Voluntary Self-Sustaining Reciprocity

45 Pages Posted: 23 Oct 2019 Last revised: 24 Oct 2019

See all articles by Alex Fabisiak

Alex Fabisiak

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

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Date Written: October 23, 2019

Abstract

In our model, self-interested agents prefer to buy from local neighbors rather than from cheaper outside vendors even in the absence of memory and coordination mechanisms. All they know is who is a local neighbor. Buyers voluntarily pay rents because they internalize that their neighbors will be wealthier and be more likely to buy from them in the future. The sellers understand that buyers’ preferences give them limited local market power, raise their prices, and earn surplus in equilibrium. Unenforced reciprocity achieves near-first-best outcomes, because it reduces wasteful production or non-production in equilibrium.

Keywords: Networks, Altruism, Reciprocity, Entry Barriers

JEL Classification: D70, L1, C7

Suggested Citation

Fabisiak, Alex and Welch, Ivo, Voluntary Self-Sustaining Reciprocity (October 23, 2019). Available at SSRN: https://ssrn.com/abstract=3464024 or http://dx.doi.org/10.2139/ssrn.3464024

Alex Fabisiak

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

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Ivo Welch (Contact Author)

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
C519
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
13
Abstract Views
199
PlumX Metrics