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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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File URL: http://128.118.178.162/eps/dev/papers/0408/0408003.pdf
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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
Contact details of provider: Web page: http://128.118.178.162

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    • 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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  10. Fafchamps, Marcel & Minten, Bart, 1998. "Relationships and traders in Madagascar," MTID discussion papers 24, International Food Policy Research Institute (IFPRI).
  11. Dirk Krueger & Krishna B. Kumar, 2004. "Skill-Specific rather than General Education: A Reason for US--Europe Growth Differences?," Journal of Economic Growth, Springer, vol. 9(2), pages 167-207, 06.
  12. Edward C. Prescott, 1997. "Needed: a theory of total factor productivity," Staff Report 242, Federal Reserve Bank of Minneapolis.
  13. Marcel Fafchamps & Bart Minten, 2000. "Returns to Social Network Capital among Traders," Development Working Papers 145, Centro Studi Luca d\'Agliano, University of Milano.
  14. Greif, Avner, 1989. "Reputation and Coalitions in Medieval Trade: Evidence on the Maghribi Traders," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 857-882, December.
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  16. Simon Johnson & John McMillan, 2002. "Courts and Relational Contracts," Journal of Law, Economics and Organization, Oxford University Press, vol. 18(1), pages 221-277, April.
  17. Timothy Besley, 1995. "Nonmarket Institutions for Credit and Risk Sharing in Low-Income Countries," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 115-127, Summer.
  18. Timur Kuran, 1997. "Islam and Underdevelopment: An Old Puzzle Revisited," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 153(1), pages 41-, March.
  19. Alberto Bisin & Giorgio Topa & Thierry Verdier, 2004. "Religious Intermarriage and Socialization in the United States," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 615-664, June.
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  21. Knack, Stephen & Keefer, Philip, 1997. "Does Social Capital Have an Economic Payoff? A Cross-Country Investigation," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1251-88, November.
  22. Alberto Bisin & Giorgio Topa, 2003. "Empirical Models of Cultural Transmission," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 363-375, 04/05.
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