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Village versus Market Social Capital: An Approach to Development

Author

Listed:
  • Krishna B. Kumar

    (USC Marshall School of Business)

  • John G. Matsusaka

    (USC Marshall School of Business)

Abstract

This paper presents a model of an economy in which traders use social capital to reduce transaction costs. A key assumption is that there are two types of social capital: “village” capital relies on personal networks and repeat play to guarantee contracts; “market” capital relies on third parties such as auditors and courts and is necessary for effective market institutions. Village capital is efficient for localized economies; market capital allows trade between strangers and greater specialization. The model shows how complementarity of social capital can prevent a village economy from transitioning to a market economy (industrializing) when market exchange becomes more efficient. The model helps understand persistent differences in wealth between countries and the reversal of economic fortune across countries in the last 500 years.

Suggested Citation

  • Krishna B. Kumar & John G. Matsusaka, 2004. "Village versus Market Social Capital: An Approach to Development," Development and Comp Systems 0408003, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpdc:0408003
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    References listed on IDEAS

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    Cited by:

    1. Kingston, Christopher, 2008. "Social structure and cultures of corruption," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 90-102, July.
    2. Elisabeth Caucutt & Krishna B. Kumar, 2007. "Education For All: A Welfare-Improving Course for Africa?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(2), pages 294-326, April.
    3. David, Quentin & Janiak, Alexandre & Wasmer, Etienne, 2008. "Local Social Capital and Geographical Mobility: A Theory," IZA Discussion Papers 3668, Institute of Labor Economics (IZA).
    4. Alison Brown & Michal Lyons & Ibrahima Dankoco, 2010. "Street Traders and the Emerging Spaces for Urban Voice and Citizenship in African Cities," Urban Studies, Urban Studies Journal Limited, vol. 47(3), pages 666-683, March.
    5. Besley, Tim & Ghatak, Maitreesh, 2009. "The de Soto Effect," CEPR Discussion Papers 7259, C.E.P.R. Discussion Papers.
    6. Mueller, Holger & Philippon, Thomas, 2006. "Family Firms, Paternalism and Labour Relations," CEPR Discussion Papers 6017, C.E.P.R. Discussion Papers.
    7. Mueller, Holger & Philippon, Thomas, 2006. "Concentrated Ownership and Labour Relations," CEPR Discussion Papers 5776, C.E.P.R. Discussion Papers.
    8. Kingston, Christopher, 2007. "Parochial corruption," Journal of Economic Behavior & Organization, Elsevier, vol. 63(1), pages 73-87, May.
    9. David, Quentin & Janiak, Alexandre & Wasmer, Etienne, 2008. "Local Social Capital and Geographical Mobility: A Theory," IZA Discussion Papers 3668, Institute of Labor Economics (IZA).
    10. Michal Lyons & Simon Snoxell, 2005. "Creating Urban Social Capital: Some Evidence from Informal Traders in Nairobi," Urban Studies, Urban Studies Journal Limited, vol. 42(7), pages 1077-1097, June.
    11. Lyons, Michal & Brown, Alison, 2010. "Has Mercantilism Reduced Urban Poverty in SSA? Perception of Boom, Bust, and the China-Africa Trade in Lomé and Bamako," World Development, Elsevier, vol. 38(5), pages 771-782, May.
    12. Michal Lyons & Alison Brown & Zhigang Li, 2008. "The 'third tier’ of globalization," City, Taylor & Francis Journals, vol. 12(2), pages 196-206, July.

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    More about this item

    Keywords

    Human capital; Transactions; Institutions; Dynamics;
    All these keywords.

    JEL classification:

    • O - Economic Development, Innovation, Technological Change, and Growth
    • P - Political Economy and Comparative Economic Systems

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