Social Capital

Social Capital
Lecture 8
November
2012
Development Economics (Exeter)
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Motivation
Standard economic view: we are all singular agents, and we need

external enforcement to mediate any exchange between us
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Motivation

When you buy something in the supermarket using your credit card,
the law protects both parties against opportunism
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Motivation

When you buy something in the supermarket using your credit card,
the law protects both parties against opportunism
However we are really not atomistic and a lot of exchange takes place
without external enforcement
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Social networks are important in obtaining jobs, and inuence our

consumption, education, fertility decisions
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Sociologists knew this all along, we have realized this more recently
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The goal is still to understand the allocation of resources and the
basic assumption is still rational choice
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The goal is still to understand the allocation of resources and the
basic assumption is still rational choice
Example: Ethnic networks, Alumni networks, Caste etc.
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A social network is a network of individuals connected by social links
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This enables them to interact, exchange without external enforcement
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For example, they may have better information, or impose sanctions
not available to outsiders
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For example, they may have better information, or impose sanctions
not available to outsiders
Solve collective action and coordination problems & alleviate market
failures.
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What are the economic foundations of the links between the

individuals? Possible candidates
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Repeated interaction
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Self-enforcing social norms (e.g., help your neighbour) with
non-conformists punished by sanctions
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Altruism (e.g., family, tribe)
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Better information
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Better information
Richer strategy sets (e.g., impose sanctions not available to outsiders)
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Close-knit and stable social structure of rural areas allow social

networks to solve collective action problems, support informal
institutions that (partly) compensates for lack of formal institutions
(e.g., legal system)
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Can do good (ROSCA, group lending) as well as bad things - the
maa, street gangs, or repressive social structures (e.g., women in
traditional societies, discrimination)
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Can do good (ROSCA, group lending) as well as bad things - the
maa, street gangs, or repressive social structures (e.g., women in
traditional societies, discrimination)
Social networks (as well as the things that they do) are sometimes
(loosely) lumped under the term social capital
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Like physical, nancial or human capital, social capital may facilitates

productive activity.
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Physical or nancial capital are embodied in material objects and
therefore wholly tangible and alienable
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Human capital is less tangible, being embodied in the skills and
knowledge acquired by an individual and also less easily alienable.
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Human capital is less tangible, being embodied in the skills and
knowledge acquired by an individual and also less easily alienable.
Social capital is even less tangible : it is embodied in social networks,
i.e., the relations among individuals.
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Social capital requires investment on the part of agents to survive investing in acquiring information, participation in community
activities and at the very least, living within the community.
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Study a formal model of why individuals have an incentive to conform
to the norms of a social network & how this improves e ciency.
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Study a formal model of why individuals have an incentive to conform
to the norms of a social network & how this improves e ciency.
Note that social networks can also detrimental to development
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Role of Social Networks in Reducing Agency Costs (Greif

(AER 1993))
Organization of trade by 11th century Maghribi traders operating

mainly around the western basin of the Mediterranean Sea.
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(AER 1993))

In pre-Modern trade, the primitive nature of the transport and
communication technology caused a lot of uncertainty
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(AER 1993))

Whether the ship will reach in time, if at all
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(AER 1993))

Whether the ship will reach in time, if at all
Whether the goods will be in good shape or not
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Prices in various places
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It was e cient for traders to employ overseas agents rather than

travel with the merchandise from the point of saving time and money.
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It was e cient for traders to employ overseas agents rather than

travel with the merchandise from the point of saving time and money.
But huge agency costs in these relationships in the absence of
supporting enforcement institutions.
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Greif studied documents like contracts, letters and accounts to nd

