Economic Action and Social Structure

Economic Action and Social Structure



Economic Action and Social Structure

Part I:

Social structure, especially in the form of social networks, affects economic outcomes for three main reasons. First, social networks affect the flow and the quality of information. Much information is subtle, nuanced and difficult to verify, so actors do not believe impersonal sources and instead rely on people they know. Second, social networks are an important source of reward and punishment, since these are often magnified in their impact when coming from others personally known. Third, trust, by which I mean the confidence that others will do the “right” thing despite a clear balance of incentives to the contrary, emerges, if it does, in the context of a social network.

Economists have recently devoted considerable attention to the impact of social structure and networks on the economy; for example, see the economists' chapters in Rauch and Casella (2001) (and the illuminating review essay of this volume by Zuckerman 2003), as well as Dutta and Jackson (2003) and Calvó-Armengol (2004). However, I focus here on sociologists' contributions. Sociologists have developed core principles about the interactions of social structure, information, ability to punish or reward, and trust that frequently recur in their analyses of political, economic and other institutions. I begin by reviewing some of these principles. Building on these, I then discuss how social structures and social networks can affect economic outcomes like hiring, price, productivity, and innovation.

Identity And Status

In-group/out-group terminology was introduced by Sumner (1906[1992]). He suggested that attachment to in-groups and preference for in-groups over out-groups may be a universal characteristic of human social life. The vast literature in social psychology inspired by Tajfel (1970) has supported the general idea that a we/they distinction is sufficient to activate differential responses to others on the basis of in-group or out-group membership.

In-group members are more likely to be positively valued than out-group members (Brewer, 1979), arouse more a positive affect and trust (Kramer & Brewer, 1984), and bring out cooperative behavior (Schopler & Insko, 1992). Experimental evidence shows that the concepts “we” and “us” carry positive emotional significance that is activated automatically and unconsciously (see, for example, Perdue, Dovidio, Gurtman, & Tyler, 1990).

When a particular in-group/out-group distinction is activated, differences in response to in-group and out-group members can arise from any of three sources. First, discrimination may arise from the positive consequences of in-group formation. This will lead to enhanced favoritism toward in-group members without any change in affect toward those who do not share the common group identity. On the other hand, discrimination may reflect the negative consequences of out-group differentiation. This enhances hostility and distrust of groups that are different from one's own. Finally, discrimination may be the product of intergroup social competition, where the attainment of a relative advantage by the in-group over the out-group underlies differential treatment.

In much of the literature on intergroup bias, in-group favoritism and out-group hatred are assumed to be reciprocally related. This was also the original treatment in Sumner ...