DP5078 Networks of Relations and Social Capital

Author(s): Steffen Lippert , Giancarlo Spagnolo

Publication Date: May 2005

Keyword(s): networks , relational contracts , implicit contracts , industrial districts , indirect multimarket contact , cooperation , collusion , social capital , social relations , embeddedness , end-network effect , peering agreements

JEL(s): D23 , D43 , L13 , L29 , O17

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP5078.asp

We model networks of relational (or implicit) contracts, exploring how sanctioning power and equilibrium conditions change under different network configurations and information transmission technologies. In our model relations are the links, and the value of the network lies in its ability to enforce cooperative agreements that could not be sustained if agents had no access to other network members’ sanctioning power and information. We identify conditions for network stability and in-network information transmission as well as conditions under which stable sub-networks inhibit more valuable larger networks. The model provides formal definitions for individual and communities’ ‘social capital’ in the spirit of Coleman and Putnam.