We experimentally disentangle two potential sources for endogenous social interactions effects. By comparing groups where the aggregate behavior is publicly observable with those where it is not we can measure the size of any endogenous observation effect. By comparing connected with disconnected groups we can measure the size of any endogenous contagion effect. Results are provided for both a coordination game and social dilemma. We find strong evidence of an endogenous observation effect in the coordination game but not social dilemma. We find no evidence of an endogenous contagion effect in either game. While our results point towards a conformity effect we argue that information on group behavior primarily acts as a coordinating device which may be reflected in changes in beliefs.

The benefits accruing from social networks and structures have been shown to correlate with economic performance at both the macro- and micro-levels. Indeed, social capital can be seen as a catalyst through which human and physical capital are utilized and political and economic freedom realized. In this chapter, the authors briefly review the broad extant literature on social capital before embarking in more detail on how game theory can be used to analyze and model social capital. Particular attention is given to the population game approach. This approach is well suited to model social capital as it allows us to capture individual behaviour, societal influence, and network structure. The growth of social capital is seen to depend on the incentives for cooperation, the way in which people learn from past experience, and the inter-connectedness of the social network. A particularly important question for many emerging economies is how social capital can be encouraged to grow from a low base. In a concluding section, which includes a discussion of the complementarities between strong institutions and social capital, the authors use the population game approach to study this issue.

We experimentally disentangle two potential sources for endogenous social interactions effects. By comparing groups where the group norm is publicly observable with those where it is not we can measure the size of any endogenous observation effect. By comparing connected with disconnected groups we can measure the size of any endogenous strategic interaction effect. Results are provided for both the stag hunt coordination game and the prisoners dilemma. We find strong evidence of an endogenous observation effect in the stag hunt game but not prisoners dilemma. We find no evidence of an endogenous strategic interaction effect in either game. While our results point towards a conformity effect we argue that information on the group norm primarily acts as a coordinating device.

Rational behaviour is required for markets to function efficiently; but myopic rational behaviour could work against pro-social choice, limit creativity, and minimise the extent of cooperative action. This tension is a serious drawback of the recent promotion of markets in developing countries because economic development will only occur if some significant set of individuals have coherent preferences for the enhancement of relevant social or public values (a social vision); the capacity for and commitment to invention, innovation and entrepreneurship (an entrepreneurial social ethic); and a willingness to act cooperatively and voluntarily in dealing with non-market issues (a cooperative social ethic). In other words, social vision and an entrepreneurial and cooperative social ethic are sufficient conditions, while investment, freedom, appropriate formal and informal institutions, are necessary for economic development. These sufficient conditions for development are themselves enshrined in a country's 'collective imagination,' which constitutes the somewhat neglected demand-preference dimension of development.

This article examines whether there are social influences on the decisions made by individuals about whether to trust others – relative strangers – in their respective societies. There are two possible types of social influences on the trust decision: first, contextual or exogenous social interactions effects would exist if there were country-specific characteristics that made people more or less trusting of others. Second, endogenous social interactions effects would exist if the behaviour (i.e. the trust decisions) of others exerted influence on the individual's decision to trust others, such that people are more or less trusting of others as those others are themselves more or less trusting. When there is behavioural endogeneity of the second sort, people would tend to conform to the particular norm or culture of trust prevailing in their society. There would also be feedbacks between individual trust decisions that result in multiple social trust equilibria, which alone could explain both the within-country conformity in trust decisions and the global diversity in average trust apparent in the World Values Survey trust data. The empirical evidence provided in this paper confirms the existence of composite contextual and endogenous social interactions effects on the trust decision, and though it is difficult to separately identify these two effects, the estimated models strongly suggest that endogenous effects in trust exist.

