Contacts, Market Institutions, and Development

We propose an endogenous growth model that incorporates the importance of business contacts and informal contacts. In our model, sold output increases with the stock of business contacts. The modelling of contact creation is based on matching theory. The cost of creating contacts decreases with more Community level Social Capital and Market Institutions, which we understand as networks of informal contacts. Technological growth is driven by the replacement of contacts within the economy. Political interference and centralization can provide disincentives to break old contacts and hence affect innovation. Simulations suggests that our model is in line with empirical observations.