Trust and Social Collateral

By Dean S. Karlan, Markus M. Mobius, Tanya Rosenblat, Adam Szeidl. 2009

586 citations recorded by the source corpus.

This paper builds a theory of informal contract enforcement in social networks. In our model, relationships between individuals generate social collateral that can be used to control moral hazard when agents interact in a borrowing relationship. We define trust between two agents as the maximum amount that one can borrow from the other, and derive a simple reduced form expression for trust as a function of the social network. We show that trust is higher in more connected and more homogenous societies, and relate our trust measure to commonly used network statistics. Our model predicts that dense networks generate greater welfare when arrangements typically require high trust, and loose networks create more welfare otherwise. Using data on social networks and behavior in dictator games, we document evidence consistent with the quantitative predictions of the model.

Subfields: Economics and Econometrics, Safety Research, Sociology and Political Science

View Paper: https://www.semanticscholar.org/paper/23d982509ea7de50d9f72192f011c22f362b62a6

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Citations in the corpus

The Impact of Regional Age Structure on Entrepreneurship (2009, background): “First, peers facilitate access to resources like capital or labor (Gompers, Lerner, and Scharfstein 2005; Michelacci and Silva 2007; Mobius and Szeidl 2007).”
Airtime transfers and mobile communications: Evidence in the aftermath of natural disasters (2016, background): “This modeling framework offers the advantage that it most transparently leads to empirical predictions that 13Our distinction also parallels the distinction Ligon & Schechter (2011) draw between “preference-related” motives and “incentive-related” motives.”
Banking on Trust: How Debit Cards Enable the Poor to Save More (2017, background): “It is particularly crucial in nancial transactions where people pay money in exchange for promises, and essential where the legal institutions that enforce contracts are weak (McMillan and Woodru , 1999; Karlan et al., 2009).”
The Economic Returns to Social Interaction: Experimental Evidence from Microfinance (2013, background): “First, in a setting in which clients lack access to explicit binding contracts, an increase in the frequency of interaction can improve clients’ ability to sustain reciprocal economic arrangements, including informal insurance schemes (Karlan et al., 2009; Besley and Coate, 1995; Ambrus et al., 2010”
Social Networks and Labor Markets: How Strong Ties Relate to Job Finding on Facebook’s Social Network (2017, background): “Weak 35 Karlan et al. (2009) suggest that persons hired through the use of network connections should earn higher wages than those not using networks and that this wage gap should intensify with the skill intensity of the work.”
Building Social Capital Through Microfinance (2010, unknown): “…contracts, an increase in the frequency of interaction can enable a pair of clients to devise and implement punishment and reward strategies that sustain reciprocal economic arrangements, including informal insurance schemes (Karlan et al., 2009; Besley and Coate, 1995; Ambrus et al., 2010).”
Social Distance and Trust: Experimental Evidence from a Slum in Cairo (2013, methodology): “Social networks increase people’s access to goods and services through reciprocal exchange (Kranton, 1996), mutual insurance (Fafchamps, 1992; Foster and Rosenzweig, 2001) and informal contract enforcement as exercised, for instance, in rotating savings and credit associations and in group banking (”
Networks in Finance (2008, background): “Mobius and Szeidl (2007) propose a model of lending and borrowing in a social network, where relationships between individuals can be used as social collateral.”
Bank relationships, business cycles, and financial crises (2011, background): “Loan-level data address both of these concerns — they give the date of the loan origination and allow us to compute network statistics at the bank level.”
The Promise of the Sharing Economy among Disadvantaged Communities (2015, background): “Past research states the importance of networking and having the right connections to find employment [18].”