Voluntary Self-Sustaining Reciprocity
45 Pages Posted: 23 Oct 2019 Last revised: 24 Oct 2019
Date Written: October 23, 2019
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: Suggested Citation