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Trust and Social Collateral

Adam Szeidl, Tanya Rosenblat, Markus Mobius () and Dean Karlan ()

Scholarly Articles from Harvard University Department of Economics

Abstract: This paper builds a theory of trust based on informal contract enforcement in social networks. In our model, network connections between individuals can be used as social collateral to secure informal borrowing. We define network-based trust as the highest amount one agent can borrow from another agent, and derive a reduced-form expression for this quantity which we then use in three applications. (1) We predict that dense networks generate bonding social capital that allows transacting valuable assets, while loose networks create bridging social capital that improves access to cheap favors like information. (2) For job recommendation networks, we show that strong ties between employers and trusted recommenders reduce asymmetric information about the quality of job candidates. (3) Using data from Peru, we show empirically that network-based trust predicts informal borrowing, and we structurally estimate and test our model.

Date: 2009
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Published in Quarterly Journal of Economics

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Journal Article: Trust and Social Collateral (2009) Downloads
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Working Paper: Trust and Social Collateral (2007) Downloads
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