Exploitation and Cooperation in Networks

A fundamental question in social sciences is how trust emerges. We provide an answer which relies on the formation of social and economic relationships. We argue that behind trust lies the fact that individuals invest in connections taking into account the potential externalities networks produce. Once social ties are in place, these externalities shape the individuals’ incentives to behave efficiently in their interactions and thereby efficient social norms are sustained. We also show that the individual’s incentives depend on the architecture of the network as well as on the position of the individual within the network. In particular, when an efficient interaction requires players to mutually cooperate, efficient social norms are easily sustained in symmetric networks. By contrast, when an efficient interaction requires players to play asymmetrically (one cooperates and the other free-rides), efficient social norms are best sustained in fully centralized architectures. We interpret these results indicating that a structural analysis is important to understand how individuals’ incentives are shaped in many strategic contexts. ∗We thank V. Bhaskar, Sanjeev Goyal, Fernando Vega-Redondo and J.L. Moraga-Gonzalez for valuable suggestions. We also thank the seminar participants at the University of Alicante, University Carlos III, Essex University and Tinbergen Institute for their comments. We gratefully acknowledge the hospitality of Queen Mary College, where part of the research was carried out. †Tinbergen Institute & Econometric Institute, Erasmus University Rotterdam. E-mail: [email protected] ‡Departamento de Fundamentos del Análisis Económico, Universidad de Alicante and Departamento de Teoría e Historia Económica, Universidad de Málaga. E-mail: [email protected]. I acknowledge centrA and the financial support from the Spanish MCyT in the form of a postgraduate fellowship.