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Village versus Market Social Capital: An Approach to Development

  • Krishna B. Kumar

    (USC Marshall School of Business)

  • John G. Matsusaka

    (USC Marshall School of Business)

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
Date of revision:
Handle: RePEc:wpa:wuwpdc:0408003
Note: Type of Document - pdf; pages: 50
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