out how Maghribi traders overcame this problem.
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Basically, they formed a coalition among themselves, and used a
multilateral reputation mechanism whereby an agent refrained from
cheating with a trader because then that would lead all other traders
to refuse to hire him.
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Basically, they formed a coalition among themselves, and used a
multilateral reputation mechanism whereby an agent refrained from
cheating with a trader because then that would lead all other traders
to refuse to hire him.
In the absence of an eective formal contracting mechanism the fact
that there is only a handful of documents containing allegations of
misconduct shows that the informal enforcement mechanism worked
well.
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The question here is: how could they induce people to follow this
norm?
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norm?
What prevented someone from not boycotting an apparently tainted
agent?
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norm?
What prevented someone from not boycotting an apparently tainted
agent?
Di cult to enforce such norms since its not directly in the
self-interest of people to participate (only fear of punishment)
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Case 1 (Playerspast history is ignored)
Repeated interaction.
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In case, any player cheats, the player loses his job and is unemployed,
but may get employed next period or remain unemployed for the rest
of the period. Players will not cheat if the benet from not cheating
is greater than that from cheating.
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discount rates of the players
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probability of getting employed after getting unemployed.
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probability of getting employed after getting unemployed.
utility when employed.
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Case 2 (Playerspast history is not ignored)
Each player has a history, either good or bad. Agent with bad history
if he gets unemployed after cheating he never gets employed again.
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This results in harsher punishment for the cheaters if they have
cheated earlier (repeat oenders)
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This results in harsher punishment for the cheaters if they have
cheated earlier (repeat oenders)
In addition to the previous case (history not known), if history is
known of the palyers the agency costs will be further reduced.
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The agent with a bad history will have to be paid more to deter him
from cheating. Hence the employers will not hire these agents.
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Agents with a bad record are more costly to hire & so its in the
self-interest of a principal not hire him.
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Agents with a bad record are more costly to hire & so its in the
self-interest of a principal not hire him.
Even if this was not the case the market just treats the agents who
have cheated or defaulted earlier dierently than the others who
havent.
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The above model assumes that traders could exchange information

among each other
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among each other
In close-knit societies, agency costs can be lowered by using local
information (similar to micronance)
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among each other
In close-knit societies, agency costs can be lowered by using local
information (similar to micronance)
Moreover, these can be self-enforcing - otherwise you would have to
spend resources to enforce social norms (e.g., social sanctions)
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So social networks can act as a second-best device that will raise

income
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income
In urban anonymous settings these punishments may not work
because of poor information ows
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income
There one would need formal institutions such as courts
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income
There one would need formal institutions such as courts
The above argument would seem to suggest that social networks are
good for development
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But one can also think of reasons why they may be costly
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(After all they are more prevalent in developing countries which are,
by denition, less developed!)
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Networks generate entry barriers: after all if anyone can enter a
network, then the informational advantages are unlikely to persist
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Networks generate entry barriers: after all if anyone can enter a
network, then the informational advantages are unlikely to persist
Therefore, they prevent competition - which we can expect will lead
to loss of output
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Miguel and Gugerty (J of Pub Econ 2005)
Relationship between ethnic diversity and collective action in western

Kenya
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Kenya
Ethnic diversity and local funding of primary schools and community
water wells in western Kenya
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Kenya
Local ethnic diversity is associated with sharply lower local school
funding and lower quality school facilities in 84 primary schools.
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Kenya
Data from 667 community water wells in rural western Kenya indicate
that local ethnic diversity may also be associated with poor well
maintenance.
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Kenya
Data from 667 community water wells in rural western Kenya indicate
that local ethnic diversity may also be associated with poor well
maintenance.
Areas with average levels of ethnic diversity are 6 percentage points
less likely to have a functioning water well than homogenous areas.
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Social sanctions are imposed more eectively within ethnic groups

than between groups.
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School committees in ethnically diverse areas threaten fewer sanctions
and use less verbal pressure against parents who contribute less to the
school.
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school.
Inability of ethnically diverse communities to sanction free-riders.
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school.
Inability of ethnically diverse communities to sanction free-riders.
Implications for less developed countries since a variety of informal
collective action, contracting, and credit market outcomes are
thought to rely on eective sanctions.
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Munshi (QJE 2003): Do networks help people nd a job?
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Tests whether networks improve labour market outcomes for its
members
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members
Mexican migrants to the US
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members
Mexican migrants to the US
Small number of Mexican communities are surveyed every year
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Each community is surveyed once only, and retrospective information

on migration patterns, labour market outcomes
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Collected for 200 randomly selected HHs, 15 years worth recall data
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People from the same community tend to go to the same places
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Find that the same individual is more likely to nd a job the larger the
network at destination, due to referrals/contacts
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Find that the same individual is more likely to nd a job the larger the
network at destination, due to referrals/contacts
Referrals from incumbent migrants are more valuable.
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Anderson, Balland and Moene (2003)- Kenyan ROSCAS

