Mobilizing Investment through Social Networks: Evidence from a Lab Experiment in the Field

Publication Date:
Jan 2013
Project Programs:
Behavioral Economics

In the absence of strong formal institutions, social networks play a significant role in contract enforcement and in determining the scope of co-investment. Social norms and rules of thumb may dictate how friends vs. strangers decide to share an economic surplus or how popular vs. socially isolated individuals sustain cooperation with others. We shed light on the effects of network characteristics on investment decisions through a framed field experiment. Our laboratory protocol builds on a basic two-party trust game with a sender and receiver. In some treatments, we introduce third-party monitors or punishers that may or may not be identifiable by the other two participants. We find that the social network interacts with the play of the game in economically meaningful ways. First, social proximity mitigates the investment problem. Both senders and receivers in socially close pairs make larger transfers to each other. Second, while on average, third-party punishment decreases the size of investments made by the sender, very central punishers are efficiency enhancing. Third, characteristics such as caste and elite status affect play. Elites benefit from higher partner transfers, but do not use their status to increase total surplus. We also find that the punishment institution reinforces network position, caste and elite status. Finally, we use our results to provide the first assessment of institutional structures as a function of network shape. Typically, socially far judges encourage efficient behavior, while socially close judges are prone to collusion. However, high centrality judges are able to resist proximity-based collusion and restore high levels of investment.

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