. Ahn, Illtae & Suominen, Matti, 2001. "Word-of-Mouth Communication and Community Enforcement," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(2), pages 399-415, May.
  15. Jeffrey C. Ely & Johannes Hörner & Wojciech Olszewski, 2005. "Belief-Free Equilibria in Repeated Games," Econometrica, Econometric Society, vol. 73(2), pages 377-415, 03.
  16. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
  17. Jeffrey C. Ely & Juuso Valimaki, 1999. "A Robust Folk Theorem for the Prisoner's Dilemma," Discussion Papers 1264, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. Felipe Balmaceda & Juan F. Escobar, 2012. "Self Governance in Social Networks of Information Transmission," Documentos de Trabajo 290, Centro de Economía Aplicada, Universidad de Chile.
  19. Dean Karlan & Markus Mobius & Tanya Rosenblat & Adam Szeidl, 2009. "Trust and Social Collateral," The Quarterly Journal of Economics, MIT Press, vol. 124(3), pages 1307-1361, August.
  20. Matthew O. Jackson & Tomas Rodriguez-Barraquer & Xu Tan, 2012. "Social Capital and Social Quilts: Network Patterns of Favor Exchange," American Economic Review, American Economic Association, vol. 102(5), pages 1857-97, August.
  21. Bendor, Jonathan & Mookherjee, Dilip, 1990. "Norms, Third-Party Sanctions, and Cooperation," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(1), pages 33-63, Spring.
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