Social Ties and Economic Development

Abstract

We develop a parsimonious general equilibrium model where agents allocate time across three activities: production, trade, and leisure. Leisure includes time spent socializing, which economizes transaction costs. Our framework yields multiple equilibria in terms of the number of social ties and predicts that the number of social ties is positively associated with development. We calibrate our model using an empirical measure of country-level social ties and are able to quantitatively match the cross-country relationship between social ties and income per capita. Our calibration also captures additional dimensions of cross-country data: (i) increasing income inequality, but converging growth rates; (ii) an association between weak social ties and development; and (iii) an association between number of social ties and size of the transaction sector.