This paper builds a theory of informal contract enforcement in social networks. In our model, relationships between individuals generate social collateral that can be used to control moral hazard when agents interact in a borrowing relationship. We define trust between two agents as the maximum...

While strong social ties help individuals cope with missing institutions, trade is essentially limited to those who are part of the social network. We examine what makes the decision to trust a stranger different from the decision to trust a member of a given social network (a friend), by...

We run a laboratory experiment were "friendship" networks are generated endogenously within an anonymous group. Our experiment builds on two phases in sequence: a network formation game and a trust game. We find that in those sessions where the trust game is played before the network formation...