Given that there are significant endogenous effects in trust that cause people to follow trust norms when deciding whether to trust others, trust can be modeled as a super modular game or a game with strategic complementarities in which individuals can converge on either mutual trust or mutual cynicism. As such, the game is amenable to monotone comparative static analysis in which institutional reform can be represented as an increase in a parameter in the game of trust. The analysis implies that formal institutional reform has only a limited role to play in increasing the level of trust because low trust is in fact an equilibrium or a ‘low trust trap.’ What is required is a tipping mechanism, which involves only a relatively small number of influential agents adopting the strategy of trusting others even in a low trust environment. Formal institutions, appropriately reformed, would however enhance the prospects of tipping by reducing the basin of attraction of the mutual cynicism equilibrium, thereby reducing the size of the minimal tipping set that would be required.

The idea that people follow trust norms when making trust decisions is developed in an evolutionary model of adaptive play by boundedly rational agents. Because it neither implies nor is it implied by cooperation, trust is not modelled as cooperation in a Prisoners' Dilemma but as a coordination game with Stag hunt payoffs. The game's two pure strategy Nash equilibria correspond to high and low trust norms, the former being Pareto optimal and the latter risk-dominant. The mixed strategy Nash equilibrium corresponds to medium trust, but is not a norm in the sense that it is not stable. Multiple equilibria explain the local conformity in trust decisions within countries, and the global diversity across countries. The model suggests that most countries are low trust because the low trust norm is stochastically stable; and that a collapse of trust in medium trust countries is prevented by exogenous forces, probably formal institutions.

This paper examines the role of institutions in balance of payments adjustment. Economic outcomes are ultimately determined by the incentives, constraints and opportunities created for rational agents by formal or informal institutions. Of the formal institutions that influence adjustment, only the government - as represented by the fiscal deficit - is usually discussed as an institution, one that creates the incentives and opportunities for fiscal indiscipline and chronic fiscal deficits. The question of whether governments are responsible for current account deficits is an open one. There are other formal institutions that have a bearing on the adjustment that is required, the process by which adjustment takes place and the adjustment outcomes themselves. These include the rules governing resource allocation, the exchange rate, savings and investment.The theory of optimum currency areas implies that balance of payments adjustment also involves the institutions and regulations that govern labour migration. Recent controls on labour migration have reduced its efficacy as an adjustment mechanism when a policy of exchange rate stability is combined with rigidity in wages and prices. The phenomenal increase in remittances in recent times suggests that the informal institutions which increase the propensity of migrants to remit and which incline migrants to want to send remittances in the first place, might have since emerged as an important mechanism of adjustment that compensates for the vitiation of the other adjustment mechanisms. Guyana is used as a case study for developing this hypothesis.

People are shown to be “more (less) trusting as others are on average more (less) trusting” in a binary-choice-with-social-interactions model that is estimated using cross-section data from more than sixty countries, with mean trust as an explanatory variable. These endogenous effects explain local conformity in trust decisions; and they explain global diversity as high, medium and low trust equilibria in various countries. A monotonicity condition that makes the existence of multiple equilibria, which could only be caused by strong endogenous interactions effects, both necessary and sufficient for the ‘pattern reversals’ evident in the data, identifies endogenous social interactions. Medium trust is unstable, implying that good formal institutions might prevent the collapse of trust in medium trust economies (e.g., the US, UK, Germany); but merely revamping formal institutions may not help countries caught in low trust traps.

The Hirshleifer model of conflict is used to argue that without voluntary action to increase human security, the state may have extensive opportunities and incentives to increase the risk of conflict in the many poor countries where central governments provide local public goods. Metaphorically, the production technology for local public goods is like ‘energy,’ far out in the ‘likelihood of conflict’ sea. That energy, which is harmless and even potentially useful, can become dangerous, battering poor countries’ feeble defences against the likelihood of conflict, when ‘waves’ conserve and bring it to shore. These waves, which are the model’s preferences and perceptions, created endogenously by ‘conflict energy,’ might drive people to migrate in search of human security if they became malevolent and optimistic respectively, as would happen when the state exploits the local public goods production technology and subverts democratic political institutions to enhance its electoral prospects.We propose a decentralised scheme, the ‘Hirshleifer Human Security’ Scheme, to neutralise the state and raise human security as a ‘shoaling’ mechanism for dissipating conflict energy and reducing the likelihood of conflict. The scheme has migrants from conflict-ridden societies providing local public goods, with contributions from donor agencies, development agencies and the state.