Raja Kali

Trade structure and economic growth

Abstract How do the number of trade partners and the concentration of trade among partners affect the economic growth of a country? We refer to these characteristics as the structure of trade, and explore this question empirically in this study. We find that the structure of trade, independently of the level of trade itself, has an important effect on the rate of economic growth. The results of the study suggest that the number of trading partners is positively correlated with growth across all countries, and this effect is more pronounced for rich countries. Trade concentration is positively correlated with growth for all countries, and the effect is concentrated in poor countries. Previous work has overlooked these characteristics of trade, although we find them to be quite relevant and that they could lead to new ways of understanding the trade – growth relationship.

The city as a giant component: a random graph approach to Zipf's law

The emergence of a ‘city’ out of a set of locations in space can be considered akin to the evolution of a random graph. Interaction between individuals who are connected to each other is at the source of the benefits associated with a city. If the interaction probability rises, a threshold is eventually crossed at which point most of the graph becomes connected, giving rise to a grand component. It is at this point that a viable ‘city’ emerges. This view suggests an interpretation of Zipfs law, which we test using US Census data.

Contractual governance, business groups and transition

We suggest a unified framework to explain the following stylized pattern in the development of contractual governance and industrial organization. Contractual governance in many emerging economies is characterized by relational contracting. Coincident with relational contracts are large, diversified organizations - often referred to as business groups. As institutions and market intermediaries develop, a process of transition from relational contracting to arms-length explicit contracting takes place. During this phase relational and explicit contracts complement each other. Business groups initially expand in size, scope and increase the strength of ties. As development proceeds, a threshold is crossed after which business groups begin to unravel. This process of transition in contractual governance is often accompanied by a period of rapid growth, which eventually comes to a stop.

Social Embeddedness and Economic Governance: A Small World Approach

We develop a framework that may be helpful for understanding the coevolution of social embeddedness and economic governance as an economy modernizes. We associate the transition from a traditional to a modern economy with an increase in the probability of interacting with individuals outside of a narrow relational neighbourhood. The small world framework, based on random graph theory, enables us to use this probability to interpolate the economy between a situation of close-knit group interaction and arms-length anonymous market interaction. This transition is accompanied by a decline in social embeddedness and can cause cooperation to collapse if the economy crosses a threshold before third party institutions emerge. Consequently, external institutions are crucial for market development to proceed beyond a threshold of complexity. The relative effectiveness of different institutions depends on the stage of modernization of the economy. Enforcement is relatively more valuable at low levels of modernization while information is relatively more valuable at high levels.

Business Groups, the Financial Market and Economic Development

Business groups are an important aspect of the industrial organization of many developing countries. This paper develops a theory suggesting that they may be organizations that facilitate economic development in the presence financial market constraints. An important function of the stockmarket is the diversification of risk that comes with specialized, productive technology. But in the face of serious information problems a well functioning stockmarket may fail to emerge, relegating the economy to a low productivity-poverty trap. Bilateral links between a firm and a group of others may be a more cost effective way to achieve risk-sharing. Such business groups may be feasible when a full-fledged stockmarket is not. As modernization takes place, either because information problems become less severe or more firms enter the economy, business groups actually expand in size before being abruptly rendered obsolete by the stockmarket. This is consistent with stylized facts from a number of emerging economies.

Economic Progress, Social Regress?

A central issue in the debate regarding the relevance of social capital is whether the decline in social embeddedness that has attended modernization over the last 40 years in the United States is as harmful as Putnam, among others, claim it to be. Critics of Putnams thesis argue that various arms-length institutions fulfil the roles performed by social capital thereby mitigating the negative impact of its recent decline. We develop a framework that provides insight into when such institutions may be adequate and when they might not. We find that if market (economic) and non-market (social) interactions differ in their payoffs but are interlinked through the modernization of the economy, the optimal level of modernization in market interactions will be higher than that in non-market interactions. Further, market supporting institutions are likely to increase the divergence between economic and social interactions since analogs for market institutions that constrain opportunistic behavior are usually nonexistent in social contexts. In this sense, economic progress may be accompanied by social regress. Copyright 2007 Blackwell Publishing, Inc..

Friendship, not Altruism: An Economic Theory with Cross-Cultural Applications

Abstract Friendship is both ubiquitous and economically important, but neglected in the economic literature. We provide a definition of friendship supported by anthropology research that we believe is plausible, widely accepted, and distinct from altruism. This motivates a game-theoretic model of friendship that provides a characterization of how friendship in a bilateral relationship can explain cooperation in a finite-horizon setting without the aid of altruism or pro-social preferences. We highlight the difference between two key equilibria of our model: opportunistic friendship that is short-lived and driven by material support, and sustained friendship that is long-lived and is distinguished from opportunistic friendship by the provision of support without the expectation of return. Opportunistic friendship seems more likely in environments characterized by economic uncertainty such as in developing countries or immigrant communities. We provide cross-cultural examples of friendship that are consistent with the conditions underpinning opportunistic versus sustained friendship equilibria.

The burden of glory: Competing for nonmonetary incentives in rank-order tournaments

In an environment in which elite, highly paid professionals compete for nonmonetary rewards, we find evidence of underperformance. Our analysis suggests that choking under pressure from high†stakes nonmonetary rewards is behind the underperformance. This implies that high stakes nonmonetary rewards can create meaningful pressure on individuals and lead to worse performance, a distinct issue that has yet to be adequately examined. These findings come from an examination of the behavior of top U.S. golfers competing to earn a place on the U.S. Ryder Cup team via their performance in PGA Tour tournaments with differing allocations of Ryder Cup qualifying points.

Community evolution in patent networks: technological change and network dynamics

When studying patent data as a way to understand innovation and technological change, the conventional indicators might fall short, and categorizing technologies based on the existing classification systems used by patent authorities could cause inaccuracy and misclassification, as shown in literature. Gao et al. (International Workshop on Complex Networks and their Applications, 2017) have established a method to analyze patent classes of similar technologies as network communities. In this paper, we adopt the stabilized Louvain method for network community detection to improve consistency and stability. Incorporating the overlapping community mapping algorithm, we also develop a new method to identify the central nodes based on the temporal evolution of the network structure and track the changes of communities over time. A case study of Germany’s patent data is used to demonstrate and verify the application of the method and the results. Compared to the non-network metrics and conventional network measures, we offer a heuristic approach with a dynamic view and more stable results.

Special Section: Social Networks and Economic Development: An Overview

We propose a framework for understanding the business group, a hybrid organizational form that occupies the middle ground between firm and market and is a prominent feature of emerging economies. These organizations are characterized by varying levels of diversification and integration. We provide an explanation for the covariation, both positive and negative, in the scope, scale and ‘strength’ of integration of business groups. This notion of integration embodies the strength of ties that connect disparate subsidiary activities to the core of the business group, and is, we believe, novel to the theory of the firm. We also suggest the framework may be useful for understanding internal organizational hierarchy and multiproduct firms. JEL: L22, L14, M13, D23