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

Arun Chandrasekhar
Horacio Larreguy
Emily Breza
Publication Type: 
Working Papers
Publication Year: 

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 versus strangers decide to share an economic surplus, or how popular versus 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 co-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, socially important punishers are efficiency enhancing. Third, characteristics such as caste and elite status affect play, but in ways distinct from network centrality. Elites benefit from higher partner transfers, but do not use their status to increase total surplus. 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.

JEL Codes: 
C92, L14
South and Central Asia
Informal Economy