Abstract
Network-based transactions are attractive as a system for economic exchange because they give network members greater protection against opportunism and exchange hazards compared to more anonymous market transactions. At the same time, networks restrict the possibilities to exploit economies of scale and other efficiency enhancing properties of markets. When the problem-solving capacity of networks do not make up for the losses generated by not trading with outsiders, trust is important to promote transactions among strangers in the anonymously market. This paper offers an economic analysis of this idea. With the help of a social evolutionary model, it is also demonstrated that mutual trust relations can survive in the anonymous market, even when there is a clear danger of opportunism, and the conventional mechanisms like repetitions and contracts are ruled out.
Highlights
Networks and markets can be viewed as two alternative ways of organising economic exchange
Network-based transactions are attractive as a system for economic exchange because they give network members greater protection against opportunism and exchange hazards compared to more anonymous market transactions
With the help of a social evolutionary model, it is demonstrated that mutual trust relations can survive in the anonymous market, even when there is a clear danger of opportunism, and the conventional mechanisms like repetitions and contracts are ruled out
Summary
Networks and markets can be viewed as two alternative ways of organising economic exchange. ECONOMIC RESEARCH-EKONOMSKA ISTRAZIVANJA networks instead of embracing valuable possibilities with new partners. This creates assurance but reduces the possibilities of securing increased gains from trade and other efficiency enhancing properties of markets. The analysis is taken a step further by asking the following question: If conventional mechanisms like repetition and contracts are ruled out, what can secure the continuation of trust-based market exchanges when untrustworthy types exploit the honest behaviours of other players? By building on the idea of Frank (1988) and Gu€th and Kliemt (2000), we show that trust-based honest behaviour can be maintained in the anonymous market if the trustworthy types have a costly type detection ‘technology’ available that makes it possible to discriminate between trustworthy and untrustworthy individuals.
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