social capital

Social CapitalLecture 8

November

2012

Development Economics (Exeter) 2012 1 / 24

Motivation

Standard economic view: we are all singular agents, and we needexternal enforcement to mediate any exchange between us

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 placewithout external enforcement

Motivation

Social networks are important in obtaining jobs, and influence ourconsumption, education, fertility decisions

Sociologists knew this all along, we have realized this more recently

The goal is still to understand the allocation of resources and thebasic assumption is still rational choice

Example: Ethnic networks, Alumni networks, Caste etc.

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

This enables them to interact, exchange without external enforcement

For example, they may have better information, or impose sanctionsnot available to outsiders

Solve collective action and coordination problems & alleviate marketfailures.

What are the economic foundations of the links between theindividuals? Possible candidates

Repeated interactionSelf-enforcing social norms (e.g., help your neighbour) withnon-conformists punished by sanctionsAltruism (e.g., family, tribe)Better informationRicher strategy sets (e.g., impose sanctions not available to outsiders)

Repeated interaction

Self-enforcing social norms (e.g., help your neighbour) withnon-conformists punished by sanctionsAltruism (e.g., family, tribe)Better informationRicher strategy sets (e.g., impose sanctions not available to outsiders)

Repeated interactionSelf-enforcing social norms (e.g., help your neighbour) withnon-conformists punished by sanctions

Altruism (e.g., family, tribe)Better informationRicher strategy sets (e.g., impose sanctions not available to outsiders)

Repeated interactionSelf-enforcing social norms (e.g., help your neighbour) withnon-conformists punished by sanctionsAltruism (e.g., family, tribe)

Better informationRicher strategy sets (e.g., impose sanctions not available to outsiders)

Repeated interactionSelf-enforcing social norms (e.g., help your neighbour) withnon-conformists punished by sanctionsAltruism (e.g., family, tribe)Better information

Richer strategy sets (e.g., impose sanctions not available to outsiders)

Repeated interactionSelf-enforcing social norms (e.g., help your neighbour) withnon-conformists punished by sanctionsAltruism (e.g., family, tribe)Better informationRicher strategy sets (e.g., impose sanctions not available to outsiders)

Close-knit and stable social structure of rural areas allow socialnetworks to solve collective action problems, support informalinstitutions that (partly) compensates for lack of formal institutions(e.g., legal system)

Can do good (ROSCA, group lending) as well as bad things - themafia, street gangs, or repressive social structures (e.g., women intraditional societies, discrimination)

Social networks (as well as the things that they do) are sometimes(loosely) lumped under the term social capital

Like physical, financial or human capital, social capital may facilitatesproductive activity.

Physical or financial capital are embodied in material objects andtherefore wholly tangible and alienableHuman capital is less tangible, being embodied in the skills andknowledge 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.

Physical or financial capital are embodied in material objects andtherefore wholly tangible and alienable

Human capital is less tangible, being embodied in the skills andknowledge 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.

Physical or financial capital are embodied in material objects andtherefore wholly tangible and alienableHuman capital is less tangible, being embodied in the skills andknowledge 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.

Physical or financial capital are embodied in material objects andtherefore wholly tangible and alienableHuman capital is less tangible, being embodied in the skills andknowledge 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.

Social capital requires investment on the part of agents to survive -investing in acquiring information, participation in communityactivities and at the very least, living within the community.

Study a formal model of why individuals have an incentive to conformto the norms of a social network & how this improves effi ciency.

Note that social networks can also detrimental to development

Role of Social Networks in Reducing Agency Costs (Greif(AER 1993))

Organization of trade by 11th century Maghribi traders operatingmainly around the western basin of the Mediterranean Sea.

In pre-Modern trade, the primitive nature of the transport andcommunication technology caused a lot of uncertainty

Whether the ship will reach in time, if at allWhether the goods will be in good shape or not

Whether the ship will reach in time, if at all

Whether the goods will be in good shape or not

Prices in various places

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

But huge agency costs in these relationships in the absence ofsupporting enforcement institutions.

Greif studied documents like contracts, letters and accounts to findout how Maghribi traders overcame this problem.

Basically, they formed a coalition among themselves, and used amultilateral reputation mechanism whereby an agent refrained fromcheating with a trader because then that would lead all other tradersto refuse to hire him.

In the absence of an effective formal contracting mechanism the factthat there is only a handful of documents containing allegations ofmisconduct shows that the informal enforcement mechanism workedwell.

The question here is: how could they induce people to follow thisnorm?

What prevented someone from not boycotting an apparently taintedagent?

