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Missing Links, The

Missing Links, The: Formation and Decay of Economic Networks

James E. Rauch editor
Copyright Date: 2007
Published by: Russell Sage Foundation
Pages: 256
  • Book Info
    Missing Links, The
    Book Description:

    Half of all workers are hired through personal referrals, and networks of social connections channel the flows of capital, technology, and international trade. Sociologists and economists alike recognize that economic exchange is shaped by social networks, which propagate information and facilitate trust, but each discipline brings a distinct theoretical perspective to the study of networks. Sociologists have focused on how networks shape individual behavior, economists on how individual choices shape networks. The Missing Links is a bold effort by an interdisciplinary group of scholars to synthesize sociological and economic theories of how economic networks emerge and evolve. Interweaving sophisticated theoretical models and concrete case studies, The Missing Links is both an introduction to the study of economic networks and a catalyst for further research. Economists Rachel Kranton and Deborah Minehart illustrate their field’s approach to modeling network formation, showing how manufacturers form networks of suppliers in ways that maximize profits. Exemplifying the sociological approach, Ronald Burt analyzes patterns of cooperation and peer evaluations among colleagues at a financial organization. He finds that dense connections of shared acquaintances lead to more stable reputations. In the latter half of the book, contributors combine the insights of sociology and economics to explore a series of case studies. Ray Reagans, Ezra Zuckerman, and Bill McEvily investigate an R & D firm in which employees participate in overlapping collaborative teams, allowing the authors to disentangle the effects of network structure and individual human capital on team performance. Kaivan Munshi and Mark Rosenzweig examine how economic development and rising inequality in India are reshaping caste-based networks of mutual insurance and job referrals. Their study shows that people’s economic decisions today are shaped both by the legacy of the caste hierarchies and by the particular incentives and constraints that each individual faces in an evolving labor market. Economic globalization is forging new connections between people in distant corners of the world, while unsettling long-standing social relations. Anyone interested in understanding the opportunities and challenges of this era of rapid change will find a highly informative guide in The Missing Links.

    eISBN: 978-1-61044-466-8
    Subjects: Sociology, Economics

Table of Contents

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  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. About the Authors
    (pp. vii-x)
  4. Acknowledgments
    (pp. xi-xii)
  5. Chapter 1 Introduction: On the Formation and Decay of Interdisciplinary Boundaries
    (pp. 1-16)
    Joel M. Podolny and James E. Rauch

    Networks of personal connections are ubiquitous in economic life. Thirty to 60 percent of all new employment relations are estimated to be the result of personal ties (Bewley 1999). Networks are used extensively to raise capital, both by households (for example, through rotating savings and credit associations [Besley, Coate, and Loury 1993]) and by entrepreneurs (for example, through syndicates of venture capital firms [Sorenson and Stuart 2001]). Networks structure the diffusion of new technology among businesses, ranging from village farmers in less-developed countries (Bandiera and Rasul 2006) to manufacturers in Silicon Valley (Saxenian 1999). International trade and investments flow along...


    • Chapter 2 Literature Review: The Study of Social Networks in Economics
      (pp. 19-43)
      Matthew O. Jackson

      As Joel Podolny and James Rauch point out in chapter 1 of this volume, “On the Formation and Decay of Interdisciplinary Boundaries,” social networks are endemic to economic interactions. The rise of what might be called “social economics” comes very much from the realization by economists that there are many economic interactions where the social context is not a second-order consideration, but is actually a primary driver of behaviors and outcomes. Obvious examples range from the primary role of social networks for people looking for jobs to their influence on decisions of which products to buy, how much education to...

    • Chapter 3 The Formation of Industrial-Supply Networks
      (pp. 44-76)
      Rachel Kranton and Deborah Minehart

      In the past two decades, the business press in the United States has been full of reports that manufacturers are reducing their supplier base, but until recently there has been no economic theory that can explain this phenomenon. Indeed, it is a puzzle: Why would a manufacturer ever want to reduce the number of its suppliers? Typical theories of industrial organization—which focus on markets, monopolies, or on hierarchies and single vertically integrated firms—cannot help us here. We need a new theory, a new way to understand the many industries, such as the automobile industry, that involve small numbers...


    • Chapter 4 Literature Review: The Formation of Inter-Organizational Networks
      (pp. 79-99)
      Toby Stuart

      In this chapter I will offer a literature review and some thoughts on processes that may systematically account for the formation networks among economic actors. After reviewing why sociologists (and, increasingly, economists) see networks as essential to the functioning of markets, and then review much of the work that has been done in economic sociology on the formation of networks and a smaller portion of the research on the subject in economics and applied mathematics. Although I describe research on networks at both the organizational and the individual level, I focus on the organization level. In the interest of brevity,...

    • Chapter 5 Illustration: Closure and Stability—Persistent Reputation and Enduring Relations Among Bankers and Analysts
      (pp. 100-144)
      Ronald S. Burt

      As the network around a set of people closes, it creates a competitive advantage known as social capital. The gist of the argument—found in economics (Tullock 1985; Greif 1989), political science (Putnam 1993, 2000), and sociology (Coleman 1988, 1990; Granovetter 1985, 1992)—is that closed networks create a reputation cost for inappropriate behavior, which facilitates trust between people in the network. A network is closed to the extent that the people in it have strong relations with one another or can reach one another indirectly through strong relations to mutual contacts. Information travels quickly in such networks. People wary...


    • Chapter 6 On Firmer Ground: The Collaborative Team as Strategic Research Site for Verifying Network-Based Social-Capital Hypotheses
      (pp. 147-182)
      Ray E. Reagans, Ezra Zuckerman and Bill McEvily

      Social networks command the interest of scholars and others because these relational patterns are assumed to have causal force. In particular, network theories typically adopt the premise that such patterns often lead to individual or collective outcomes that cannot be fully ascribed to the exogenous forces that determined such configurations. When this premise of network exogeneity is undermined, network analysis may be a useful tool for viewing the operation of other forces, but it cannot fulfill the network analyst’s ambition of demonstrating how social networks shape important outcomes. Moreover, network analysts must concede that network structures are always subject to...

    • Chapter 7 Network Decay in Traditional Economies
      (pp. 183-209)
      Kaivan Munshi and Mark Rosenzweig

      Community-based networks serve many roles in a traditional economy. In India, the setting of this study, rural caste networks have provided mutual insurance and credit to their members for centuries. More recently, these networks have been transplanted to the city, where they provide jobs to migrants drawn from the same caste.

      Economists have increasingly recognized that networks, and nonmarket institutions more generally, can play an important role in facilitating economic activity when markets function imperfectly. It is commonly thought, therefore, that modernization inevitably then leads to the destruction of networks, but this is not always the case. First, economic growth...

    • Chapter 8 Clusters and Bridges in Networks of Entrepreneurs
      (pp. 210-236)
      James E. Rauch and Joel Watson

      The predominant sociological approach to formation of economic networks focuses on past interaction: people get to know and trust each other, especially in social settings (“embeddedness”), and are then able to share information and do business together. Economists argue instead that actors strategically choose to invest in certain relationships on the basis of forward-looking incentives. To oversimplify the two positions: in economics you choose your network whereas in sociology your network chooses you.

      In this chapter we take a step toward merging these two approaches. We do not attempt to do so at the most general level, focusing instead on...

  9. Index
    (pp. 237-244)