RETURNS TO SOCIAL CAPITAL AMONG TRADERS
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Using data on agricultural traders in Madagascar, this paper shows that social capital
has a large effect on efficiency. Better connected traders are shown to have
significantly larger sales and gross margins than less connected traders after controlling
for physical and human inputs. The analysis indicates that three dimensions of social network
capital should be distinguished: relationships with other traders, which help firms
economize on transactions costs; relationships with individuals who can help in times of
financial difficulties, which insure traders against liquidity risk; and family relationships,
which reduce efficiency, possibly because of measurement error. Social network capital
enables traders to deal with each other in a more trustworthy manner by granting and
receiving credit, exchanging price information, and economizing on quality inspection.
Schooling is correlated with the use of superior modes of transaction but needs to be
complemented by social network capital.