Informal group lending, rotating savings and credit associations
(roscas).
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(roscas).
They do not and cannot rely on external enforcements.
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(roscas).
The incentive for members who receive the pot earlier on in the cycle
to default on their later contributions is high.
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(roscas).
Roscas are typically formed by small group of individuals who live in
the same area, it is generally assumed that the prospect of
participating in future cycles of the rosca as well as the threat of
social sanctions by the other members of the group are enough to
deter opportunistic defection.
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(roscas).
Roscas are typically formed by small group of individuals who live in
the same area, it is generally assumed that the prospect of
participating in future cycles of the rosca as well as the threat of
social sanctions by the other members of the group are enough to
deter opportunistic defection.
Weak results regarding social sanctions- threat of future participations
are not strong enough to deter bad behaviour.
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Balland, Bardhan, Das and Mookherjee (2010)- Forests in

Himalayas
This paper assesses degradation of forests managed by local

communities (Van Panchayats (VPs)), relative to state protected and
open access forests in the Indian state of Uttaranchal.
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Himalayas

It is based on ground-level ecological measures of forest quality in
forest areas adjoining a random sample of villages, and controls for
unobserved village heterogeneity, possible endogeneity of management
regimes and cross-forest spillovers.
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Himalayas

It is based on ground-level ecological measures of forest quality in
forest areas adjoining a random sample of villages, and controls for
unobserved village heterogeneity, possible endogeneity of management
regimes and cross-forest spillovers.
VP forests are found to be 20 30% better managed and healthier
(less loped), and similar on other dimensions.
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Social Capital

Development Economics (Exeter)

Standard economic view: we are all singular agents, and we need

Development Economics (Exeter)

Standard economic view: we are all singular agents, and we need

Development Economics (Exeter)

Standard economic view: we are all singular agents, and we need

Development Economics (Exeter)

Social networks are important in obtaining jobs, and inuence our

Development Economics (Exeter)

Social networks are important in obtaining jobs, and inuence our

Development Economics (Exeter)

Social networks are important in obtaining jobs, and inuence our

Development Economics (Exeter)

Social networks are important in obtaining jobs, and inuence our

Development Economics (Exeter)

A social network is a network of individuals connected by social links

Development Economics (Exeter)

A social network is a network of individuals connected by social links

Development Economics (Exeter)

A social network is a network of individuals connected by social links

Development Economics (Exeter)

A social network is a network of individuals connected by social links

Development Economics (Exeter)

What are the economic foundations of the links between the

Development Economics (Exeter)

What are the economic foundations of the links between the

Development Economics (Exeter)

What are the economic foundations of the links between the

Development Economics (Exeter)

What are the economic foundations of the links between the

Development Economics (Exeter)

What are the economic foundations of the links between the

Development Economics (Exeter)

What are the economic foundations of the links between the

Development Economics (Exeter)

Close-knit and stable social structure of rural areas allow social

Development Economics (Exeter)

Close-knit and stable social structure of rural areas allow social

Development Economics (Exeter)

Close-knit and stable social structure of rural areas allow social

Development Economics (Exeter)

Like physical, nancial or human capital, social capital may facilitates

Development Economics (Exeter)

Like physical, nancial or human capital, social capital may facilitates

Development Economics (Exeter)

Like physical, nancial or human capital, social capital may facilitates

Development Economics (Exeter)

Like physical, nancial or human capital, social capital may facilitates

Development Economics (Exeter)

Development Economics (Exeter)

Development Economics (Exeter)

Development Economics (Exeter)

Role of Social Networks in Reducing Agency Costs (Greif

Organization of trade by 11th century Maghribi traders operating

Development Economics (Exeter)

Role of Social Networks in Reducing Agency Costs (Greif

Organization of trade by 11th century Maghribi traders operating

Development Economics (Exeter)

Role of Social Networks in Reducing Agency Costs (Greif

Organization of trade by 11th century Maghribi traders operating

Development Economics (Exeter)

Role of Social Networks in Reducing Agency Costs (Greif

Organization of trade by 11th century Maghribi traders operating