Voluntary Self-Sustaining Reciprocity

In our model, self-interested agents prefer to buy from local neighbors rather than from cheaper outside vendors even in the absence of memory and coordination mechanisms. All they know is who is a local neighbor. Buyers voluntarily pay rents because they internalize that their neighbors will be wealthier and be more likely to buy from them in the future. The sellers understand that buyers' preferences give them limited local market power, raise their prices, and earn surplus in equilibrium. Unenforced reciprocity achieves near-first-best outcomes, because it reduces wasteful production or non-production in equilibrium