Social Networks as Contract Enforcement: Evidence from a Lab Experiment in the Field
Absence of well-functioning formal institutions leads to reliance on social networks to enforce informal contracts. Social ties may aid cooperation, but agents vary in network centrality, and this hierarchy may hinder cooperation. To assess the extent to which networks substitute for enforcement, we conducted high-stakes games across 34 Indian villages. We randomized subjects' partners and whether contracts were enforced to estimate how partners' relative network position differentially matters across contracting environments. Socially close pairs cooperate even without enforcement; distant pairs do not. Pairs with unequal importance behave less cooperatively without enforcement. Thus capacity for cooperation depends on the underlying network.
We gratefully acknowledge financial support from NSF grant SES-0752735. We thank Abhijit Banerjee, Esther Duflo, Matthew Jackson, Daron Acemoglu, Lori Beaman, Emily Breza, Dave Donaldson, Pascaline Dupas, Simon Gaechter, Ben Golub, Avner Greif, S. Holger Herz, Seema Jayachandran, Markus Möbius, Gowri Nagaraj, Ben Olken, Adam Sacarny, Laura Schechter, Tavneet Suri, Robert Townsend, Tom Wilkening, Jan Zilinsky, as well as participants at various seminars. Chandrasekhar thanks the NSF GRFP, Kinnan the US Dept. of Education, and Larreguy the Bank of Spain and Caja Madrid Foundation. CMF at the IFMR provided valuable assistance. JPAL, CIS, MISTI-India, and MIT's Shultz Fund provided financial support for this project. A previous version of this paper was titled "Can networks substitute for contracts? Evidence from a lab experiment in the field." The network data used in this paper are archived at the J-PAL Dataverse at Harvard IQSS: http://hdl.handle.net/1902.1/16559. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Arun G. Chandrasekhar & Cynthia Kinnan & Horacio Larreguy, 2018. "Social Networks as Contract Enforcement: Evidence from a Lab Experiment in the Field," American Economic Journal: Applied Economics, vol 10(4), pages 43-78. citation courtesy of