Social Structure and Institutional Design: Evidence from a Lab Experiment in the Field

34 Pages Posted: 24 Jul 2014 Last revised: 16 Jun 2015

See all articles by Emily Breza

Emily Breza

Columbia Business School - Finance and Economics

Arun G. Chandrasekhar

Stanford University - Department of Economics

Horacio Larreguy Arbesu

Harvard University

Date Written: July 2014

Abstract

In settings with poor formal contract enforcement, profitable investments are likely unrealized. While social closeness can mitigate contractual incompleteness, we examine how to improve the preponderance of cases where contracting parties cannot rely upon social ties. We ask if a community can enlist members to monitor transactions or punish offending parties. We conduct a laboratory experiment in 40 Indian villages, with 960 non-anonymized subjects, where we have social network data. Participants play modified sender-receiver investment games, with and without third-party monitors and punishers. We examine whether network centrality of the third party increases efficiency of interaction. Furthermore, we decompose the efficiency increase into a monitoring channel (central third parties are valuable since they may influence reputations) and an enforcement channel (central third parties may be more able to punish without fear of retaliation).Assigning a third party at the 75th percentile of the centrality distribution (as compared to the 25th) increases efficiency by 21% relative to the mean: we attribute 2/5 of the effect to monitoring and 3/5 to enforcement. The largest efficiency increase occurs when senders and receivers are socially distant, unable to maintain efficient levels autonomously. Results cannot be explained by demographics such as elite status, caste, wealth or gender.Our findings show not every member is equally well-equipped to be part of a local institution. Knowing that a central third party observes their interaction increases sender-receiver efficiency. More importantly, to be able to punish someone, the third party must be important in the community.

Suggested Citation

Breza, Emily and Chandrasekhar, Arun G. and Larreguy Arbesu, Horacio, Social Structure and Institutional Design: Evidence from a Lab Experiment in the Field (July 2014). NBER Working Paper No. w20309, Available at SSRN: https://ssrn.com/abstract=2471202

Emily Breza (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Arun G. Chandrasekhar

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

Horacio Larreguy Arbesu

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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