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Trust and Social Collateral

Author

Listed:
  • Karlan, Dean
  • Mobius, Markus
  • Rosenblat, Tanya
  • Szeidl, Adam

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 de…ne 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.

Suggested Citation

  • Karlan, Dean & Mobius, Markus & Rosenblat, Tanya & Szeidl, Adam, 2009. "Trust and Social Collateral," Staff General Research Papers Archive 13026, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:13026
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    Keywords

    trust; social networks;

    JEL classification:

    • D00 - Microeconomics - - General - - - General

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