Social Capital and Incentive Compatibility: Modelling the Accumulation and Use of Social Collateral

In economics, where the long resistance to reflecting on the effects of social interaction on economic behaviour is slowly waning, the concept of social capital may turn out to be a useful analytical tool. However, initial interest in social capital has produced a large variety of definitions, theoretical frameworks, empirical analyses, and even policy prescriptions. This paper provides a selective review and critique of some of the more recent literature on social capital. It then suggests that many of the problems in the existing literature can be addressed by lowering aspirations about what social capital is and reformulating it in terms of its impact on incentive problems in economic transactions in the presence of imperfect markets and costly or non-enforceable contracts. The paper finally advances a model of one of the ways that social capital resolves incentive compatibility problems, namely its role as a collateral assetSocial Capital; Incentive Compatibility; Social Collateral; Credit

Social Capital and Incentive Compatibility: Modelling the Accumulation and Use of Social Collateral

In economics, where the long resistance to reflecting on the effects of social interaction on economic behaviour is slowly waning, the concept of social capital may turn out to be a useful analytical tool. However, initial interest in social capital has produced a large variety of definitions, theoretical frameworks, empirical analyses, and even policy prescriptions. This paper provides a selective review and critique of some of the more recent literature on social capital. It then suggests that many of the problems in the existing literature can be addressed by lowering aspirations about what social capital is and reformulating it in terms of its impact on incentive problems in economic transactions in the presence of imperfect markets and costly or non-enforceable contracts. The paper finally advances a model of one of the ways that social capital resolves incentive compatibility problems, namely its role as a collateral asset.

A model of manager-induced organisational stability in post-Soviet agriculture

Agricultural transition in the former Soviet Union has, surprisingly for many observers, not led to a widespread adoption of individual farming. This article attempts to understand some previously neglected forces behind this outcome. It develops a theoretical model of farm restructuring in which managers exploit the preferences of workers for conformity within a social reference group to cement their own power. The model provides a rationale for the persistent support among workers and managers to the status-quo organisation, despite the availability of a more efficient individual farming option. Based on empirical evidence, we argue that managers have an incentive to keep horizons of workers limited by sheltering them from pro-reform influences. Polar reform equilibria are generated that are consistent with the observed spatial patterns of restructuring. The model predicts that policies aiming at the establishment of independent farms will fail unless they induce a big push in reform attitudes among workers.Agricultural transition, former Soviet Union, social interaction effects, farm restructuring., Farm Management,

Specialization without regret - transfer rights, agricultural productivity, and investment in an industrializing economy

A number of studies have examined the effects of secure tenure on agricultural investment and productivity. The authors also study the importance of rights to household residual income and land use being transferable. Contemporary China - where industrialization has spread rapidly, if unevenly - is a good place to study the economic effects of transfer rights as well as conventional security of tenure. Village collectives formally own land in China, so there can be no individual land sales, but farmers are sometimes entitled to sell their rights to use the land allocated to them under the household responsibility system. Whether a household has secure tenure depends on whether its landholding will be reduced if the household population declines, whether the landholding will be increased if the household population increases, and how frequent average land adjustments are under the household responsibility system. Analyzing panel data for a sample of farm households, the authors study the"investment regret mitigation effect", which results when greater transfer rights make households more willing to invest because they are less likely to regret such investments when they can recoup the investment value even if they exit farming. The authors find that transfer rights may be especially important in an industrializing economy. A property rights system with incomplete security of tenure but with strong transfer rights that permit"specialization without regret"- so farmers can recoup the value of an investment even if they exit farming - may have much to recommend it.Economic Theory&Research,Environmental Economics&Policies,Labor Policies,Banks&Banking Reform,Municipal Financial Management,Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,Municipal Financial Management,Municipal Housing and Land

Getting Institutions 'Right' for Whom: Credit Constraints and the Impact of Property Rights on the Quantity and Compostiton of Investment

The effects of property rights on investment are typically hypothesized to occur through a security-induced investment demand and a collateral-based credit supply. Using a two period model, this paper shows that for farms that are constrained in their access to liquidity, the investment demand effect will itself induce an increase in the endogenous shadow price of liquidity. Other things equal, this induced increase in the price of liquidity will discourage capital accumulation, and that the desired stock of expropriation-immune movable capital may decrease with tenure security. Empirical analysis of farm-level data from Paraguay corroborates this proposition and reveals that the underlying pattern of wealth-biased capital access creates a world in which property rights reform has differential effects across producer wealth classes and gets institutions "right" and agriculture moving for only for a wealthier subset of producers.

