TY  - JOUR
AU  - Mobius,Markus
AU  - Szeidl,Adam
TI  - Trust and Social Collateral
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13126
PY  - 2007
Y2  - May 2007
UR  - http://www.nber.org/papers/w13126
L1  - http://www.nber.org/papers/w13126.pdf
N1  - Author contact info:
Markus Mobius
Department of Economics
Iowa State University
460A Heady Hall
Ames, IA 50011
Tel: (515) 257-6233
Fax: (515) 294-0221
E-Mail: mobius@fas.harvard.edu

Adam Szeidl
Department of Economics
Central European University
Nador u. 11
Budapest, Hungary
Tel: +361 327-2000
E-Mail: szeidla@ceu.hu
AB  - 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.
ER  -