A Theory of Community Formation and Social Hierarchy

49 Pages Posted: 17 Aug 2016 Last revised: 9 Oct 2016

See all articles by Susan Athey

Susan Athey

Stanford Graduate School of Business

Emilio Calvano

University of Bologna - Department of Economics; University of Toulouse 1 - Department of Economics; CSEF - Center for Studies in Economics and Finance

Saumitra Jha

Stanford Graduate School of Business

Date Written: August 15, 2016

Abstract

We analyze the classic problem of sustaining trust when cheating and leaving trading partners is easy, and outside enforcement is difficult. We construct equilibria where individuals are loyal to smaller groups – communities – that allow repeated interaction. Hierarchies provide incentives for loyalty and allow individuals to trust agents to extent that the agents are actually trustworthy. We contrast these with other plausible institutions for engendering loyalty that require inefficient withholding of trust to support group norms, and are not robust to coalitional deviations. In communities whose members randomly match, we show that social mobility within hierarchies falls as temptations to cheat rise. In communities where individuals can concentrate their trading with pre-selected members, hierarchies where senior members are favored for trade sustain trust even in the presence of proximate non-hierarchical communities. We link these results to the emergence of trust in new market environments and early human societies.

Keywords: trust, hierarchy, online communities, inter-ethnic, early humans

Suggested Citation

Carleton Athey, Susan and Calvano, Emilio and Jha, Saumitra, A Theory of Community Formation and Social Hierarchy (August 15, 2016). Stanford University Graduate School of Business Research Paper No. 16-41. Available at SSRN: https://ssrn.com/abstract=2823777 or http://dx.doi.org/10.2139/ssrn.2823777

Susan Carleton Athey (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Emilio Calvano

University of Bologna - Department of Economics ( email )

Bologna
Italy

University of Toulouse 1 - Department of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

CSEF - Center for Studies in Economics and Finance ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Saumitra Jha

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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