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Networks and Markets

Networks and Markets

James E. Rauch
Alessandra Casella
Copyright Date: 2001
Published by: Russell Sage Foundation
Pages: 276
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  • Book Info
    Networks and Markets
    Book Description:

    Networks and Marketsargues that economists' knowledge of markets and sociologists' rich understanding of networks can and should be combined. Together they can help us achieve a more coherent view of economic life, where transactions follow both the logic of economic incentives and the established channels of personal relationships.

    Market exchange is impersonal, episodic, and carried out at arm's length. All that matters is how much the seller is asking, and how much the buyer is offering. An economic network, by contrast, is based upon more personalized and enduring relationships between people tied together by more than just price.Networks and Marketsfocuses on how the two concepts relate to each other: Are social networks an essential precondition for successful markets, or do networks arise naturally out of markets, as faceless traders build reputations and gain confidence in each other?

    The book includes contributions by both sociologists and economists, applying the concepts of markets and networks to concrete empirical phenomena. Among the topics analyzed, the book explains how, in Taiwan, South Korea, and Japan, firms combine into tightly-knit business blocs, how wholesalers in a Marseille fish market earn the loyalty of customers, and how ethnic retailers in the U.S. share valuable market information with other shopkeepers from their ethnic group. A response to each chapter discusses the issue from the standpoint of the other discipline. Sociologists are challenged to go beyond small-scale economic exchange and to integrate their concept of networks into a broader understanding of the economic system as a whole, while economists are challenged to consider the economic implications of network ties, which can be strong or weak, unconditional or highly contingent.

    This book proves that both economics and sociology provide stronger insights when they study markets and networks as parallel forms of exchange. But it also clarifies the healthy division of labor that remains between the two disciplines. Sociologists are adept at showing how markets are framed by social institutions; economists specialize in explaining how markets perform, taking the social context as a given.Networks and Marketsshowcases what each discipline does best and reveals where each discipline would do better by borrowing from the other.

    eISBN: 978-1-61044-467-5
    Subjects: Sociology, Economics

Table of Contents

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  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Contributors
    (pp. vii-viii)
  4. Acknowledgments
    (pp. ix-x)
    James E. Rauch and Alessandra Casella
  5. Chapter 1 Networks and Markets: Concepts for Bridging Disciplines
    (pp. 1-29)
    James E. Rauch and Gary G. Hamilton

    For most of their respective histories, economics and sociology have shared surprisingly little common ground. In recent years, however, practitioners of the two disciplines increasingly find themselves working side by side, exploring the same topics, being challenged by similar issues, and sometimes coming to the same conclusions. The two disciplines have different reasons for coming together. While economists are moving out from the traditional disciplinary center to explore topics such as family, ethnicity, and bureaucracy, sociologists have moved into the heart of economics to uncover the institutional and organizational features of phenomena formerly understood only through a neoclassical lens.


  6. Chapter 2 Bandwidth and Echo: Trust, Information, and Gossip in Social Networks
    (pp. 30-74)
    Ronald S. Burt

    There are two schools of thought on how network structures create the competitive advantage known as social capital. One school focuses on the advantages of closure. A network is closed to the extent that people in it are connected by strong relationships. Typical forms of closure are dense networks, in which everyone is connected to everyone else, and hierarchical networks, in which people are connected indirectly through mutual relations with a few leaders at the center of the network. Both forms provide numerous communication channels, which facilitate the enforcement of sanctions against misbehavior. Closure lowers the risk of trust, thus...

  7. Discussion: Another View of Trust and Gossip
    (pp. 75-85)
    Joel Sobel

    My task is to describe how an economic theorist might model the issues raised by Ronald S. Burt in chapter 2, “Bandwidth and Echo: Trust, Information, and Gossip in Social Networks.” I focus my discussion on a stylized argument that plays a central role in the chapter. The two steps of the argument are:

    1. Information from closely connected third parties tends to confirm prior information (etiquette).

    2. The availability of a dense network of close third parties increases the information available to a manager (bandwidth).

    Burt concludes that managers with close third-party connections tend to become more confident of...

  8. Chapter 3 The Organization of the Taiwanese and South Korean Economies: A Comparative Equilibrium Analysis
    (pp. 86-142)
    Robert C. Feenstra, Gary G. Hamilton and Deng-Shing Huang

    Most specialists recognize that business networks are widespread in Asia. The dominance of the keiretsu in Japan and the chaebol in South Korea is common knowledge. In recent years, many scholars and journalists have also written about the importance of Chinese business networks in all the Chinese-dominated economies (for example, mainland China, Taiwan, Hong Kong, and several Southeast Asian countries, including Thailand and Malaysia). Despite the recognition that Asian business networks are commonplace, there has been surprisingly little effort to analyze the organization and performance of these networks. In fact, most writers dismiss the importance of business networks as a...

