Trust and Social Collateral

52 Pages Posted: 27 Jun 2007 Last revised: 15 May 2022

See all articles by Markus M. Mobius

Markus M. Mobius

Microsoft Corporation - Microsoft Research New England; University of Michigan at Ann Arbor - School of Information; National Bureau of Economic Research (NBER)

Adam Szeidl

Central European University

Date Written: May 2007

Abstract

This paper builds a theory of informal contract enforcement in social networks. In our model, relationships between individuals generate social collateral that can be used to control moral hazard when agents interact in a borrowing relationship. We define trust between two agents as the maximum amount that one can borrow from the other, and derive a simple reduced form expression for trust as a function of the social network. We show that trust is higher in more connected and more homogenous societies, and relate our trust measure to commonly used network statistics. Our model predicts that dense networks generate greater welfare when arrangements typically require high trust, and loose networks create more welfare otherwise. Using data on social networks and behavior in dictator games, we document evidence consistent with the quantitative predictions of the model.

Suggested Citation

Mobius, Markus M. and Mobius, Markus M. and Szeidl, Adam, Trust and Social Collateral (May 2007). NBER Working Paper No. w13126, Available at SSRN: https://ssrn.com/abstract=988936

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Adam Szeidl

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