Social Structure and Institutional Design: Evidence from a Lab Experiment in the Field

Abstract

In settings with poor formal contract enforcement, profitable investments are likely unrealized. While social closeness can mitigate contractual incompleteness, we examine how to improve the preponderance of cases where contracting parties cannot rely upon social ties. We ask if a community can enlist members to monitor transactions or punish offending parties.We conduct a laboratory experiment in 40 Indian villages, with 960 non-anonymized subjects, where we have social network data. Participants play modified sender-receiver investment games, with and without third-party monitors and punishers. We examine whether network centrality of the third party increases efficiency of interaction. Furthermore, we decompose the efficiency increase into a monitoring channel (central third parties are valuable since they may influence reputations) and an enforcement channel (central third parties may be more able to punish without fear of retaliation).Assigning a third party at the 75th percentile of the centrality distribution (as compared to the 25th) increases efficiency by 21% relative to the mean: we attribute 2/5 of the effect to monitoring and 3/5 to enforcement. The largest efficiency increase occurs when senders and receivers are socially distant, unable to maintain efficient levels autonomously. Results cannot be explained by demographics such as elite status, caste, wealth or gender.Our findings show not every member is equally well-equipped to be part of a local institution. Knowing that a central third party observes their interaction increases sender-receiver efficiency. More importantly, to be able to punish someone, the third party must be important in the community.

Field Experiments, Social Networks, and Development

“…Binzel and Fehr (2013) find similar results in a laboratory experiment in a Cairo slum. 23 Also see Breza et al (2014) (described below) and Barr (2003) for related evidence.…”

“…However, some of these same network processes are also useful for peer monitoring and enforcement. Breza et al (2014) conducted non-anonymized trust games with third-party monitoring and punishment in 40 Indian villages and matched experimental outcomes with the Banerjee et al (2013) networks data. They find evidence that when contracting parties could not call upon social proximity, peers could be used to improve outcomes.…”

“…If highly network central individuals were chosen to serve as the third party and were given a punishment technology, outcomes between these socially distant pairs were as good as those between socially close pairs without a third party. While network centrality was not randomly assigned, Breza et al (2014) randomized both the identities of the players and the available contracting tools. They also find that no other demographic characteristics such as caste, elite status or wealth could replicate the centrality effects.…”

Opinion dynamics and wisdom under conformity

“…DeMarzo et al (2003) introduce this approach into the economics literature arguing that people are often unable to properly account for repetition of information. The underlying assumption of a "persuasion bias" is helpful to understand different empirical phenomena such as the importance of airtime in political discussions and it has also found empirical support in the laboratory (Corazzini et al, 2012;Grimm and Mengel, 2013;Battiston and Stanca, 2014) and in the field (Chandrasekhar et al, 2012;Breza et al, 2014). Among naïve agents the social network becomes vital in the sense that not only accuracy of information but also network centrality determines an agent's influence on her group (DeMarzo et al, 2003).…”

Bargaining under surveillance: Evidence from a three-person ultimatum game

“…Likewise, third-parties' rank in a social hierarchy and centrality in a social network may influence the effect of third-party surveillance in naturally-occurring situations. For instance, Breza et al (2015) find in their lab-in-the-field experiment that surveillance by high-centrality third-parties has substantially larger impact on trust game outcomes than surveillance by thirdparties with low ranks in the centrality distribution. These observations overall indicate that the highly stylized and anonymous decision environment applied in this study may attenuate the impact of third-party monitoring on distributional outcomes.…”