Diffi cult to enforce such norms since its not directly in theself-interest of people to participate (only fear of punishment)

Case 1 (Playerspast history is ignored)

Repeated interaction.

In case, any player cheats, the player loses his job and is unemployed,but may get employed next period or remain unemployed for the restof the period. Players will not cheat if the benefit from not cheatingis greater than that from cheating.

discount rates of the playersprobability of getting employed after getting unemployed.utility when employed.

discount rates of the players

probability of getting employed after getting unemployed.utility when employed.

discount rates of the playersprobability of getting employed after getting unemployed.

utility when employed.

Case 2 (Playerspast history is not ignored)

Each player has a history, either good or bad. Agent with bad historyif he gets unemployed after cheating he never gets employed again.

This results in harsher punishment for the cheaters if they havecheated earlier (repeat offenders)

In addition to the previous case (history not known), if history isknown of the palyers the agency costs will be further reduced.

The agent with a bad history will have to be paid more to deter himfrom cheating. Hence the employers will not hire these agents.

Agents with a bad record are more costly to hire & so its in theself-interest of a principal not hire him.

Even if this was not the case the market just treats the agents whohave cheated or defaulted earlier differently than the others whohavent.

The above model assumes that traders could exchange informationamong each other

In close-knit societies, agency costs can be lowered by using localinformation (similar to microfinance)

Moreover, these can be self-enforcing - otherwise you would have tospend resources to enforce social norms (e.g., social sanctions)

So social networks can act as a second-best device that will raiseincome

In urban anonymous settings these punishments may not workbecause of poor information flows

There one would need formal institutions such as courts

The above argument would seem to suggest that social networks aregood for development

But one can also think of reasons why they may be costly

(After all they are more prevalent in developing countries which are,by definition, less developed!)

Networks generate entry barriers: after all if anyone can enter anetwork, then the informational advantages are unlikely to persist

Therefore, they prevent competition - which we can expect will leadto loss of output

Miguel and Gugerty (J of Pub Econ 2005)

Relationship between ethnic diversity and collective action in westernKenya

Ethnic diversity and local funding of primary schools and communitywater wells in western Kenya

Local ethnic diversity is associated with sharply lower local schoolfunding and lower quality school facilities in 84 primary schools.

Data from 667 community water wells in rural western Kenya indicatethat local ethnic diversity may also be associated with poor wellmaintenance.

Areas with average levels of ethnic diversity are 6 percentage pointsless likely to have a functioning water well than homogenous areas.

Social sanctions are imposed more effectively within ethnic groupsthan between groups.

School committees in ethnically diverse areas threaten fewer sanctionsand use less verbal pressure against parents who contribute less to theschool.

Inability of ethnically diverse communities to sanction free-riders.

Implications for less developed countries since a variety of informalcollective action, contracting, and credit market outcomes arethought to rely on effective sanctions.

Munshi (QJE 2003): Do networks help people find a job?

Tests whether networks improve labour market outcomes for itsmembers

Mexican migrants to the US

Small number of Mexican communities are surveyed every year

Each community is surveyed once only, and retrospective informationon migration patterns, labour market outcomes

Collected for 200 randomly selected HHs, 15 years worth recall data

People from the same community tend to go to the same places

Find that the same individual is more likely to find a job the larger thenetwork at destination, due to referrals/contacts

Referrals from incumbent migrants are more valuable.

Anderson, Balland and Moene (2003)- Kenyan ROSCAS

Informal group lending, rotating savings and credit associations(roscas).

They do not and cannot rely on external enforcements.

The incentive for members who receive the pot earlier on in the cycleto default on their later contributions is high.

Roscas are typically formed by small group of individuals who live inthe same area, it is generally assumed that the prospect ofparticipating in future cycles of the rosca as well as the threat ofsocial sanctions by the other members of the group are enough todeter opportunistic defection.

Weak results regarding social sanctions- threat of future participationsare not strong enough to deter bad behaviour.

Balland, Bardhan, Das and Mookherjee (2010)- Forests inHimalayas

This paper assesses degradation of forests managed by localcommunities (Van Panchayats (VPs)), relative to state protected andopen access forests in the Indian state of Uttaranchal.

It is based on ground-level ecological measures of forest quality inforest areas adjoining a random sample of villages, and controls forunobserved village heterogeneity, possible endogeneity of managementregimes and cross-forest spillovers.

VP forests are found to be 20 30% better managed and healthier(less loped), and similar on other dimensions.

Social CapitalSocial Capital

social capital

Documents

social networks

ethnic networks

alumni networks

lot of exchange

social linksthis

rational choiceexample

influence ourconsumption

thebasic assumption