Trust and Social Collateral

Markus Michael Mobius () and Adam Szeidl

No 13126, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D02 D23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-evo, nep-exp, nep-hap, nep-hpe and nep-soc
Date: 2007-05
Note: LS
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