Trust and Social Collateral / Markus Mobius, Adam Szeidl.

Format:

Book

Author/Creator:

Mobius, Markus.

Contributor:

National Bureau of Economic Research.

Szeidl, Adam.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13126.

NBER working paper series no. w13126

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

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.

Notes:

Print version record

May 2007.