SOCIAL CAPITAL AND THE REPRODUCTION OF INEQUALITY IN SOCIALLY POLARIZED ECONOMIES

This paper explores the idea that how wealth is distributed across social groups (ethnic or language groups, gender, etc.) fundamentally affects the evolution of economic inequality. By providing microfoundations suitable for this exploration, this paper hopes to enhance our understanding of when social forces contribute to the reproduction of economic inequality, and what the relevant policy implications might be. In tackling this issue, this paper offers contributions in two domains. First, it adds a dimension to the literature on social capital. Second, it offers a modest generalization of the concepts of identity, alienation and economic polarization used by Esteban and Ray (1994). This generalization permits us to consider the multiple characteristics that shape social identity, inclusion and exclusion. It also underwrites a higher-order measure of socio-economic polarization that permits us to explore the hypothesis of Frances Stewart and others that economic inequality is most pernicious and persistent when it is socially embedded. Among other things we are able to show that holding constant the initial levels of economic polarization and inequality, increases in socio-economic polarization deepen the reproduction of economic inequality.Institutional and Behavioral Economics,

Market versus administrative reallocation of agricultural land in a period of rapid industrialization

Under communal farm production, there was little incentive to work hard: the communal system guaranteed a livelihood, and there were few private gains from additional efforts. The reform that introduced the household responsibility system in China in the early 1980s sharpened individual work incentives by assigning specific plots and the rights to residual income to individual households. However, the household responsibility system left unresolved questions about the reallocation of land over time - questions that have become increasingly important (for both efficiency and equity) with the rapid growth of the non-farm economy. The authors use household and village data to show that the initially egalitarian distribution of land is becoming more dispersed over time. In what has become a hybrid property rights system, in some areas local village leaders (the cadre) were empowered to periodically redistribute land between households on the basis of economic and demographic changes among households. In other villages, households were granted much greater immunity against redistribution of any sort. Similarly, villages differed in the degree to which individual households could trade land among themselves. Some villages did not regulate the practice, and other required village approval or prohibited land rental relationships. The authors use simulated maximum likelihood methods to estimate hybrid panel models of the determinants of both market-based and administrative reallocation of land. They also use them to estimate the insecurity-induced investment costs of market-based reallocation of land. They find that administrative reallocation responds to the increasing inequality but non-market reallocations come at a significant cost in forgone investment.Labor Policies,Environmental Economics&Policies,Banks&Banking Reform,Public Sector Economics&Finance,Municipal Housing and Land,Environmental Economics&Policies,Banks&Banking Reform,Municipal Housing and Land,Urban Housing,Public Sector Economics&Finance

An Experimental Approach to Social Capital in South Africa

This paper measures the social capital of trust and trustworthiness in South Africa using an experimental protocol designed to distinguish these norms from altruism. Experimental participants played multiple roles, making it impossible to construct theoretically-grounded norm measures based on an individual's play across roles. Two-stage estimates of a social interaction model of norms identifies the presence of endogenous social effects, indicating that communities can be meaningfully typified as having and maintaining distinct normative environments. However, in contrast to studies that rely on less direct social capital measures, we do not find that trust boosts mean household living standards when controlling for the endogeneity of norms.

Risk Rationing and Activity Choice in Moral Hazard Constrained Credit Markets

This paper explores the productivity and income distribution e.ects of asymmetric information and risk preferences on the credit market. A model of contract design in the presence of moral hazard is developed in which competitive, risk neutral lenders o.er contracts to risk averse agents who hold the option to invest capital and labor time in an entrepreneurial activity. The model gives rise to the potential for quantity rationing and an additional form of non-price rationing called risk rationing. Both quantity and risk rationed agents would seek credit and carry out the entrepreneurial activity in a first best, or symmetric information world. When information is asymmetric, the menu of available loan contracts shrinks. In equilibrium, neither type of agent ends up with a loan contract, and both undertake a safe, but low return wage labor activity. Quantity rationed agents are involuntarily excluded from the entrepreneurial activity because they are denied any loan contract. Risk rationed agents voluntarily retreat from the credit market and the entrepreneurial activity rather than choose among the limited set of high risk contracts available to them in the presence of asymmetric information. Analysis shows that both quantity and risk rationing are likely to be wealth-biased, inhibiting the activity choice and the income earning potential of low wealth agents, and reproducing initial inequality.

Underwriting area-based yield insurance to crowd-in credit supply and demand

Recent theoretical and empirical evidence suggests that risk (especially covariant risk that is correlated across producers) may discourage both the supply of agricultural credit and the willingness of small holders to utilize available credit and enjoy the higher expected incomes credit could make available to them. One possible resolution to this problem is to remove risk from the system by independently insuring it. However, conventional (all hazard) crop insurance has in almost every instance been rendered financially unsustainable by moral hazard and adverse selection problems. This paper instead analyzes two index-based insurance schemes, one based on a weather index, and a second based on measured average yields. While these index insurance products do not protect the farmer from all risks, our econometric analysis (which is based on data from the north coast of Peru) shows that they could have substantial value to the producer and could also crowd-in credit supply from lenders reluctant to carry too much covariant risk in their loan portfolios. We also show that insurance based on measured yields is markedly superior to a weather index (for both borrowers and lenders). We close by arguing that present and past public good failures justify public intervention in this area, and analyze the feasibility of a public scheme to initially underwrite the costs and uncertainties associated with area-based yield insurance