Social Capital and Informal Contracting: Experimental Evidence

Economics Bulletin, Volume 39, Issue 2, pages 1259-1265

8 Pages Posted: 23 Oct 2017 Last revised: 3 Jun 2019

See all articles by Bruno Pellegrino

Bruno Pellegrino

University of California, Los Angeles (UCLA), Anderson School of Management

Date Written: August 19, 2018

Abstract

Informal contracting is widely spread, but what makes it work in the absence of institutional enforcement and repetition? According to game-theoretic models of social capital, informal relationships can help agents self-enforce contracts when third-party enforcement is not available, because agents can use network links as a form of “collateral”. While recent empirical studies find a link between network proximity and the ability to self-enforce contracts, it is unclear whether this effect is mediated by agents behaving altruistically or whether they are responding to incentives to preserve their network status. Additionally, the endogeneity of natural networks makes econometric identification of these effects challenging. In this study, I estimate a structural decision model in which both mechanisms are present but distinct, using experimental gameplay data from the administration of an Optional Prisoner’s Dilemma. The game is framed to mimic a situation of informal exchange. I find the gameplay to be consistent with the “social collateral” channel, but not with the “directed altruism” channel.

Keywords: Social Capital, Networks, Contracts, Informal, Informality, Empathy, Social Collateral, Enforcement, Experiment, Experimental

JEL Classification: C7, C9, D8, Z1

Suggested Citation

Pellegrino, Bruno, Social Capital and Informal Contracting: Experimental Evidence (August 19, 2018). Economics Bulletin, Volume 39, Issue 2, pages 1259-1265. Available at SSRN: https://ssrn.com/abstract=3056772 or http://dx.doi.org/10.2139/ssrn.3056772

Bruno Pellegrino (Contact Author)

University of California, Los Angeles (UCLA), Anderson School of Management ( email )

Los Angeles, CA
United States
3122578888 (Phone)

HOME PAGE: http://www.brunopellegrino.com

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