  9. Discussion: Stability, Efficiency, and the National Organization of Production
    (pp. 143-154)
    Neil Fligstein

    Robert Feenstra, Gary Hamilton, and Deng-Shing Huang raise one of the deepest questions for economics and economic sociology: If market processes select efficient systems of social organization, how do we account for the persistent differences we observe in the social organization of national capitalisms? There are at least three ways to answer this question. One could argue that these social relationships do not matter for firm survival and that it is important only to have basic factors in place like economies of scale and scope (Chandler, Amatori, and Hikino 1997). One could also argue that the persistence of differences across...

  10. Chapter 4 Market Organization and Individual Behavior: Evidence from Fish Markets
    (pp. 155-195)
    Alan Kirman

    Markets, their organization, and the relationships that develop within them have long held a fascination for historians, anthropologists, and sociologists. Economists have, despite the work of Douglass North and others, tended to take some specific model of market organization as given and then to examine the aggregate behavior of the market. The intricacies of particular forms of market organization are not considered relevant to the aggregate outcome. Frequently the individuals are thought of as acting independently of each other and linked only through the price system. In this case, the market is generally assumed to behave like an individual. Alternatively,...

  11. Discussion: Comments and Further Thoughts on “Market Organization and Individual Behavior”
    (pp. 196-210)
    Alessandra Casella

    At a very broad level, Alan Kinnan’s chapter reminds us that aggregating individual behaviors into a macro economy is a complicated matter. Far from confirming the comforts of models in which all individuals are assumed identical and thus each is representative of the whole economy, the Marseille fish market (of all places!) demonstrates empirically that the link between individual behavior and aggregate outcomes is so little understood that it still strikes us as unpredictable. Stated in these terms, the message is important and too often neglected, but well known.

    In fact, the research summarized in this chapter belongs in a...

  12. Chapter 5 Organizational Genesis, Identity, and Control: The Transformation of Banking in Renaissance Florence
    (pp. 211-257)
    John F. Padgett

    Current organization theories explain organizational form essentially through selection. That is, instead of focusing on the dynamics of emergence, the field as a whole adopts as its epistemology consequentialism, which emphasizes the relative performances, and hence death rates, of different forms in different environments. The hope of the field is that the performance relationship between form and environment is sufficiently invariant that equilibrium fixed points will be reached, independent of dynamic path.

    This shared epistemological stance hardly implies that theoretical consensus has been reached. Strong debates flourish over which selection environment is the most powerful (markets versus states versus professions);...

  13. Discussion: Comments and Further Thoughts on “Organizational Genesis, Identity, and Control: The Transformation of Banking in Renaissance Florence”
    (pp. 258-269)
    Gregory Besharov and Avner Greif

    Do new organizational forms spring, fully formed, from the head of their founder? Does the environment forge new forms from old, with ceaseless heating and hammering? Do their constitutive elements change so that existing organizations take new forms in mad pursuit of new opportunities? In “Organizational Genesis, Identity, and Control: The Transformation of Banking in Renaissance Florence,” John Padgett develops a general theory of the genesis of organizational forms in which, to some extent, each of these three mechanisms has a role.

    In Padgett’s theory, there is a founder of an organization who imbues a firm with its organizing conception....

  14. Chapter 6 Black Ties Only? Ethnic Business Networks, Intermediaries, and African American Retail Entrepreneurship
    (pp. 270-309)
    James E. Rauch

    An ethnic business network can be a tool that allows entrepreneurs to avoid or overcome the effects of discrimination. The first objective of this chapter is to show, for the case of retail trade, how careful study of the interaction of networks and markets can improve understanding of the ways in which ethnic business networks benefit their members. The second objective is to demonstrate that this understanding can be used to generate new, workable ideas for policy where ethnic business networks are weak or absent. In particular, I argue that large, diversified commercial trade intermediaries already provide many of the...

  15. Discussion: Ethnic Ties and Entrepreneurship: Comment on “Black Ties Only? Ethnic Business Networks, Intermediaries, and African American Retail Entrepreneurship”
    (pp. 310-327)
    Marta Tienda and Rebeca Raijman

    The high rate of business ownership among recent immigrants, particularly Asians, has directed attention to the strategies that enable new arrivals to establish a foothold in the U.S. economy through small-business ownership. Ethnic networks link producers, distributors, and consumers vertically and horizontally to enhance the social “embeddedness of economic transactions (Granovetter 1985; Portes 1996). Rauch acknowledges that ethnic networks not only permit entrepreneurs to transcend market discrimination but also contribute to the economic vitality of communities. He poses a vexing question: If recent immigrants can succeed in small businesses, why are African Americans seemingly less able to do so? This...

  16. Chapter 7 Concluding Remarks: Questions for Policy
    (pp. 328-338)
    Alessandra Casella

    The unifying theme of the contributions to this volume is the relationship between networks and markets, as seen from the perspective of two neighboring but different disciplines in social science. The novel aspect of the volume is in part the close interdisciplinary collaboration, but more fundamentally the emphasis on studying markets and networkstogether,not as alternative institutional structures, each of which supplants and excludes the other, but as different organizations for the exchange of information, assets, and goods that coexist in our societies and affect and shape each other. In fact, it can be said that the formal pairing...

  17. Index
    (pp. 339-346)