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Village versus Market Social Capital: An Approach to Development

Author

Listed:
  • 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.

Suggested Citation

  • Krishna B. Kumar & John G. Matsusaka, 2004. "Village versus Market Social Capital: An Approach to Development," Development and Comp Systems 0408003, EconWPA.
  • Handle: RePEc:wpa:wuwpdc:0408003
    Note: Type of Document - pdf; pages: 50
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    References listed on IDEAS

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    2. Durlauf, Steven N. & Fafchamps, Marcel, 2005. "Social Capital," Handbook of Economic Growth,in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 26, pages 1639-1699 Elsevier.
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    Citations

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    Cited by:

    1. Kingston, Christopher, 2008. "Social structure and cultures of corruption," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 90-102, July.
    2. 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.
    3. David, Quentin & Janiak, Alexandre & Wasmer, Etienne, 2008. "Local Social Capital and Geographical Mobility: A Theory," IZA Discussion Papers 3668, Institute for the Study of Labor (IZA).
    4. Besley, Timothy J. & Ghatak, Maitreesh, 2009. "The de Soto Effect," CEPR Discussion Papers 7259, C.E.P.R. Discussion Papers.
    5. Holger M. Mueller & Thomas Philippon, 2006. "Family Firms, Paternalism, and Labor Relations," NBER Working Papers 12739, National Bureau of Economic Research, Inc.
    6. 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.
    7. Mueller, Holger M & Philippon, Thomas, 2006. "Concentrated Ownership and Labour Relations," CEPR Discussion Papers 5776, C.E.P.R. Discussion Papers.
    8. Kingston, Christopher, 2007. "Parochial corruption," Journal of Economic Behavior & Organization, Elsevier, vol. 63(1), pages 73-87, May.
    9. Michal Lyons & Alison Brown & Zhigang Li, 2008. "The 'third tier’ of globalization," City, Taylor & Francis Journals, vol. 12(2), pages 196-206, July.

    More about this item

    Keywords

    Human capital; Transactions; Institutions; Dynamics;

    JEL classification:

    • O - Economic Development, Innovation, Technological Change, and Growth
    • P - Economic Systems

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